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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998.
Commission file number: 1-12375
THE LEARNING COMPANY, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 94-2562108
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(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (617) 494-1200
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The aggregate market value of voting stock of the registrant held by
non-affiliates of the registrant as of February 2, 1998 was approximately
$779,986,631. As of February 2, 1998, 49,919,124 shares of the registrant's
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders expected
to be held in May 1998 are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
Page
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1. Business 3
2. Properties 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters 16
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
8. Consolidated Financial Statements and Supplementary Data 30
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 55
PART III
10. Directors and Executive Officers of the Registrant 55
11. Executive Compensation 55
12. Security Ownership of Certain Beneficial Owners and Management 55
13. Certain Relationships and Related Transactions 55
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 56
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ITEM 1. BUSINESS
The Learning Company, Inc. ("TLC" or the "Company") develops and publishes
a broad range of high quality branded consumer software for personal computers
("PCs") that educate across every age category, from young children to adults.
The Company's primary emphasis is in educational and reference software, but it
also offers a selection of lifestyle, productivity and, to a lesser extent,
entertainment products, both in North America and internationally.
The Company's educational products are principally sold under a number of
well known brands, including The Learning Company, MECC and Creative Wonders
brands. The Company develops and markets educational products for children ages
18 months to 7 years in the popular "Reader Rabbit" family, which includes both
single-subject and multi-subject titles such as Reader Rabbit's Reading 1 and
Reader Rabbit's Math 1, and Reader Rabbit's Toddler, Reader Rabbit's Pre-school,
Reader Rabbit's Kindergarten and Reader Rabbit's 1st Grade. The Company also
publishes educational products for this age group based on the popular Sesame
Street and Madeline characters, among others. For children seven years and
older, the Company develops and markets engaging educational products such as
the long-running "Trail" series, which includes Oregon Trail 3rd Edition, as
well as products based on the popular Baby-Sitter's Club books. During 1997, the
Company launched its American Girls Premiere title, which is marketed towards
girls in this age group.
The Company develops and markets several different lines of software
designed to teach children and adults such foreign languages as French, German,
Spanish and Japanese. These lines include, among others, the Learn to Speak and
Berlitz lines of products.
The Company's reference products include the "Compton's Home Library" line
which includes, among others, Compton's Interactive Encyclopedia and Compton's
World Atlas. In addition, the Company offers a line of medical reference
products that includes BodyWorks, Home Medical Reference Library and Mosby's
Medical Encyclopedia. The Company's productivity line is marketed under the
SoftKey and the Creative Office brands. The Company also publishes a
lower-priced line of products in box version under the Key and Classics brands
and a jewel-case only version under the SoftKey brand.
During 1997, the Company began offering an Internet filtering product with
the introduction of the popular Cyber Patrol, which allows parents and teachers
to choose what content on the Internet is appropriate for children. Adults can
choose to block material organized into many different categories such as
violence, nudity, and explicit sexual material and hate speech. In addition to
marketing the product to homes and schools, the Company is also marketing to
corporations a version of Cyber Patrol that can block sites with content such as
sports, leisure and shopping to improve productivity in the office.
The Company distributes its products through retail channels, including
direct sales to computer electronics stores, office superstores, mass
merchandisers, discount warehouse stores and software specialty stores which
control over 23,000 North American storefronts. The Company also sells its
products directly to consumers through the mail, telemarketing and the Internet,
and directly to schools. The Company's international sales are conducted from
subsidiaries in Germany, France, Holland, Ireland, the United Kingdom, Australia
and Japan. The Company also derives revenue from licensing its products to
original equipment manufacturers ("OEMs"), which bundle the Company's products
for sale with computer systems or components and through on-line offerings.
The Company has a history of acquiring companies in order to broaden its
product lines and sales channels. During 1997, the Company completed a number of
small complementary acquisitions in the educational software segment. During the
third quarter of 1997, the Company acquired Learning Services Inc. ("Learning
Services") (a national school software catalog for teachers), Skills Bank
Corporation ("Skills Bank") (a developer of older age and remedial educational
software for schools) and Microsystems Software, Inc. ("Microsystems") (an
Internet filtering publisher and creator of Cyber Patrol). During the fourth
quarter of 1997, the Company acquired control of Creative Wonders, L.L.C.
("Creative Wonders") (a developer of branded children's educational software)
and acquired TEC Direct, Inc. ("TEC Direct") (the publisher of an educational
consumer software catalog).
The Company was incorporated in California in October 1978 and
re-incorporated in Delaware in October 1986. In February 1994, the Company,
which was then known as WordStar International Incorporated, completed a
three-way business combination with SoftKey Software Products Inc. and Spinnaker
Software Corporation in which the Company changed its name to SoftKey
International Inc. In May 1996, the Company consummated the acquisition of
Minnesota
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Educational Computing Corporation (MECC) ("MECC"), an educational software
publisher. That acquisition, together with the acquisitions in December 1995 of
The Learning Company ("The Former Learning Company") and Compton's NewMedia,
Inc. ("Compton's"), marked the completion of the Company's strategic initiative
to expand its educational software franchise.
In October 1996, the Company changed its name from SoftKey International
Inc. to The Learning Company, Inc. to reflect its emphasis on educational
software. The Company's executive offices are located at One Athenaeum Street,
Cambridge, Massachusetts 02142. Its telephone number is (617) 494-1200, and its
internet web site is located at http:/www.learningco.com.
INDUSTRY BACKGROUND
The consumer software market has grown over the past few years as a result
of several major trends, including the increasing installed base of PCs in the
home, the improved multimedia capabilities of PCs and the increasing demand for
a greater number of high quality, affordably priced software applications. In
addition, consumers are exposed to software purchase opportunities from a wide
variety of sources and with increased frequency. The Internet increased
consumers exposure to a variety of software products and technologies and
therefore increased their expectations for high quality multimedia educational
and reference software. In addition to traditional software offerings, today's
successful software companies should also be able to offer hybrid
CD-ROM/Internet titles. The Company believes the Internet has reduced barriers
to enter the market and has allowed competitors with less access to capital to
compete effectively.
Improved product performance, expanded memory and enhanced multimedia
capabilities have been the main drivers of growth in the consumer software
market. Improvements in multimedia technology have made possible engaging,
highly interactive environments filled with rich content such as enhanced
graphics, animation and photographs, realistic sounds and music and clips of
film and video. These capabilities are particularly relevant to the education,
reference, lifestyle and entertainment categories, as specific software
purchases within these categories are largely driven by their content,
appearance and degree of interactivity.
The demand for a large number and broad spectrum of value-priced software
products is also having significant impact on consumer software distribution.
The distribution of consumer software has expanded beyond traditional software
retailers and computer stores to include mass merchandisers, price clubs and
superstores. As demand for consumer software has grown with improvements in
multimedia technology, consumers have also grown more sophisticated in their
expectations for software, requiring increasingly easy to use, content rich
products. Furthermore, competition has continued to increase among new and
existing multimedia software publishers, increasing price pressure and
competition for limited retail shelf space. This competition is characterized by
increased emphasis on channel marketing, coupon rebate programs and advertising.
As this trend continues, it will become increasingly important for companies to
achieve greater sell-through unit volumes through brand name recognition, to
establish strong relationships with retailers and to consistently launch new
product offerings with state-of-the-art capabilities and rich content.
PRODUCTS
The Company develops, publishes and markets software products that educate
across every age, from young children to adults. The Company strives for
recognition from retailers, parents, teachers and students as the leader in
educational and reference software. The Company's strategy is to leverage its
name brands and breadth of content by selling across a range of price points and
through multiple distribution channels. By creating software titles that parents
and teachers trust to teach children fundamental skills at all age levels, the
Company strives to create an ongoing buying relationship with its consumers that
continues as their children grow older.
The Learning Company and Creative Wonders Educational Software
The Company's educational brands represent a series of products tailored to
support the most fundamental learning topics taught in schools. The product
lines are organized by age and by subject area, covering everything from
learning essentials for pre-schoolers to test preparation for college-bound
students and foreign language instruction for adults. Market research and an
experienced staff of educational specialists seek to ensure that the content of
each program is educational, engaging, age-appropriate, non-violent and
effectively delivered. Highlights from the educational product line include:
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- - The Reader Rabbit series of software is designed to develop a lifelong love
of learning in children ages 2 through 9. During 1997, the Company launched
its early learning series of multi-subject titles including Reader Rabbit's
Toddler, Reader Rabbit's Preschool, Reader Rabbit's Kindergarten and Reader
Rabbit's 1st Grade. Other products in the Reader Rabbit series include
Reader Rabbit's Reading 1, Reading 2 and Math 1. The Reader Rabbit series
of products has been developed based on a wealth of research by educators,
parents, children and reading specialists in order to create the most
educational, engaging, easy-to-use reading and multi-subject software. In
1997, the Company expanded its line of multi-subject learning titles with
the introduction of The Cluefinders' 3rd Grade Adventures, the first of a
new series of products designed to meet the educational needs and interest
of older children.
- - The American Girls Premiere, which is based on The American Girls
Collection successful line of historical fiction books, dolls and
accessories from Pleasant Company, is a new creativity program designed for
girls aged 7 to 12. The product allows young girls to bring American
history to life by creating and producing their own plays featuring five of
the American Girls Doll characters.
- - The Trail series, including Oregon Trail 3rd Edition, are interactive
education products where children learn about history and geography while
taking part in exciting interactive adventures.
- - The Munchers series of products for children ages 6 to 12 is used widely in
both schools and homes to build children's skills and confidence in math,
spelling and trivia.
- - TLC is a leader in foreign language software with its four lines of
products covering language instruction in Spanish, French, German, Italian,
Japanese and English. Appropriate for high school age through adult users,
each line combines state-of-the-art technology with advanced language
learning techniques to create highly interactive and effective products,
that meet the abilities, interests and price sensitivities of all
consumers. Learn To Speak, is a comprehensive and complete interactive
course using state of the art technology to develop all-around fluency for
the entire family. The Berlitz line, designed to help the user learn a
language quickly, is an effective and complete interactive language course
branded with the famous Berlitz name. The For Everyone line uses a fun,
easy and interactive approach to learning a foreign language and is
designed for high school students and adults who want to learn real-life
conversation. Berlitz Think and Talk, based on the proven Berlitz teaching
method, offers a complete introductory language study at a value price.
- - The Company markets a number of additional products for older children,
including Success Builder - High School, Score Builder for the SAT and ACT,
Treasure Mathstorm and Super Solvers Mission: T.H.I.N.K.
During 1997, the Company acquired Creative Wonders, an educational
software publisher. Creative Wonders focuses on creating educational software
for children using well-known branded content. The Creative Wonders line of
products are sold by the Company under the Creative Wonders brand and includes:
- - The Sesame Street series using the well-known characters from Children's
Television Workshop in a series of early learning titles that includes
among others Sesame Street: Toddlers Deluxe, Sesame Street: Reading is Fun!
(Toddler Edition), Sesame Street: Elmo's Preschool Deluxe, and Sesame
Street: Get Set for Kindergarten Deluxe.
- - The Madeline Classroom Companion Series is a fun and comprehensive way to
help young girls get a successful start in school. This series includes
Madeline: Preschool & Kindergarten, Madeline: 1st and 2nd Grade as well as
a number of titles for children ages 5 and up such as European Adventures,
Thinking Games and The Magnificent Puppet Show.
- - The Schoolhouse Rock series reinforces essential learning skills for
children to succeed in elementary school. The series includes Schoolhouse
Rock 1st and 2nd Grade Essentials and Schoolhouse Rock 1st-4th Grade Math
Essentials.
Reference and Lifestyle Software
The Compton's Home Library brand comprises a complete line of core
reference, lifestyle and special interest programs. The Compton's Home Library
products are designed specifically to meet consumers' home information needs.
Each product in the line provides easy access to a wealth of information for
researching, learning and exploring, with many providing direct links to the
World-Wide-Web for up-to-date information. Products in this line include
Compton's Interactive Encyclopedia-1998 Edition, Compton's World Atlas,
Compton's Deluxe Weight Watchers Light and Tasty and Compton's Interactive
Bible--NIV.
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The Company's medical reference products are among the best-selling
titles in the industry. Strong brands and rich multimedia content enables the
Company to sell these products across all of its channels. The Company offers a
line of medical reference products that includes the popular BodyWorks, Home
Medical Reference Library and Mosby's Medical Encyclopedia.
Internet Filtering Software
Cyber Patrol is the Company's popular Internet filtering software
designed to help protect children in cyberspace. Cyber Patrol allows parents and
teachers to choose what content on the Internet is appropriate for children.
Adults can choose to block material organized into many different categories
such as violence, nudity, explicit sexual material and hate speech. Cyber Patrol
can be customized for use by up to 10 different children. Adults can add or
delete specific sites based on their own beliefs and judgment, so that, for
example, content blocked for a 7-year-old can remain available to a 15-year-old.
The latest version, Cyber Patrol 4.0, offers a daily update of blocked sites,
assuring even greater protection in a Web environment that changes daily. In
addition to marketing the product to homes and schools, the Company is also
marketing to corporations a version of Cyber Patrol that can block sites with
content such as sports, leisure and shopping that improves productivity in the
office.
Productivity Software
Productivity titles targeted at the home, small business and home
office users are the flagship titles under the SoftKey brand. The price points
and content of these programs are designed for the consumer who purchases
programs to meet very specific needs. During 1997, the Company launched the
"Creative Office" series. Included in this series are Calendar Creator 5.0,
PhotoFinish 4.1 and Resume Pro 3.0. Each of these titles has had a long history
of success in the productivity market. The "Key" line is designed to meet
productivity needs of those users who appreciate good value and quality
performance. This line includes a range of personal productivity tools, content
such as fonts and clip art, office productivity solutions and design tools.
Value Software
The Value lines under the Key, SoftKey and Classic brands are
recognized as top performers in the budget category of software. These lines
offer consumers brand name software at affordable prices in a jewel case only
and boxed format ranging in retail price from $9.99 to $14.95. The line covers
all software categories including reference, education, productivity, lifestyle
and games.
Tax Software and Services
In Canada, the Company is a supplier of income tax software products
and services through its subsidiary SoftKey Software Products Inc. ("SoftKey").
Large and small accounting firms, corporations and small businesses in Canada
rely on the Company to develop and annually update software products for all
aspects of income tax preparation. The Company also publishes personal tax
preparation software for use by individuals. The Company offers tax software
products under the TaxPrep, CanTax, Informatrix, HomeTax and L'Impot Personnel
brands.
SALES AND MARKETING
The Company distributes its consumer software products through retail,
direct response, OEMs and school channels within North America and through
international channels throughout Europe and the Pacific Rim.
Retail Channels. The Company has relationships with over 50 national
retailers and direct distributors controlling over 23,000 individual North
American storefronts where most of the nation's software sales occur. The
Company's retail distribution strategy is to foster strong direct relationships
with large retailers through a broad product offering, actively participating in
channel management and innovative merchandising. These direct relationships have
been the result of an established history of developing and publishing a wide
range of products and actively working with retailers to understand consumer
purchasing behavior and trends. Retailers routinely share sell-through sales
data with the Company, providing the Company with the ability to proactively
tailor its product offerings, modify distribution tactics and optimize product
marketing, merchandising, promotions and mix for specific retail channels and
stores. The Company sponsors merchandising programs and provides electronic data
interchange ("EDI") to most major accounts. The Company intends to continue to
build its relationships with the retail channels in an effort to further
strengthen these
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strategic relationships. The Company's dealer sales channel consists of
traditional PC hardware and software retail stores, including national and
regional chains and superstores. Increasingly, the Company sells its products to
office superstores such as Office Depot, OfficeMax and Staples, electronic
superstores such as CompUSA, Circuit City and Best Buy and mass merchants such
as Wal-Mart and K-Mart. In addition, the Company sells to distributors such as
Ingram Micro Inc., GT Interactive and Navarre.
Direct Response. The Company's database of over 7 million end-users
provides many cross-marketing opportunities. The Company mailed over 16 million
pieces of targeted direct mail in 1997. The Company typically utilizes targeted
customer mailings highlighting specific products. Prior to a full mailing, the
Company conducts test mailings at different price points and marketing
approaches in order to maximize response rates from its customers. The Company
also sells its products through direct mailings to potential end-users who are
not part of the installed user base using rented mailing lists. The Company made
approximately 4 million outbound telephone calls in 1997 to sell its products to
its customers. The Company has electronic registration of its consumer software
products that allows it to collect data from its customers that in turn provide
customer leads for the direct response business. The Company maintains an
Internet website which contains a catalog of the Company's products which
consumers can use to browse through the Company's products and submit orders
on-line or by telephone.
Original Equipment Manufacturers. The objective of the Company's OEM
sales strategy is to assist hardware manufacturers and on-line services to
differentiate their product lines and to introduce the Company's brands to new
computer hardware buyers. The Company licenses its software products to OEMs
(including IBM, Apple, Compaq, Hewlett-Packard and America On-Line), which
typically purchase the Company's products in higher volumes and at lower prices
than retail stores and distributors. The manufacturing costs incurred by the
Company for OEM sales are typically lower than for its boxed product because in
many cases the products are duplicated by the OEMs and sold without packaging
or, in some instances, documentation. In addition, the Company receives
royalties from a number of OEMs that have no production costs, which results in
higher gross margins for the Company.
School Channel. The Company's efforts in the school channel focus on
the unique needs of the school market through targeted and specialized marketing
and services. The Company sells products directly to schools and school
districts through field based direct sales representatives, telemarketing and
direct mail. Sales are also made through authorized resellers and distributors
including Educational Resources, Ingram Micro and Baker & Taylor. The Company
markets its school products to over 795 key school districts, 85,000 school
buildings and, in turn, to over 2.5 million classrooms across the United States.
Through its subsidiary Learning Services, the Company publishes an educational
software catalog for teachers and schools marketing products from most
educational software publishers, including the Company, under the Learning
Services brand. The Company intends to continue to leverage its established
position in the school market to expand its sales in the home market. The
Company believes that the history of acceptance of its products in schools,
coupled with its broad range of award-winning products, positions it to further
enhance its market share position and brand awareness in the home market.
International. The Company believes that the international consumer
software markets are rapidly growing as a result of trends similar to those
driving the North American market. The Company operates subsidiaries outside of
North America in Germany, France, Holland, Japan, the United Kingdom and
Ireland. In addition, the Company has distributors in major European, Latin
American and Pacific Rim countries, as well as in Australia and South Africa.
The Company's subsidiaries in Ireland and Germany generally coordinate
manufacturing and distribution for all of the Company's sales in Europe, Latin
America and the Pacific Rim. Generally, retail stores outside of North America
are more reliant on distributors than retail stores in North America. As
distribution environments differ from country to country, the Company tailors
its distribution strategy accordingly.
PRODUCT DEVELOPMENT
The Company develops and publishes products through internal
development as well as licensing. Approximately 83% of the Company's domestic
revenues in 1997 were derived from products that have been internally developed.
Through this dual product strategy approach, the Company is able to introduce
new products while managing its research and development costs. During 1997, the
Company launched a total of 53 new and upgraded North American premium
education, reference and productivity products, of which 46 were developed
internally.
Internal Product Development. The Company's internal product
development efforts are designed to result in efficient and timely product
introductions by focusing on "core code" development. Where possible, the
Company specifies, develops and manages (or purchases) one base of source code
from which many products are created. Using one
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base of source code permits the Company to maximize programming efficiency
because the investment of time and capital in developing the base source code is
shared among multiple products and additional programming time is minimized. As
a result, production schedules are more predictable and development costs are
lower since the underlying code for new programs has previously been tested and
debugged and the software already documented. Even with these "core codes" the
Company must continuously update and improve the content and the technology of
its products in order to remain competitive.
In certain instances, the Company's internally developed products
contain components that have been developed by outside developers or authors and
are licensed by the Company. The Company generally pays these outside
developers/authors royalties based on a percentage of net sales or on a
work-for-hire basis.
The Company maintains principal research and development facilities and
personnel in Framingham, MA; Fremont, CA; Knoxville, TN; Baltimore, MD and
Minneapolis, MN. The Company's development efforts include product development,
documentation and testing as well as the translation of certain of its products
into foreign languages.
The Company believes that its premium educational products require
significant investments in product marketing and research and development in
order to take advantage of new technologies that benefit educational software
products and to remain competitive. In addition to expenses related to
engineering and quality assurance, the Company's research and development
expenses include costs associated with the identification and validation of
educational content and engagement features and the development and
incorporation of new technologies into new products.
The Company's premium educational products require varying degrees of
development time, frequently depending on treatment of the subject matter, the
number of activities and the general complexity of the product. The typical
length of research and development time ranges from 6 to 24 months with the
first product in a new family generally requiring the longest period of
development. The development and introduction of new products that operate on,
and the adaptation of existing titles to new platforms or operating systems or
that incorporate emerging technologies may require greater development time and
expense and may generate less revenue per product as compared with recent
introductions of new products or product adaptations.
Most of the Company's educational products have been designed and
developed internally by Company employees. The Company also uses third-party
designers, artists and programmers in its research and development efforts and
expects to continue to do so in the future. The Company believes that a mix of
internal and external third-party resources, as well as potential acquisitions
of products or technologies, is a cost-effective method of facilitating the
development of new educational software products. Products that are developed
using external third parties are generally owned or licensed exclusively by the
Company and are marketed under the Company's various brand names. During 1997,
the Company launched The American Girls Premier, which combined the Company's
advanced proprietary technology with the well-known American Girls brand.
Similarly, through its Creative Wonders products, including the Sesame Street
line, the Company seeks to capitalize on brands that are trusted by parents and
teachers for their educational value.
Licensed Products. The Company supplements its development efforts by
acquiring the rights to products on either an exclusive or non-exclusive basis,
both through the purchase of products and under royalty-bearing licenses.
Generally, the Company's license agreements provide for the payment of royalties
based on a percentage of the Company's net sales of such products.
The licensed products typically are repackaged under the Company's
proprietary labels and sold through its distribution channels. The advantage of
this distribution method to the outside software developers is that the Company
is generally able to provide a significantly greater volume of sales than the
software developer would be able to command itself. The Company leverages its
broad distribution strength and reputation for successfully publishing products
to attract outside developers/authors and further enhance its relationships with
the software development community. Retail and direct response marketers benefit
from this arrangement by having convenient access to a wide range of products
offered by the Company.
The Company's licensing of fully developed products allows for
efficiencies because the cost of development is borne by the licensor. Licensing
also reduces the financial and market risk to the Company from a product that is
not well accepted by customers since the Company generally pays royalties based
on actual net sales.
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Both internally developed and licensed products under development are
extensively tested by the Company's quality assurance department before being
released for production. The department tests for defects, functionality,
ease-of-use and compatibility the many of the popular PC and printer
configurations that are available to consumers.
The process of developing software products such as those offered by
the Company is extremely complex and is becoming more complex and expensive over
time. The Company's product development expense levels are based largely on its
expectations regarding future sales, and, accordingly, operating results would
be disproportionately adversely affected by a decrease in sales or failure to
meet the Company's sales expectations due to delays in new product
introductions, or lower than expected demand. If the Company does not accurately
anticipate and successfully adapt its products to emerging platforms,
environments and technologies, or new products are not introduced when planned
or do not achieve anticipated revenues, the Company's operating results could be
materially adversely affected. In addition, the Company believes that on-line or
Internet products and services will become an increasingly important platform
and distribution media; and as such the Company's failure to timely and
successfully adapt to and utilize such technologies could materially and
adversely affect its competitive position and its financial results.
PRODUCTION
The Company strives to minimize production costs, driving costs down as
unit volumes and the rate of new title introductions increase through process
efficiencies and economies of scale. Production of the Company's products
involves the duplication of diskettes or CD-ROM disks and the printing and
assembly of packaging, labels, user manuals and other purchased components. The
Company subcontracts all of the manufacture and fulfillment of its products to
third party vendors. In 1997, the production, assembly and distribution of the
Company's North American products, with certain exceptions (including
duplication of CD-ROM disks, school channel products and certain OEM products),
was performed by two units of Bertelsmann AG (collectively, "BMG"). The Company
believes that its existing production capacity is sufficient to handle
anticipated increases in volume and titles into the foreseeable future.
Manufacturing and assembly of the Company's international products take place
primarily at the Company's facilities in Dublin, Ireland and to a lesser extent
in Munich, Germany.
TECHNICAL SUPPORT
The Company provides a variety of technical support services to
dealers, distributors, corporations and end-users. Users of the Company's
products generally receive free telephone support for the life of the product
(i.e. until the next version is released or manufacturing of the product is
discontinued). This support is principally provided by the Company's Technical
Support Center in Knoxville, TN.
COMPETITION
The consumer software industry is intensely and increasingly
competitive and is characterized by rapid changes in technology and customer
requirements. The Company competes for retail shelf space and general consumer
awareness with a number of companies that market consumer software. The Company
encounters competition from both established companies, including the largest
companies in the industry and new companies that may develop comparable or
superior products. A number of the Company's competitors and potential
competitors possess significantly greater capital, marketing resources and brand
recognition than the Company. Rapid changes in technology, product obsolescence
and advances in computer software and hardware require the Company to develop or
acquire new products and to enhance its existing products on a timely basis. The
Company's marketplace has recently experienced a higher emphasis on on-line and
Internet related services and content tailored for this new distribution
channel. To the extent that demand increases for on-line products and content,
the demand for the Company's existing products may change. There can be no
assurance that the Company will be able to maintain market share or that the
market for the Company's products will not to erode, and otherwise compete
successfully in the future.
Competitive pressures in the consumer software industry have resulted,
and the Company believes are likely to continue to result, in more innovative
channel marketing and advertising in the future. During 1997, the Company and
many of its competitors began using rebate coupons in order to induce consumers
to purchase their products. In addition, the Company uses various forms of print
and television advertising to enhance brand and product awareness. The use of
these methods of channel marketing and advertising is becoming more prevalent
among the larger consumer software publishers. To the extent that the Company
fails to match competitors' future channel marketing and advertising programs it
could risk loss of market share and corresponding revenues and operating
profits. Furthermore, during early 1997, the Company reduced the retail selling
prices of many of its core educational products in order to remain
9
<PAGE> 10
competitive in the market place. There can be no assurance that the Company's
selling prices will not decline in the future or that the Company will not
respond to such declines with additional price reductions or marketing programs.
Such price reductions or marketing programs may reduce the Company's revenues
and operating margins in the future.
Large companies with substantial bases of intellectual property content
in the motion picture and media industries, sophisticated product marketing and
technical abilities and/or financial resources that may not need to realize an
immediate profit or return on investment have increasingly entered the consumer
software market. These competitors include: Microsoft, Disney, Mattel, Hasbro,
IBM and Cendant Corporation (formerly CUC International Inc.). For example,
technology companies have begun to acquire greater access to branded content,
and content-oriented companies have begun to acquire greater technological
capabilities. To the extent that competitors achieve a performance, price or
distribution advantage, the Company could be adversely affected. Furthermore,
increased consolidation of the consumer software market may impact future growth
potential and performance.
In the retail distribution channel resellers typically have a limited
amount of shelf space and promotional resources. There is intense competition
for high quality and adequate levels of shelf space and promotional support from
retailers. To the extent that the number of consumer computer platforms and
products increases, competition for shelf space may also increase. Mass
merchants such as Wal-Mart are increasingly representing a larger portion of the
Company's revenues. As these retailers achieve greater market share from the
traditional software retailers, the Company may experience higher marketing
costs and increased competition for shelf space, which could impact future sales
and operating margins. Additionally, as technology evolves, the type and number
of distribution channels will further change and new types of competitors, such
as cable or telephone companies, may emerge. There can be no assurance that the
Company will compete effectively in these channels.
The retail channels of distribution available for products are subject
to rapid changes as retailers and distributors enter and exit the consumer
software market or alter their product inventory preferences. Other types of
retail outlets and methods of product distribution may become important in the
future. These new methods may include delivery of software using on-line
services or the Internet, which will necessitate certain changes in the
Company's business and operations including addressing operational challenges
such as improving download time for pictures, images and programs, ensuring
proper regulation of content quality and developing sophisticated security for
transmitting payments. Should on-line distribution channels increase, the
Company will be required to modify its existing technology platforms in order
for its products to be compatible and remain competitive. It is critical to the
success of the Company that, as these changes occur, it maintains access to
those channels of distribution offering software in its market segments.
In both the professional and home income tax preparation markets in
Canada, there are relatively few barriers to entry for competitors. In Canada,
there are numerous companies offering tax preparation software products for both
the professional and home user. As a result, there is significant price and
product competition in this market. Currently, the Company's tax products are
generally designed to run on DOS and Windows operating systems, with certain
professional packages running on the Macintosh system. The demand for and
ability to develop successful packages to run in the Windows operating
environment may affect the success of such products.
PROPRIETARY RIGHTS AND LICENSES
Consistent with industry practice, the Company does not have signed
license agreements with the end-users of its products, and its products do not
contain mechanisms to inhibit unauthorized copying. Instead, the Company relies
on the copyright laws to prevent unauthorized distribution of its software. The
Company also relies on a combination of trade secret, patent, trademark and
other proprietary rights, laws and license agreements to protect its proprietary
rights. Existing copyright laws afford only limited protection. It may be
possible for unauthorized third parties to copy the Company's products or to
obtain and use information the Company regards as proprietary.
Policing unauthorized use and distribution of the Company's products is
difficult, and while it is difficult to determine the extent to which such use
or distribution exists, software piracy can be expected to be a persistent
problem. These problems are particularly acute in certain international markets
such as South America, the Middle East, the Pacific Rim and the Far East, and
the laws of certain countries in which the Company's products are or may be
distributed provide less protection than those of the United States.
The Company periodically receives communications alleging or suggesting
that its products may incorporate material covered by the copyrights, trademarks
or other proprietary rights of third parties. With increased use of music, video
and animation in CD-ROM products and the increased number of products on the
market generally, the Company is
10
<PAGE> 11
likely to experience an increase in the number of infringement claims asserted
against it in the future. With respect to licensed products, the Company is
generally indemnified against liability on these matters. The Company's policy
is to investigate the factual basis of such communications and to resolve such
matters promptly by enforcing its rights, negotiating licenses (if necessary) or
taking other appropriate actions.
In certain circumstances, litigation may be necessary to enforce the
Company's proprietary rights, to protect copyrights, trademarks and trade
secrets and other intellectual property rights owned by the Company or its
licensors, to defend the Company against claimed infringements of the rights of
others and to determine the scope and validity of the proprietary rights of the
Company and others. Any such litigation, whether with or without merit, could be
costly and could result in a diversion of management's attention, which could
have an adverse effect on the Company's business, operating results or financial
condition. Adverse determinations in litigation relating to any of the Company's
products could result in the loss of the Company's proprietary rights, subject
the Company to liabilities, require the Company to seek licenses from third
parties or prevent the Company from selling particular products.
HISTORY
Corporate Background. The Company was founded and incorporated in
California under the name MicroPro International Corporation in October 1978. In
November 1986, it changed its state of incorporation from California to
Delaware, and in May 1989, it changed its corporate name to WordStar
International Incorporated. In February 1994, WordStar changed its name to
SoftKey International Inc. in connection with a three-way business combination
including the Company, SoftKey Software Products Inc. ("Former SoftKey") and
Spinnaker Software Corporation ("Spinnaker") (the "Three-Party Combination").
The business of Former SoftKey prior to such transaction commenced in 1984 and
focused originally on vertical software applications, or software packages
designed for specific types of businesses. By 1993, Former SoftKey was generally
engaged in the computer software and services businesses, operating in three
business units: a publishing division, which acquired software application
packages from various software developers and distributed them to end users; a
tax division, which developed and distributed professional tax software products
and also engaged in the computer processing of tax data; and a consulting
division, which has been discontinued. After the Three-Party Combination, the
Former SoftKey publishing division operations were consolidated with the
operations of the Company and SoftKey continued to operate the businesses of the
tax division.
In 1995 and 1996, the Company acquired several educational software
companies, including The Former Learning Company, Compton's, tewi Verlag GmbH,
Edusoft S.A. and MECC. In October 1996, the Company changed its name to The
Learning Company, Inc. to reflect its expanded emphasis on educational software.
During 1997, the Company expanded its presence in education software
with the acquisitions of Creative Wonders, Skills Bank, Learning Services, TEC
Direct and Microsystems.
EMPLOYEES
At February 2, 1998, the Company had 1,525 full time employees. The
Company believes that its success is highly dependent on its ability to attract
and retain qualified employees. As necessary, the Company supplements its
regular employees with temporary and contract personnel. No employees are
covered by a collective bargaining agreement, and there have been no work
stoppages.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial Information pertaining to the Company's foreign and domestic
operations is set forth in the Consolidated Financial Statements - Note 12,
included in Part II, Item 8 and presented as a separate section of this report.
FORWARD LOOKING STATEMENTS
Certain of the information contained in this Annual Report on Form
10-K, including without limitation statements made under this Part I, Item 1,
"Business" and Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts,
may include "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company's actual results may differ materially from those set forth in such
forward-looking statements.
11
<PAGE> 12
Important factors and assumptions that could cause the Company's actual
results to differ materially from those included in the forward-looking
statements made herein include the factors which are responsible for
period-to-period fluctuations in the Company's operating results generally.
These factors include without limitation the integration of operations resulting
from acquisitions of companies, delays in customer purchases in anticipation of
upgrades to existing products or release of competitive products, currency
fluctuations, dealer and distributor order patterns and seasonality of buying
patterns of customers and the historic and recurring pattern of Company sales by
which a disproportionate percentage of a quarter's total sales occur in the last
month and weeks of each quarter, making predictions of revenues and earnings
especially difficult and resulting in substantial risk of variance of actual
results from those foregoing at any time prior to near the quarter close.
Additional factors and assumptions that could generally cause the Company's
actual results to differ materially from those included in the forward-looking
statements made herein include without limitation the Company's ability to
develop and introduce new products or new versions of existing products, the
timing of such new product introductions, expenses relating to the development
and promotion of such new product introductions, changes in pricing policies by
the Company or its competitors, projected and actual changes in platforms and
technologies, timely and successful adaptation to such platforms or
technologies, the accuracy of forecasts of consumer demand, product returns,
market seasonality, changes or disruptions in the consumer software distribution
channels, the effects of general economic conditions, the rate of growth in the
consumer software industry, the impact of competitive products and pricing in
the consumer software industry, the sufficiency of the Company's production
capacity to meet future demand for its products and the Company's ability to
continue to exploit new channels of distribution for its products. In the past
the Company has grown partially by acquisition, some of which have been
accounted for by the purchase method, resulting in large amounts of goodwill and
amortization charges. The Company may enter into similar transactions in the
future. Additional factors that may cause the Company's actual results to vary
from those set forth in forward-looking statements are described elsewhere in
the Annual Report on Form 10-K under the heading "Future Operating Results".
Other factors and assumptions not identified above were also involved
in the derivation of these forward-looking statements and the failure of such
other assumptions to be realized, as well as other factors, may also cause
actual results to differ materially from those projected. The Company assumes no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
ITEM 2. PROPERTIES
FACILITIES
The Company's headquarters are currently located in approximately
71,000 square feet of leased space in an office building in Cambridge,
Massachusetts, where the Company's executive, operational, administrative and
certain sales activities are currently conducted. The lease for the Cambridge
facility expires in December 2001. The Company leases approximately 66,000
square feet of office and warehouse space in Fremont, California expiring from
October 1999 to March 2003, which is primarily used for marketing and
development of its educational products. The Company leases approximately 50,000
square feet of office space in Minneapolis, Minnesota, which is used primarily
for its school sales operation, and the development of certain of its
educational products. The Minneapolis lease expires in January 1999. The Company
leases approximately 38,000 square feet of office space in Knoxville, Tennessee,
which is primarily used for development of the Company's foreign language based
products and for its technical support activities. The Knoxville leases expire
in May 2000 and April 2001. The Company also leases various office,
manufacturing and warehouse space in Framingham, Massachusetts; Eugene, Oregon;
Baltimore, Maryland; Boulder, Colorado; and certain other states in which it
operates.
The Company's Canadian subsidiary, SoftKey Software Products Inc., owns
land and a building with approximately 19,000 square feet of office space in
Sherbrooke, Quebec, leases approximately 35,000 square feet of office space in
Mississauga, Ontario, which expires in September 2000, and leases additional
warehouse and office space in Mississauga, Ontario, Sherbrooke, Quebec, and
Calgary, Alberta.
The Company also leases various office, manufacturing and warehouse
space in London, England; Dublin, Ireland; Munich, Germany; Amsterdam, Holland;
Paris, France and certain other foreign countries in which it operates.
The Company believes that its facilities, in general, are adequate for
its present and currently foreseeable needs. All properties leased or owned by
the Company are in suitable condition for the purposes for which they are used
by the Company.
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<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
On February 24, 1997, the Company terminated its business relationship
with Stream International Inc. ("Stream"), and, on February 26, 1997, filed suit
against Stream in Massachusetts Superior Court for Middlesex County, seeking
injunctive relief and damages resulting from Stream's delayed and defective
performance of its manufacturing and distribution obligations. Stream responded
to the complaint by denying the Company's claims and asserting counterclaims for
certain outstanding invoices and other matters. As of September 4, 1997 the
parties settled the litigation. The Company had previously accrued for the
anticipated settlement in its financial statements; accordingly, the settlement
did not have a material impact on the Company's results of operations.
The Company is subject to various other pending claims. Management,
after review and consultation with counsel, considers that any liability from
the disposition of such lawsuits in the aggregate would not have a material
adverse effect upon the consolidated financial position or results of operations
of the Company.
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<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's 1997 Annual Meeting of Stockholders was held on
December 4, 1997.
(b) The following directors were elected at the meeting, and no other
directors' terms of office continued after the meeting: Lamar
Alexander, Michael A. Bell, James C. Dowdle, Robert Gagnon, Kevin
O'Leary, Charles L. Palmer, Michael J. Perik, Carolynn Reid-Wallace,
Robert A. Rubinoff and Scott M. Sperling.
(c) The first matter voted upon at the meeting was the election of
Directors. Each of the nominees was elected as a director to serve
until the Company's 1998 Annual Meeting and until his successor is
elected and qualified. The votes for each of the nominees were reported
as follows:
Lamar Alexander For: 40,435,550
Withheld: 2,742,719
Michael A. Bell For: 40,434,418
Withheld: 2,743,851
James C. Dowdle For: 40,437,088
Withheld: 2,741,181
Robert Gagnon For: 40,440,973
Withheld 2,737,296
Kevin O'Leary For: 40,436,851
Withheld: 2,741,418
Charles L. Palmer For: 40,440,574
Withheld: 2,737,695
Michael J. Perik For: 40,434,702
Withheld: 2,743,567
Carolynn Reid-Wallace For: 40,437,162
Withheld: 2,741,107
Robert A. Rubinoff For: 40,440,118
Withheld: 2,738,151
Scott M. Sperling For: 36,916,091
Withheld: 6,262,178
The second matter voted upon at the meeting was the ratification of the Board's
appointment of Coopers & Lybrand L.L.P. as independent public accountants for
the fiscal year ended January 3, 1998. Such appointment was approved. The votes
were reported as follows:
Coopers & Lybrand L.L.P. For: 43,000,082
Against: 100,503
Abstain: 77,684
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<PAGE> 15
The third matter voted upon at the meeting was a proposal to approve the
Company's 1996 Non-Employee Director Stock Option Plan. Such proposal was
approved. The votes were reported as follows:
Approval of the 1996 Non- For: 23,651,379
Employee Director Stock Against: 10,169,890
Option Plan Abstain: 149,009
Non-Votes: 9,207,991
The fourth matter voted upon at the meeting was a proposal to approve the
Company's 1997 Employee Stock Purchase Plan. Such proposal was approved. The
votes were reported as follows:
Approval of the 1997 For: 32,759,045
Employee Stock Purchase Against: 1,096,471
Plan Abstain: 114,762
Non-Votes: 9,207,991
The fifth matter voted upon at the meeting was a proposal to approve the
amendments to the Company's Long Term Equity Incentive Plan (the "LTIP"), to
increase the number of shares issuable under the LTIP from 7,000,000 to
9,000,000 and to eliminate the Company's ability to grant options at below the
fair market value of the common stock at the time of the grant. Such proposal
was approved. The votes were reported as follows:
Approval of the LTIP For: 21,328,251
Amendments Against: 12,510,047
Abstain: 131,980
Non-Votes: 9,207,991
The sixth matter voted upon at the meeting was a proposal to approve the
issuance of an aggregate of 750,000 shares of Series A Convertible Participating
Preferred Stock of the Company to affiliates of Thomas H. Lee Company, Bain
Capital, Inc. and Centre Partners Management LLC. Such proposal was approved.
The votes were reported as follows:
Approval of Issuance of For: 30,071,671
Shares Against: 3,215,432
Abstain: 177,392
Non-Votes: 9,713,775
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<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange
under the symbol "TLC." As of February 2, 1998, to the Company's knowledge,
there were approximately 1,469 holders of record of the common stock. The
Company has not paid cash dividends on its common stock and does not anticipate
doing so in the foreseeable future.
The following sets forth the quarterly high and low sales prices for
the fiscal periods indicated.
1996 High LOW
---- ---
First Quarter $27.75 $13.375
Second Quarter 30.3125 17.25
Third Quarter 22.375 15.25
Fourth Quarter 25.75 13.375
1997 High LOW
---- ---
First Quarter $18.00 $ 5.75
Second Quarter 9.625 5.50
Third Quarter 15.75 8.5625
Fourth Quarter 20.50 13.78125
On December 30, 1997, the Company issued 424,010 shares of the
Company's common stock to the former stockholders of TEC Direct, Inc. ("TEC
Direct") in connection with the Company's acquisition of TEC Direct. On January
21, 1998, the Company issued an additional 5,723 shares of common stock to
complete the acquisition. For such issuances the Company has relied upon the
exemption from registration under Section 4(2) of the Securities Act of 1993
(the "Securities Act"). The basis for this exemption is satisfaction of the
conditions of Rule 506 under the Securities Act in that the offers and sales
satisfied all the terms and conditions of Rules 501 and 502 under the Securities
Act, there were no more than 35 purchasers of securities from the Company, other
than accredited investors, and each purchaser, either alone or with his
purchaser representative, had such knowledge and experience in financial and
business matters that he was capable of evaluating the merits and risks of the
prospective investment.
On December 5, 1997, the Company issued 750,000 shares of its Series A
Convertible Participating Preferred Stock (the "Preferred Stock") to certain
institutional investors in exchange for the surrender of the Company's 5-1/2%
Convertible/Exchangeable Notes due 2000 in the aggregate principal amount of
$150,000,000, which the investors purchased from Tribune Company in a private
transaction. Each share of the Preferred Stock has an initial liquidation
preference of $200 and is initially convertible into 20 shares of the Company's
common stock, subject to adjustment in certain circumstances. For the issuance
of the Preferred Stock, the Company relied on the exemption from registration
under Section 4(2) of the Securities Act. The basis for this exemption is
satisfaction of the conditions of Rule 506 of the Securities Act in that the
offers and sales satisfied all the terms and conditions of Rules 501 and 502
under the Securities Act, there were no more than 35 purchasers of securities
from the Company, other than accredited investors, and each purchaser, either
alone or with its purchaser representative, had such knowledge and experience in
financial and business matters that it was capable of evaluating the merits and
risks of the prospective investment.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the Years Ended
December 31, 1997, 1996, 1995 and 1994, the six month period ended December 31,
1993 (the "Transition Period Ended December 31, 1993") and the Year Ended June
30, 1993 are derived from the Company's audited consolidated financial
statements. The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto, included elsewhere in this report.
OPERATING INFORMATION:
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
Years Ended December 31, 30, December 31, June 30,
-------------------------------------------------------------- ------------- ------------
1997 1996 1995 1994 1993 1993
----------- ----------- ------------ ----------- ------------- ------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 392,438 $ 343,321 $ 167,042 $ 121,287 $ 41,645 $ 109,704
Operating income (loss) (393,055) (381,312) (60,870) 25,741 (69,057) (56,981)
Net income (loss) (475,667) (405,451) (65,960) 21,145 (73,258) (57,250)
Net income (loss) per
share:
Basic $ (9.59) $ (9.94) $ (2.65) $ 1.13 $ (5.01) $ (4.36)
Diluted $ (9.59) $ (9.94) $ (2.65) $ 1.07 $ (5.01) $ (4.36)
Weighted average
number of shares
outstanding:
Basic 49,613,000 40,801,000 24,855,000 20,462,000 14,618,000 13,129,000
Diluted 49,613,000 40,801,000 24,855,000 18,710,000 14,618,000 13,129,000
</TABLE>
BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $ 416,791 $793,518 $900,413 $90,815 $79,334
Total long-term obligations 360,221 574,928 561,101 21,859 24,687
Total stockholders' equity (deficit) (103,786) 104,937 214,519 37,485 (8,632)
</TABLE>
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto, and the information included
elsewhere herein. All dollar amounts presented in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are presented in
thousands, except share and per share amounts.
GENERAL
Business Combinations
On February 4, 1994, the Company completed a three-way business
combination (the "Three-Party Combination") among SoftKey Software Products Inc.
("Former SoftKey"), WordStar International Incorporated ("WordStar") and
Spinnaker Software Corporation ("Spinnaker"). The Three-Party Combination was
accounted for using the pooling-of-interests method of accounting. On February
4, 1994, WordStar changed its name to SoftKey International Inc. and on October
24, 1996 changed its name to The Learning Company, Inc. ("TLC" or the
"Company").
On October 23, 1997, the Company acquired control of 100% of the equity
interest in Creative Wonders L.L.C. ("Creative Wonders"), an educational
software company that publishes among other titles, the Sesame Street line of
products. The purchase price was a total of $37,799, including the value of
employee stock options assumed by the Company and estimated transaction costs.
The purchase price included cash payments totaling $33,883. The transaction was
accounted for as a purchase.
On September 19, 1997, the Company acquired Learning Services Inc.
("Learning Services"), a national school software catalog for teachers, in
exchange for the issuance of 709,976 shares of common stock. On September 29,
1997, the Company acquired Skills Bank Corporation ("Skills Bank"), a leader in
developing language, mathematics and reading software products for adult,
adolescent and K to 12 students in exchange for the issuance of 1,069,286 shares
of common stock. On October 2, 1997, the Company acquired Microsystems Software,
Inc. ("Microsystems"), a leading developer of Internet filtering software, in
exchange for the issuance of 955,819 shares of common stock. On December 30,
1997, the Company acquired TEC Direct, Inc. ("TEC Direct"), an educational
consumer software catalog, in exchange for the issuance of 429,733 shares of
common stock. Each of these transactions was accounted for using the
pooling-of-interests method of accounting. The consolidated financial statements
of the Company for the years prior to December 31, 1997 included in this report
do not include the results and balances of these companies as they were
determined to be immaterial to the consolidated financial statements for those
periods.
On May 17, 1996, the Company acquired Minnesota Educational Computing
Corporation (MECC) ("MECC"), a publisher and developer of high quality
educational software for children sold to consumers and schools, in exchange for
9,214,007 shares of common stock. The total purchase price was $284,631,
including estimated transaction costs, the value of stock options assumed and
deferred income taxes related to certain identifiable intangible assets
acquired. In the transaction, approximately 1,048,000 MECC employee stock
options were converted into options to purchase approximately 1,198,000 shares
of TLC common stock. The transaction was accounted for as a purchase.
On August 12, 1996, the Company acquired Edusoft S.A. ("Edusoft"), an
educational software company located in Paris, France, in exchange for the
issuance of 752,275 shares of common stock. The total purchase price was
$13,313, including estimated transaction costs. In addition, certain
stockholders are eligible to earn additional purchase price dependent upon
future operating results and certain other conditions. The amount may be settled
annually in shares of the Company's common stock, the number of which is to be
determined on a volume-weighted average of the closing stock price following the
close of each fiscal year. The transaction was accounted for as a purchase.
On December 28, 1995, the Company purchased Compton's NewMedia, Inc.
and Compton's Learning Company (collectively, "Compton's"), developers and
publishers of educational and reference multimedia software titles and each a
former wholly-owned subsidiary of Tribune Company. In connection with the
acquisition, the Company issued a total of 5,052,697 shares of common stock,
which included 587,036 shares to settle $14,000 of intercompany debt to Tribune
Company and executed a promissory note to Tribune Company for $3,000 in
cancellation of certain remaining intercompany indebtedness. The total purchase
price was $104,394, including estimated transaction costs, settlement of certain
intercompany debt to Tribune Company, deferred income taxes related to certain
identifiable intangible assets
18
<PAGE> 19
acquired and assumption of the fair value of net liabilities of Compton's. The
$3,000 promissory note was repaid in 1996 by the issuance of 158,099 shares of
common stock. The transaction was accounted for as a purchase.
On December 22, 1995, the Company acquired control of The Learning
Company ("The Former Learning Company"), a leading developer of education
software products for use at home and school. Under the terms of the merger
agreement, the Company acquired, in a two-step business combination, all of the
outstanding common stock of The Former Learning Company for total consideration
of $684,066, including estimated transaction costs, value of stock options
assumed and deferred income taxes related to certain identifiable intangible
assets acquired. Approximately $543,163 of the purchase price was settled in
cash. Approximately 1.1 million unvested Former Learning Company stock options
were assumed and converted into stock options to purchase 3,123,000 shares of
TLC common stock, based on the merger consideration of $67.50 per share, and
were vested on or before January 26, 1996. The transaction was accounted for as
a purchase.
On August 31, 1995, the Company acquired all of the issued and
outstanding capital stock of Future Vision Holding, Inc. ("Future Vision"), a
multimedia software company, in exchange for 1,088,149 shares of common stock.
The transaction was accounted for using the pooling-of-interests method of
accounting.
On July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi"), a
German software publisher and distributor, for a combination of cash and stock.
One of the former stockholders of tewi is eligible to receive additional
consideration for the purchase up to a maximum of DM 1,080 in each of fiscal
1996 and 1997 based upon achievement of certain revenue and profitability goals.
The amount may be settled annually in shares of the Company's common stock, the
number of which to be determined based on a volume-weighted average of the
closing stock price following the closing of each fiscal year. The transaction
was accounted for as a purchase.
Fiscal Periods
On January 27, 1994, the Company changed its fiscal year end to the 52
or 53 weeks ending on or after December 31. For clarity of presentation herein,
all references to the Year Ended December 31, 1997 relate to the period January
5, 1997 to January 3, 1998. All references to the Year Ended December 31, 1996
relate to the period January 7, 1996 to January 4, 1997; all references to the
Year Ended December 31, 1995 relate to the period January 1, 1995 to January 6,
1996.
Period-to-Period Comparisons
A variety of factors may cause period-to-period fluctuations in the
Company's operating results, including the integration of operations resulting
from acquisitions of companies, revenues and expenses related to the
introduction of new products or new versions of existing products, delays in
customer purchases in anticipation of upgrades to existing products, new or
larger competitors in the marketplace, currency fluctuations, dealer and
distributor order patterns and seasonality of buying patterns of customers.
Historical operating results are not indicative of future operating results and
performance. This is particularly true of historical data presented herein,
certain of which reflects the results of TLC prior to its acquisitions of The
Former Learning Company, MECC and Compton's and the other more recent
acquisitions.
0 19
<PAGE> 20
Summary of Results
The following table summarizes the audited results of operations of the
Company for the periods shown. Reference is made to the Consolidated Financial
Statements included in this report and on which the following table is based.
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 392,438 $ 343,321 $ 167,042
Operating loss (393,055) (381,312) (60,870)
Net loss (475,667) (405,451) (65,960)
Net loss per share (basic and diluted) $ (9.59) $ (9.94) $ (2.65)
</TABLE>
Operating loss includes amortization, merger and other charges of
$515,016, $501,330 and $103,172 in the Years Ended December 31, 1997, 1996 and
1995, respectively.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Revenues
Revenues by distribution channel for the Years Ended December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, % of total December 31, % of total
1997 revenues 1996 revenues
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Distribution Channel
- --------------------
Retail $179,255 46 $174,812 51
OEM 27,286 7 27,855 8
School 48,666 12 21,701 6
Direct response 43,309 11 38,548 11
International 74,179 19 57,684 17
Tax software and services 19,743 5 22,721 7
-------- --- -------- ---
$392,438 100 $343,321 100
======== === ======== ===
</TABLE>
Total revenues increased 14% in the Year Ended December 31, 1997 as
compared to the Year Ended December 31, 1996 primarily due to the introduction
of new educational software products by the Company such as Reader Rabbit's
Toddler, Reader Rabbit's Preschool, Reader Rabbit's Kindergarten and Reader
Rabbit's 1st Grade, The Clue Finders' 3rd Grade Adventures, Oregon Trail 3rd
Edition and The American Girls Premiere.
Retail sales during the Year Ended December 31, 1997 grew due to the
introduction of new and upgraded products by the Company. The Company believes
that the increasing availability of PCs at lower prices have contributed to the
increase in retail revenues. OEM sales declined due to lower demand from
hardware manufacturers but this decline was offset by the revenues derived from
the acquisition of Microsystems. School revenues increased primarily as a result
of sales from the acquisitions of Skills Bank and Learning Services and due to
the introduction of new and upgraded school software titles such as Oregon Trail
3rd Edition. Direct response sales increased due to the continued expansion of
the out-bound tele-sales channel during 1997. The increase in direct response
revenues was offset by a decline in solo direct mail revenues due to the effect
of the Internet and a shift in the Company's product strategy from productivity
and reference products to educational products, which historically have had a
lower response rate in the mail. The international business continued to expand
due to the introduction of 631 new localized and translated titles during the
Year Ended December 31, 1997, and due to the effect of a full year's results of
Edusoft in France and Domus in Holland, which were acquired in August and
September of 1996, respectively. In addition, the Company entered into several
20
<PAGE> 21
international license and distribution transactions during the Year Ended
December 31, 1997 that increased revenues. Revenues from tax software and
services declined due to fluctuations in the Canadian dollar exchange rates and
the timing of delivery of certain products.
The Company expects that its future revenue growth will depend on,
among other things, its ability to introduce new and upgraded products to the
marketplace, the extent of competition, unit pricing trends, the rate of
proliferation of personal computers into the home market and the demand for its
consumer software products along with the Company's respective share in the
consumer software market. Unit pricing will be affected by the extent of
competition in the consumer software industry, which is expected to increase. In
addition, the Company's ability to develop products for new platforms and
introduce titles into new distribution channels will impact future revenues and
growth rates. The consumer software industry has experienced continued
consolidation of formerly independent companies. To the extent that these
companies gain greater market share than the Company, future results will be
affected negatively. During 1997, the Company and many of its competitors began
using rebate coupons as an incentive to consumers to purchase products and
expand revenues. In addition, the Company uses various forms of print and
television media advertising to enhance brand and product awareness. The use of
these methods of channel marketing and advertising is becoming more prevalent
among the larger consumer software companies. To the extent that the Company
competes with companies larger than itself having more financial resources, it
may not be able to adequately match future channel marketing and advertising
programs, which may in turn result in loss of market share and corresponding
revenues and operating profits.
Costs and Expenses
The Company's costs and expenses and the respective percentages of
revenues for the Year Ended December 31, 1997 as compared to the Year Ended
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, % of total December 31, % of total
1997 revenues 1996 revenues
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Costs of production $111,703 28 $ 91,045 27
Sales and marketing 86,621 22 67,690 20
General and administrative 31,135 8 28,550 8
Development and software costs 41,018 10 36,018 10
Amortization, merger and
other charges 515,016 131 501,330 146
-------- --- -------- ---
$785,493 199 $724,633 211
======== === ======== ===
</TABLE>
Total costs and expenses decreased as a percentage of revenues to 199%
in the Year Ended December 31, 1997 as compared with 211% in the Year Ended
December 31, 1996. The negative percentage of revenues was caused primarily by
the effect of the amortization, merger and other charges.
Costs of production includes the cost of manuals, packaging, diskettes
and CD-ROM discs, duplication, assembly and fulfillment charges. In addition,
costs of production includes royalties paid to third party developers and
inventory obsolescence reserves. Costs of production, as a percentage of
revenues, increased to 28% in the Year Ended December 31, 1997 as compared to
27% in the Year Ended December 31, 1996. The increase in costs of production as
a percentage of revenues was caused by a reduction in the retail selling prices
of certain of the Company's products during the year. The Company expects that
costs of production as a percentage of revenues may continue to increase in the
foreseeable future.
Sales and marketing costs increased to 22% of revenues in the Year
Ended December 31, 1997 as compared to 20% of revenues in the Year Ended
December 31, 1996. The increase as a percentage of revenues was a result of
increased spending on coupon rebate programs in the retail channel, higher
channel marketing costs and increased spending for print and television media
advertising.
General and administrative costs as a percentage of revenues were
constant between years. The increase in expenses was due to the 1997
acquisitions.
21
<PAGE> 22
Development and software costs were constant as a percentage of
revenues. Overall dollars spent increased in the Year Ended December 31, 1997 as
compared to the Year Ended December 31, 1996 as a result of the higher cost to
develop titles in the Reader Rabbit multi-subject series as well as The Clue
Finders' Adventures and Compton's Interactive Encyclopedia, which each have a
higher proportion of animation, graphics and online content than products
developed in prior years. In addition, the Company has begun to develop MMX, DVD
and Internet Applet platform based technologies, which are more expensive to
develop than traditional software code. The Company expects that as technologies
become more complex it will spend an increasing percentage of its revenues on
research and development.
Amortization, merger and other charges decreased as a percentage of
revenues to 131% in the Year Ended December 31, 1997 as compared to 146% in the
Year Ended December 31, 1996. The amortization, merger and other charges
includes, among other things, the amortization of goodwill and other acquired
intangible assets from the acquisitions of The Former Learning Company,
Compton's, Creative Wonders and MECC plus certain of the European acquisitions.
In addition, the amortization, merger and other charges for the Year Ended
December 31, 1997 include certain exit and restructuring costs related to
centralizing certain administrative functions of the acquisitions and employee
severance. The change in dollar amount is also due to inclusion of a full year
of amortization of the goodwill and intangible assets resulting from the
acquisition of MECC, whereas the prior year included amortization from May 17,
1996, the acquisition date, to the end of that year. In addition, the
amortization, merger and other charges includes a charge for incomplete
technology in the Year Ended December 31, 1997 of $1,050 related to the
acquisition of Creative Wonders and in the Year Ended December 31, 1996 includes
a charge for incomplete technology of $56,688 related to the acquisition of
MECC.
22
<PAGE> 23
Amortization, merger and other charges are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996
-------- --------
<S> <C> <C>
Amortization of goodwill and other intangible assets $457,393 $434,866
Exit and restructuring costs 48,571 4,260
Charge for incomplete technology 1,050 56,688
Provision for earn-outs 5,497 2,917
Professional fees and other costs 2,505 2,599
-------- --------
$515,016 $501,330
======== ========
</TABLE>
The increase in amortization of goodwill and other intangible assets in
the Year Ended December 31, 1997 as compared to the Year Ended December 31, 1996
related primarily to a full year of amortization of goodwill and other
intangible assets resulting from the acquisitions of MECC in May 1996 and a full
year of amortization of goodwill and other intangible assets resulting from the
European acquisitions of Edusoft and Domus in August and September of 1996.
During 1997, the amortization of the goodwill and other intangible assets
related to the acquisitions of The Former Learning Company and Compton's was
completed.
Exit and restructuring costs related to charges for employee severance,
discontinued products, termination of certain supplier relationships and other
charges related to the acquisitions. The charge increased in the Year Ended
December 31, 1997 as compared to the Year Ended December 31, 1996 as a result of
the 1997 acquisitions and related changes in strategy related to the school
channel and discontinued product.
The charge for incomplete technology for the Year Ended December 31,
1997 related to products being developed by Creative Wonders and for the Year
Ended December 31, 1996 related to products being developed by MECC, in each
case which the Company believes had not yet reached technological feasibility
and had no future alternative use at the date of acquisition and for which
additional development was required to complete the software technology and
products. The Company engaged a nationally recognized valuation firm to
determine the value of the complete, incomplete technology and other
identifiable intangible assets.
The provision for earn-outs related to additional payments which were
earned by the former owners of certain acquisitions completed in 1996 and 1995.
The earn-out requirements are based upon meeting certain financial and other
goals and are recorded when those conditions are met. The amounts due are
payable in shares of the Company's common stock and are due prior to December
31, 1998.
Professional fees related to the investment banking, legal and
accounting costs for the acquisitions.
Interest Expense
Interest expense decreased to a net expense of $21,378 in the Year
Ended December 31, 1997 as compared to a net expense of $24,139 in the Year
Ended December 31, 1996 as a result of the repurchase of certain of the Senior
Convertible Notes, offset by the interest costs associated with the sale of
certain trade accounts receivable and by borrowings throughout the year under
the bank line of credit.
23
<PAGE> 24
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1995
Revenues
Revenues by distribution channel for the Years Ended December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, % of total December 31, % of total
1996 revenues 1995 revenues
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Distribution Channel
- --------------------
Retail $174,812 51 $ 75,734 45
OEM 27,855 8 20,021 12
School 21,701 6 -- --
Direct response 38,548 11 26,203 16
International 57,684 17 25,631 15
Tax software and services 22,721 7 19,453 12
-------- --- -------- ---
$343,321 100 $167,042 100
======== === ======== ===
</TABLE>
Total revenues increased 106% in the Year Ended December 31, 1996 as
compared to the Year Ended December 31, 1995 due to several factors, including
the effect of revenues from the acquisitions of The Former Learning Company,
Compton's and MECC and an increase in sales of new and upgraded products
launched by the Company during the year. Retail revenues increased as a result
of the acquisitions of The Former Learning Company, Compton's and MECC plus a
general increase in sales of consumer software products through retailers such
as Wal-Mart, Office Depot, Kmart and OfficeMax and sales from new and upgraded
products. International sales increased primarily as a result of the acquisition
of Edusoft in 1996, a full year of sales from tewi which was acquired in July
1995 and an increase in the number of translated foreign language versions of
the Company's products available for sale in the international markets. Original
equipment manufacturer ("OEM") revenues increased due to the availability of new
product offerings for this channel and an increased demand for multi-language
titles. Direct response revenues increased on a dollar basis but decreased as a
percentage of revenues due to the overall increase in revenues resulting from
product sales of the acquired companies, which did not formerly participate in
the direct response channel. Direct response revenues also increased as a result
of the introduction of an outbound telephone sales program during 1996. Prior to
the acquisitions of The Former Learning Company and MECC, the Company did not
participate in the school channel. Revenues from tax software and services
increased for the Year Ended December 31, 1996 as compared to the Year Ended
December 31, 1995 as a result of earlier delivery of product to the Company's
customers.
Costs and Expenses
The Company's costs and expenses and the respective percentages of
revenues for the Year Ended December 31, 1996 as compared to the Year Ended
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, % of total December 31, % of total
1996 revenues 1995 revenues
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Costs of production $ 91,045 27 $ 53,070 32
Sales and marketing 67,690 20 38,370 23
General and administrative 28,550 8 20,813 12
Development and software costs 36,018 10 12,487 7
Amortization, merger
and other charges 501,330 146 103,172 62
-------- --- -------- ---
$724,633 211 $227,912 136
======== === ======== ===
</TABLE>
Total costs and expenses increased as a percentage of revenues to 211%
in the Year Ended December 31, 1996, as compared with 136% in the Year Ended
December 31, 1995. This increase as a percentage of revenues was caused
primarily by the charges for incomplete technology, the amortization of goodwill
and acquired technology resulting from the acquisitions of The Former Learning
Company, Compton's and MECC, offset by the reduction in general and
24
<PAGE> 25
administrative costs, sales and marketing costs and costs of production as a
percentage of revenues as a result of the integration and centralization of the
operations of the acquired companies.
Costs of production includes the cost of manuals, packaging, diskettes
and CD-ROM discs, duplication, assembly and fulfillment charges. In addition,
costs of production includes royalties paid to third party developers and
inventory obsolescence reserves. Costs of production, as a percentage of
revenues, decreased to 27% in the Year Ended December 31, 1996 as compared to
32% in the Year Ended December 31, 1995. The decrease in costs of production as
a percentage of revenues was caused by reduced prices on the cost to manufacture
product due to increased unit volumes, changes in the production components, the
impact from The Former Learning Company and MECC having historically higher
gross margin selling products than the Company prior to the acquisitions. In
addition, during 1996 the Company experienced an increase in revenues in the
OEM, school and direct response channels, all of which typically experience
higher gross margins than the Company's traditional retail box product sales
channel. As well, the Company has seen an increase in sales of its Value line of
products, which, due to the nature of the low cost packaging in a jewel case,
also generate higher gross margins.
Sales and marketing expenses decreased to 20% of revenues in the Year
Ended December 31, 1996 as compared to 23% of revenues in the Year Ended
December 31, 1995. The percentage decrease was a result of the Company reducing
both fixed costs and employee headcount of its combined operations following the
acquisitions in late 1995 and May 1996.
General and administrative expenses decreased to 8% of revenues in the
Year Ended December 31, 1996 as compared to 12% in the Year Ended December 31,
1995. This is primarily the result of a general reduction in overhead costs and
employee headcount following the acquisitions in 1995 and 1996.
Development and software costs increased to 10% of revenues for the
Year Ended December 31, 1996 as compared to 7% in the Year Ended December 31,
1995. The increase is a result of a higher proportion of internally developed
products from The Former Learning Company, Compton's and MECC than developed by
the Company prior to these acquisitions.
Amortization, merger and other charges increased to 146% of revenues in
the Year Ended December 31, 1996 as compared to 62% in the Year Ended December
31, 1995. The increase results from the amortization of the goodwill and other
intangible assets arising on the acquisitions of The Former Learning Company and
Compton's for a full year in the Year Ended December 31, 1996 as compared to
less than a month in the Year Ended December 31, 1995, and from the amortization
of goodwill and other intangible assets and the charge for incomplete technology
arising from the acquisition of MECC in May 1996.
Amortization, merger and other charges are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Amortization of goodwill and other intangible assets $434,866 $ 31,968
Charge for incomplete technology 56,688 60,483
Employee severance costs 4,260 1,304
Provision for earn-outs 2,917 --
Professional fees and other costs 2,599 6,784
Provision for litigation -- 2,633
-------- --------
$501,330 $103,172
======== ========
</TABLE>
The increase in amortization of goodwill and other intangible assets in
the Year Ended December 31, 1996 as compared to the Year Ended December 31, 1995
relates primarily to the amortization resulting from acquisitions of MECC in May
1996 and a full year of amortization of goodwill arising from The Former
Learning Company and Compton's, which were acquired in December 1995. Goodwill
and other intangible assets are primarily being amortized on a straight-line
basis over two years.
The charge for incomplete technology for the Year Ended December 31,
1996 relates to products being developed by MECC and in the Year Ended December
31, 1995 for products developed by The Former Learning Company and
25
<PAGE> 26
Compton's which the Company believes had not yet reached technological
feasibility at the date of acquisition and for which additional development was
required to complete the software technology and products.
Employee severance costs in each year related to severance paid to
employees of the Company terminated in connection with the acquisitions.
The provision for earn-outs relates to additional payments which may be
earned by the former owners of certain international acquisitions purchased in
1996 and 1995. The earn-out requirements are based upon meeting certain
financial and other goals and will be recorded when those conditions are met.
Professional fees and other costs decreased in the Year Ended December
31, 1996 as compared to the Year Ended December 31, 1995 due to decreased
charges related to the investment banking, legal and accounting costs.
Interest Income (Expense)
Interest income (expense) increased to a net expense of $24,139 in the
Year Ended December 31, 1996 as compared to interest income of $705 in 1995 as a
result of increased interest expense arising from the Senior Convertible Notes
issued by the Company in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $110,120 at December 31, 1996
to $95,137 at December 31, 1997. This decrease was attributable to the
repurchase of $28,000 of 5-1/2% Senior Convertible Notes due 2000 (the "Senior
Convertible Notes") offset by cash generated from operations of $90,074. The
Company also paid $33,500 during the year to acquire control of Creative
Wonders, which was offset by the net proceeds of $57,462 from the issue of the
special warrants in Canada. Included as a use of cash from operating activities
is $25,115 of interest related to the Senior Convertible Notes and the 5-1/2%
Senior Convertible/Exchangeable Notes due 2000 formerly held by Tribune Company
(the "Private Notes").
On August 1, 1996, the Company announced that its Board of Directors
authorized the repurchase by the Company over the next twelve months of up to
$50,000 principal amount of its Senior Convertible Notes from time to time in
the open market and privately negotiated transactions. Any purchases would
depend on price, market conditions and other factors. During the Year Ended
December 31, 1997, the Company repurchased $28,000 of Senior Convertible Notes.
As of February 2, 1998, the Company has outstanding $293,650 long-term
principal amount Senior Convertible Notes. The Senior Convertible Notes will be
redeemable by the Company on or after November 2, 1998 at declining redemption
prices and are due on November 2, 2000. Should the Senior Convertible Notes not
convert under their terms into common stock, there can be no assurances that the
Company will have sufficient cash flows from future operations to meet payment
requirements under the debt or be able to refinance the notes under favorable
terms or at all.
On December 5, 1997, the Company issued an aggregate of 750,000 shares
of Series A Convertible Participating Preferred Stock (the "Preferred Stock") to
an investor group. The Preferred Stock was issued in exchange for $150,000
principal amount of the Private Notes, which the investor group purchased from
Tribune Company in a private transaction. Each share of the Preferred Stock has
an initial liquidation preference of $200 and is initially convertible into 20
shares of common stock, subject to adjustment. The Preferred Stock is
non-redeemable, bears no dividend, is subject to restrictions on resale for a
period of at least eighteen months and is manditorily convertible into common
stock upon satisfaction of certain conditions. The retirement of the Private
Notes will reduce the Company's future annual interest expense by $8,250.
On November 6, 1997, the Company's Canadian subsidiary, SoftKey
Software Products Inc. ("SoftKey"), issued 4,072,000 special warrants in a
private placement in Canada for net proceeds of $57,462 . Each special warrant
is exercisable without additional payment for one exchangeable non-voting share
of SoftKey (an "Exchangeable Share"). The Exchangeable Shares are exchangeable
at the option of the holder on a one-for-one basis for common stock of the
Company. The proceeds of the private placement were used to acquire a 100%
equity interest in Creative Wonders for $33,500 and the remainder was used for
general corporate purposes.
26
<PAGE> 27
The Company has in place a revolving line of credit (the "Line") with
Fleet Bank to provide for a maximum availability of $50,000, of which $35,000 is
outstanding at December 31, 1997. Borrowings under the Line become due on July
1, 1999 and bear interest at the prime rate (8 1/2% at December 31, 1997). The
Line is subject to certain financial covenants, is secured by a general security
interest in certain operating subsidiaries of the Company and by a pledge of the
stock of certain of its subsidiaries. The Line is guaranteed by the Company.
The Company, through its wholly owned subsidiary The Learning Company
Funding, Inc. (a separate special purpose corporation), is party to a
receivables purchase agreement whereby it can sell without recourse undivided
interests in eligible pools of trade accounts receivable up to $75,000 on a
revolving basis during a five year period ending September 30, 2002. The Company
acts as servicing agent for the sold receivables in the collection and
administration of the accounts.
On October 23, 1997, the Company acquired control of in Creative
Wonders for a total purchase price of approximately $37,799, which included
$33,883 of cash ($33,500 of which had been paid at year end), the value of
employee stock options assumed by the Company and estimated transaction costs.
Income generated by the Company's subsidiaries in certain foreign
countries cannot be repatriated to the Company in the United States without
payment of additional taxes since the Company does not currently receive a U.S.
tax credit with respect to income taxes paid by the Company (including its
subsidiaries) in those foreign countries. The Company also conducts its tax
software business in Canada, which has experienced foreign currency exchange
rate fluctuation relative to the U.S. dollar.
The Company conducts portions of its business in currencies other than
U.S. dollar. The Company does not expect that it will incur any significant risk
of currency translation loss due to fluctuations in those other currencies as
the amounts are not material.
The Company has expensed all costs incurred in connection with Year
2000 system conversions. The amounts incurred and expected to be incurred are
not material.
At the present time, the Company expects that its cash and cash equivalents
and cash flows from operations will be sufficient to finance the Company's
operations for at least the next twelve months. Longer-term cash requirements
are dictated by a number of external factors, which include the Company's
ability to launch new and competitive products, the strength of competition in
the consumer software industry and the growth of the home computer market. In
addition, the Company's remaining long-term portion of the Senior Convertible
Notes totaling $293,650, mature in November 2000. If not converted to common
stock, the Company may be required to secure alternative financing sources.
There can be no assurance that alternative financing sources will be available
on terms acceptable to the Company in the future or at all. The Company
continuously evaluates products and technologies for acquisitions, however no
estimation of short-term or long-term cash requirements for such acquisitions
can be made at this time.
27
<PAGE> 28
FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment that is subject
to many risks and uncertainties. Some of the important risks and uncertainties
which may cause the Company's operating results to differ materially or
adversely are discussed below and elsewhere in this Annual Report on Form 10-K.
INTENSE COMPETITIVE ENVIRONMENT
The consumer software industry is intensely and increasingly
competitive and is characterized by rapid changes in technology and customer
requirements. The Company competes for retail shelf space and general consumer
awareness with a number of companies that market consumer software. The Company
encounters competition from both established companies, including the largest
companies in the industry, and new companies that may develop comparable or
superior products. A number of the Company's competitors and potential
competitors possess significantly greater capital, marketing resources and brand
recognition than the Company. Rapid changes in technology, product obsolescence
and advances in computer software and hardware require the Company to develop or
acquire new products and to enhance its existing products on a timely basis. The
Company's marketplace has recently experienced a higher emphasis on online and
Internet related services and content tailored for this new delivery vehicle. To
the extent that demand increases for online products and content, the demand for
the Company's existing products change. There can be no assurance that the
Company will be able to successfully maintain market share and otherwise compete
successfully in the future.
Competitive pressures in the software industry have resulted, and the
Company believes may continue to result, in pressure to reduce the prices of its
products or risk loss of market share. In response to such competitive pressures
during early 1997 the Company reduced the retail selling price of certain of its
educational products. There can be no assurance that Company's product selling
prices will not continue to decline in the future or that the Company will not
respond to such declines with additional price reductions. Such price reductions
may reduce the Company's revenues and operating margins in the future. During
1997, the Company and many of its competitors began using rebate coupons in
order to induce consumers to purchase their products. In addition, the Company
uses various forms of prints and television advertising to enhance brand and
product awareness. The use of these methods of channel marketing and advertising
is becoming more prevalent among the larger consumer software publishers. To the
extent that the Company fails to match competitors' future channel marketing and
advertising programs, it could risk loss of market share and corresponding
revenues and operating profits.
Large companies with substantial bases of intellectual property content
in the motion picture and media industries, sophisticated product marketing and
technical abilities and/or financial resources that may not need to realize an
immediate profit or return on investment have increasingly entered or announced
their intention to enter the consumer software market. These competitors include
Microsoft, Disney, Mattel, Hasbro and Cendant Corporation (formerly CUC
International Inc.). For example, technology companies have begun to acquire
greater access to content, and content-oriented companies have begun to acquire
greater technological capabilities. To the extent that competitors achieve a
performance, price or distribution advantage, the Company could be adversely
affected. Furthermore, increased consolidation of the consumer software market
may impact future growth potential and performance.
In the retail distribution channel resellers typically have available a
limited amount of shelf space and promotional resources. There is intense
competition for high quality and adequate levels of shelf space and promotional
support from retailers. To the extent that the number of consumer computer
platforms and products increases, this competition for shelf space may also
increase. The Company also competes for shelf space against non-educational and
reference category publishers such as games. To the extent that these vendors
acquire greater shelf space, the Company's position may be reduced. Mass
merchants such as Wal-Mart and Kmart are increasingly becoming a larger portion
of the Company's sales. As these retailers achieve greater market share from the
traditional software retailers, the Company may experience higher marketing
costs and increased competition for shelf space, which could impact future sales
and operating margins. Additionally, as technology changes, the type and number
of distribution channels will further change and new types of competitors, such
as cable or telephone companies, are likely to emerge. There can be no assurance
that the Company will compete effectively in these channels in the future.
The retail channels of distribution available for products are subject
to rapid changes as retailers and distributors enter and exit the consumer
software market or alter their product inventory preferences. Other types of
retail outlets and methods of product distribution may become important in the
future. These new methods may include delivery of software using online services
or the Internet which will necessitate certain changes in the Company's business
and
28
<PAGE> 29
operations including addressing operational challenges such as improving
download time for pictures, images and programs, ensuring proper regulation of
content quality and developing sophisticated security for transmitting payments.
Should on-line distribution channels increase, the Company will be required to
modify its existing technology platforms in order for its products to be
compatible and remain competitive. It is critical to the success of the Company
that, as these changes occur, it maintain access to those channels of
distribution offering software in its market segments.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
The Company operates in a highly competitive and technology driven
environment. The consumer software industry is undergoing substantial change and
is subject to a high level of uncertainty. Software companies must continue to
develop or acquire new products or upgrade existing products on a timely basis
to sustain revenues and profitable operations. Factors contributing to the short
life span of PC software have included rapid technological change and an
expanded demand for content-rich products. Software companies must continue to
create or acquire innovative new products reflecting technological changes in
hardware and software and translate current products into newly accepted
hardware and software formats, in order to gain and maintain a viable market for
their products. PC hardware, in particular, is steadily advancing in power and
function, expanding the market for increasingly complex and flexible software
products. This has also resulted in longer periods necessary for research and
development of new products and a greater degree of unpredictability in the time
necessary to develop products. Furthermore, the rapid changes in the market and
the increasing number of new products available to consumers have increased the
degree of consumer acceptance risk with respect to any specific title that the
Company may publish. It is expected that this trend will continue and may become
more pronounced in the future.
Similarly, the Company's product-content focus and enhanced presence in
the educational and reference software market have required and will continue to
require the Company to evaluate and adopt appropriate development and marketing
strategies and methods, which may differ from those historically employed by the
Company and subject the Company to the risks and competitive pressures
associated with those new strategies.
The Company's rights to license many of its software products are
non-exclusive and, generally, of limited duration, and there is no assurance the
Company will be able to continue to obtain new products from developers or to
maintain or expand its market share in the event that a competitor offers the
same or similar software products. If the Company is unable to develop or
acquire new products in a timely manner as revenues decrease from products
reaching the end of their natural life cycle, the Company's results of
operations will be adversely affected.
Certain of the Company's products, such as The American Girls Premiere
and the Sesame Street line of products, among others, include branded content
licensed from third parties. This content is licensed pursuant to agreements
with terms of finite duration and which may contain restrictions on the
Company's ability to develop future products without the consent of the
applicable licensor. If the Company is not able to develop future products under
these agreements or enter into alternative arrangements with the same or
additional licensors, the Company's operating results could be adversely
affected.
DEPENDENCE ON MAJOR SUPPLIER
In 1997, the production, assembly and distribution of the Company's
North American line of products was performed by two units of Bertelsmann AG
(collectively, "BMG"), (with the exception of school channel products and
certain OEM products). The Company believes that its existing production
capacity is sufficient to handle anticipated increases in volume and titles into
the foreseeable future. Although the Company believes that suitable alternative
suppliers exist, there can be no assurance that any termination or modification
of its arrangement with BMG would not result in a short-term business
interruption for the Company.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENT
For the Year Ended December 31, 1997, the Company adopted Statement of
Accounting Standards No. 128 ("FAS 128"), which requires the presentation of
basic and diluted earnings per share, which replaces primary and fully diluted
earnings per share. Earnings per share have been restated for all periods
presented to reflect the adoption of FAS 128. Basic net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period, plus the diluted effect
of common stock equivalents. Common stock equivalent shares consist of
convertible
29
<PAGE> 30
debentures, preferred stock, stock options and warrants. The dilutive
computations do not include potential common stock equivalents for the years
ended December 31, 1997, 1996 and 1995 as their inclusion would be antidilutive.
The Financial Accounting Standards Board recently issued Statement of
Position ("SOP") No. 97-2, Software Revenue Recognition, which supersedes SOP
No. 91-1, the existing pronouncement on this subject, in its final form. The
most significant changes to SOP No. 91-1, relate to multiple deliverables and
"when and if available" products. The adoption of this new standard is not
expected to have a material effect on the Company's financial statements. The
SOP is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the new standards for its fiscal year
ending December 31, 1998.
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive
Income which establishes standards for reporting and display of comprehensive
income and its components (revenue expenses, gains and losses) in a full set of
general purpose financial statements. Management has not yet evaluated the
effects of this change on its reporting of income. The Company will adopt SFAS
No. 130 for its fiscal year ending December 31, 1998.
In June 1997, the FASB issued SFAS No. 131 Disclosure about Segments of
an Enterprise and Related Information which changes the way public companies
report information about operating segments. SFAS No. 131 which is based on the
management approach to segment reporting establishes requirements to report
selected segment information quarterly and to report entity wide disclosures
about products and services major customers and the material countries in which
the entity holds assets and reports revenue. Management is currently evaluating
the effects of this change on its reporting of segment information. The Company
will adopt SFAS No. 131 for its fiscal year ending December 31, 1998.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements set forth on page 31
hereof.
30
<PAGE> 31
THE LEARNING COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.............................................32
Consolidated Balance Sheets as of December 31, 1997 and 1996 ................ 33
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995.........................................34
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1997, 1996 and 1995.............................35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.........................................36
Notes to Consolidated Financial Statements....................................38
Financial Statement Schedule of Valuation and Qualifying Accounts
for the Years Ended December 31, 1997, 1996 and 1995.....................55
31
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Learning Company, Inc.:
We have audited the accompanying consolidated balance sheets of The
Learning Company, Inc. as of January 3, 1998 and January 4, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three fiscal years in the period ended January 3, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Learning Company, Inc. as of January 3, 1998 and January 4, 1997 and the related
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended January 3, 1998 in conformity with generally
accepted accounting principles.
In connection with our audits of the financial statements referred to
above, we have also audited the related financial statement schedule of
valuation and qualifying accounts. In our opinion, this financial statement
schedule for each of the three fiscal years in the period ended January 3, 1998,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 9, 1998
(except as to Note 12 which is
as of March 6, 1998)
32
<PAGE> 33
THE LEARNING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,137 $ 110,120
Accounts receivable, less allowances of $29,226
and $15,191, respectively 99,677 79,610
Inventories 29,600 15,894
Other current assets 32,590 20,349
----------- ---------
257,004 225,973
----------- ---------
Fixed assets and other, net 32,306 22,975
Goodwill and other intangible assets, net 127,481 544,570
----------- ---------
$ 416,791 $ 793,518
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 94,060 $ 66,658
Line of credit 35,150 25,000
Merger related accruals 12,533 10,667
Current portion of long-term obligations 10,717 8,083
Purchase price payable 7,896 3,245
----------- ---------
160,356 113,653
----------- ---------
LONG-TERM OBLIGATIONS:
Long-term debt 294,356 332,930
Related party debt -- 150,000
Accrued and deferred income taxes 59,746 86,920
Other 6,119 5,078
----------- ---------
360,221 574,928
----------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Preferred Stock, $.01 par value - Authorized 750,000
shares, issued and outstanding 750,000 shares at December
31, 1997 (liquidation value of $150,000) 8 --
Common stock, $0.01 par value - Authorized - 120,000,000
shares; issued and outstanding 48,868,659 and 44,379,781
shares at December 31, 1997 and 1996, respectively 489 444
Special voting stock - Authorized and issued - one share
representing the voting rights of 1,478,929 and 1,551,428
outstanding Exchangeable Shares (for common stock) at
December 31, 1997 and 1996, respectively -- --
Additional paid-in-capital 1,012,273 733,229
Accumulated deficit (1,099,907) (618,047)
Cumulative translation adjustment (16,649) (10,689)
----------- ---------
(103,786) 104,937
----------- ---------
$ 416,791 $ 793,518
=========== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
33
<PAGE> 34
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 392,438 $ 343,321 $ 167,042
COSTS AND EXPENSES:
Costs of production 111,703 91,045 53,070
Sales and marketing 86,621 67,690 38,370
General and administrative 31,135 28,550 20,813
Development and software costs 41,018 36,018 12,487
Amortization, merger and other charges 515,016 501,330 103,172
----------- ----------- -----------
Total operating expenses 785,493 724,633 227,912
----------- ----------- -----------
OPERATING LOSS (393,055) (381,312) (60,870)
----------- ----------- -----------
INTEREST INCOME (EXPENSE):
Interest income 1,104 2,564 6,020
Interest expense (22,482) (26,703) (5,315)
----------- ----------- -----------
Total interest income (expense) (21,378) (24,139) 705
----------- ----------- -----------
LOSS BEFORE TAXES (414,433) (405,451) (60,165)
PROVISION FOR INCOME TAXES 61,234 -- 5,795
----------- ----------- -----------
NET LOSS $ (475,667) $ (405,451) $ (65,960)
=========== =========== ===========
NET LOSS PER SHARE:
Basic and Diluted $ (9.59) $ (9.94) $ (2.65)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic and Diluted 49,613,000 40,801,000 24,855,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
34
<PAGE> 35
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Series A Total
Preferred Common Stock Additional Cumulative Stockholders'
-------------- --------------- Paid-In Accumulated Translation Treasury Equity
Shares Amount Shares Amount Capital Deficit Adjustment Stock (Deficit)
------ ------ ------ ------ ----------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 -- $-- 16,697 $167 $ 191,390 $ (142,792) $ (9,651) $(1,629) $ 37,485
Acquisition of Future Vision -- -- 1,135 11 8,455 (3,608) -- -- 4,858
Acquisition of tewi -- -- 99 1 3,639 -- -- -- 3,640
Acquisition of The Former
Learning Company -- -- -- -- 43,369 -- -- -- 43,369
Acquisition of Compton's -- -- 5,053 51 86,634 -- -- -- 86,685
Other acquisitions -- -- 262 3 2,673 (236) -- -- 2,440
Sale of common stock -- -- 2,713 27 73,584 -- -- -- 73,611
Stock issued under exercise
of options and warrants -- -- 1,898 19 28,171 -- -- -- 28,190
Treasury stock retirement -- -- -- -- (1,629) -- -- 1,629 --
Conversion of Exchangeable
Shares to common stock -- -- 2,508 25 (25) -- -- -- --
Translation adjustments -- -- -- -- -- -- 201 -- 201
Net loss -- -- -- -- -- (65,960) -- -- (65,960)
--- --- ------ ---- ---------- ----------- -------- ----- ---------
BALANCE, DECEMBER 31, 1995 -- -- 30,365 304 436,261 (212,596) (9,450) -- 214,519
Acquisition of MECC -- -- 9,214 92 240,670 -- -- -- 240,762
Other acquisitions -- -- 899 9 15,247 -- -- -- 15,256
Conversion of debt to common
stock -- -- 158 2 3,051 -- -- -- 3,053
Stock issued under exercise
of options -- -- 3,198 32 24,985 -- -- -- 25,017
Conversion of Exchangeable
Shares to common stock -- -- 45 -- -- -- -- -- --
Stock issued for settlement
of expenses -- -- 500 5 13,015 -- -- -- 13,020
Translation adjustments -- -- -- -- -- -- (1,239) -- (1,239)
Net loss -- -- -- -- -- (405,451) -- -- (405,451)
--- --- ------ ---- ---------- ----------- -------- ----- ---------
BALANCE, DECEMBER 31, 1996 -- -- 44,379 444 733,229 (618,047) (10,689) -- 104,937
Issuance of Series A
Preferred Stock 750 8 -- -- 202,025 -- -- -- 202,033
Issuance of special warrants -- -- -- -- 57,462 -- -- -- 57,462
Conversion of Exchangeable
Shares to common stock -- -- 73 -- -- -- -- -- --
Stock issued under exercise
of stock options -- -- 1,116 11 8,959 -- -- -- 8,970
Stock issued to settle
earn-outs -- -- 135 2 2,021 -- -- -- 2,023
Other acquisitions -- -- 3,165 32 8,577 (6,193) -- -- 2,416
Translation adjustments -- -- -- -- -- -- (5,960) -- (5,960)
Net loss -- -- -- -- -- (475,667) -- -- (475,667)
--- --- ------ ---- ---------- ----------- -------- ----- ---------
BALANCE, DECEMBER 31, 1997 750 8 48,868 $489 $1,012,273 $(1,099,907) $(16,649) $ -- $(103,786)
=== === ====== ==== ========== =========== ======== ===== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
35
<PAGE> 36
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(475,667) $(405,451) $ (65,960)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 531,206 451,133 29,802
Charge for incomplete technology 1,050 56,688 60,483
Provision for returns and doubtful accounts 67,773 38,112 22,358
Provision for income taxes 61,234 -- --
Change in assets and liabilities (net of acquired assets and
liabilities):
Accounts receivable (89,396) (91,413) (39,811)
Inventories (10,954) 3,332 (4,441)
Other current assets (2,035) 4,203 8,865
Other long-term assets (8,625) (4,308) 11,990
Accounts payable and accrued expenses 15,488 13,359 9,942
Other long-term obligations -- -- (2,294)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 90,074 65,655 30,934
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Businesses acquired, net of cash on-hand (55,592) 21,518 (547,889)
Purchases of property and equipment, net (4,685) (4,939) (7,811)
Software development costs (27,299) (12,344) (2,410)
Merger related accruals (53,021) (38,091) (7,341)
Payments to stockholders of The Former Learning Company -- (25,025) --
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (140,597) (58,881) (565,451)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock, options and warrants 8,970 27,905 106,616
Borrowings under line of credit 10,150 25,000 3,150
Payments on term notes -- (4,832) (8,815)
Payments on capital lease obligations (2,676) (1,874) (1,008)
Sale (repurchase) of senior notes (28,000) (18,350) 500,000
Costs incurred to issue Series A Preferred Stock (10,701) -- --
Proceeds from issue of special warrants 57,462 -- --
Other 1,821 (1,092) --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 37,026 26,757 599,943
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH (1,486) (1,243) 201
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (14,983) 32,288 65,627
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 110,120 77,832 12,205
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 95,137 $ 110,120 $ 77,832
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
36
<PAGE> 37
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULING OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of Series A Preferred Stock to retire debt $202,033 $ -- $ --
Common stock issued to settle earn-out agreements 2,023 -- --
Common stock issued to acquire MECC -- 221,319 --
Increase in APIC due to value of in-the-money employee
stock options acquired in connection with acquisitions 2,969 19,444 43,369
Common stock issued for acquisitions -- 15,255 95,292
Conversion of debt to equity -- 3,053 3,471
Common stock issued for settlement of expenses -- 10,132 111
Equipment acquired under capital leases -- 1,262 627
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during period for:
Interest paid $ 29,876 $ 28,466 $ 524
Income taxes paid (refunded) 1,583 (7,886) (12)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
37
<PAGE> 38
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Business
The Learning Company, Inc. ("TLC" or the "Company") develops, publishes
and markets consumer software in the education and reference category and, to a
lesser extent, productivity, lifestyle and entertainment categories. The Company
sells its products in the retail channel through mass merchants, consumer
electronic stores, price clubs, office supply stores, software specialty stores
and distributors; to original equipment manufacturers ("OEMs"); to schools and
to end-users through direct response methods. The Company also develops and
distributes income tax software products and offers computerized processing of
income tax returns in Canada. The Company's principal market is in the United
States and Canada. The Company has international operations in Germany, Ireland,
France, Holland, the United Kingdom, Japan and Australia. On October 24, 1996,
SoftKey International Inc. changed its name to The Learning Company, Inc.
The Company's fiscal year is the 52 or 53 weeks ending on or after
December 31. For clarity of presentation herein, all references to December 31,
1997 relate to balances as of January 3, 1998, references to December 31, 1996
relate to balances as of January 4, 1997, the period from January 5, 1997 to
January 3, 1998 is referred to as the "Year Ended December 31, 1997", the period
from January 7, 1996 to January 4, 1997 is referred to as the "Year Ended
December 31, 1996" and the period from January 1, 1995 to January 6, 1996 is
referred to as the "Year Ended December 31, 1995".
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions regarding
items such as return reserves and allowances, net realizable value of intangible
assets and valuation allowances for deferred tax assets that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates in
these financial statements include: return reserves, inventory reserves,
valuation of deferred tax assets and valuation and useful lives of intangible
assets. Actual results could differ from these estimates.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
amounts and transactions have been eliminated.
Certain prior period amounts have been reclassified to conform with the
current year presentation.
Revenue Recognition
Revenues are primarily derived from the sale of software products and
from software licensing and royalty arrangements. The Company recognizes revenue
in accordance with the Statement of Position ("SOP") No. 91-1, Software Revenue
Recognition. The Financial Accounting Standards Board recently issued SOP No.
97-2, Software Revenue Recognition. The most significant changes to SOP No.
91-1, relate to multiple deliverables and "when and if available" products. The
new SOP No. 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997 and will be adopted by the Company for the
fiscal year ending December 31, 1998. The adoption of this new standard is not
expected to have a material effect on the Company's financial statements.
Revenues from the sale of software products are recognized upon
shipment, provided that no significant obligations remain outstanding and
collection of the receivable is probable. Costs related to insignificant post
shipment obligations are accrued when revenue is recognized for the sale of the
related products. Allowances for estimated returns are provided at the time of
sale and charged against revenues. The Company evaluates the adequacy of
allowances for returns and doubtful accounts primarily based upon its evaluation
of historical and expected sales experience and by channel of distribution. The
estimates determined for reserves for returns and allowances are based upon
information available at the reporting date. To the extent the future market,
sell-through experience, customer mix, channels of
38
<PAGE> 39
distribution, product pricing and general economic conditions change, the
estimated reserves required for returns and allowances may also change. Revenues
from royalty and license arrangements are recognized as earned based upon
performance or product shipments.
Cash Equivalents
Cash equivalents are valued at cost, which approximates market value,
and consist principally of commercial paper, bankers' acceptances, short-term
government securities and money market accounts. The Company considers all such
investments having maturities at purchase of less than 90 days to be cash
equivalents. At year end approximately $20,000 of cash is restricted under
compensating balances required under the receivables purchase agreement with the
Company's bank.
Accounting for Transfers and Servicing Financial Assets
The Company follows Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("FAS 125"). FAS 125 applies a control-oriented,
financial-components approach to financial asset transfer transactions whereby
the Company (1) recognizes the financial and servicing assets it controls and
the liabilities it has incurred, (2) derecognizes financial assets when control
has been surrendered, and (3) derecognizes liabilities once they are
extinguished. The Company, through its wholly owned subsidiary The Learning
Company Funding, Inc. (a separate special purpose corporation), is party to a
receivables purchase agreement whereby it can sell without recourse undivided
interests in eligible pools of trade accounts receivable of up to $75,000 on a
revolving basis during a five year period ending September 30, 2002. The Company
acts as servicing agent for the sold receivables in the collection and
administration of the accounts.
Inventories
Inventories are stated at the lower of weighted average cost or net
realizable value and include third-party assembly costs, CD-ROM discs, manuals
and an allocation of fixed overhead.
December 31,
---------------------
1997 1996
------- -------
Components $ 4,243 $ 1,213
Finished goods 25,357 14,681
------- -------
$29,600 $15,894
======= =======
Property and Equipment
Property and equipment are stated at the lower of cost, net of
accumulated depreciation or net realizable value. Depreciation is calculated
using accelerated and straight-line methods over the following useful lives:
Building 40 years
Computer equipment 3-5 years
Furniture and fixtures 3-5 years
Leasehold improvements Shorter of the life of the lease
or the estimated useful life
Betterments and major renewals are capitalized and included in
property, plant, and equipment accounts while expenditures for maintenance and
repairs and minor renewals are charged to expense. When assets are retired or
otherwise disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in income.
Goodwill and Intangible Assets
The excess cost over the fair value of net assets acquired, goodwill,
is amortized on a straight-line basis over 2 years, except for the goodwill
associated with the Company's Canadian income tax software business, which is
being
39
<PAGE> 40
amortized on a straight-line basis over its estimated useful life of 40 years
(balance of $22,341 at the end of fiscal 1997 and $23,352 at the end of fiscal
1996). The cost of identified intangible assets is generally amortized on a
straight-line basis over their estimated useful lives of 2 to 10 years. Deferred
financing costs are being amortized on a straight-line basis over the term of
the related debt financing.
The carrying value of goodwill and intangible assets is reviewed on a
quarterly and annual basis for the existence of facts or circumstances both
internally and externally that may suggest impairment. To date no such
impairment has occurred. The Company determines whether an impairment has
occurred based on gross expected future cash flows and measures the amount of
the impairment based on the related future estimated discounted cash flows. The
cash flow estimates that are used to determine the amount of an impairment, if
any, contain management's best estimates, using appropriate and customary
assumptions and projections at the time. Goodwill and other intangible assets
have been presented net of accumulated amortization of $905,425 at the end of
fiscal 1997 and $444,967 at the end of fiscal 1996.
<TABLE>
<CAPTION>
Description Estimated
----------- useful life in Net balance
years at December 31,
-------------- ----------------------------
1997 1996
-------- --------
<S> <C> <C> <C>
Goodwill 2 to 40 $ 55,199 $397,459
Acquired technology 2 16,662 126,763
Brands and related content rights 7 to 10 51,453 10,061
Deferred financing costs 5 3,828 9,423
Other intangible assets 3 339 864
-------- --------
$127,481 $544,570
======== ========
</TABLE>
Development and Software Costs
Development and software costs are expensed as incurred. Development
costs for new software products and enhancements to existing software products
are expensed as incurred until technological feasibility has been established.
Capitalized software development costs on a product-by-product basis are being
amortized using the straight-line method over the remaining estimated economic
life of the product, which is generally twelve months beginning when launched,
which approximates the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product.
Income Taxes
Deferred tax liabilities and assets are determined based on the
differences between the financial statement basis and tax basis of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. FAS 109 also requires a valuation allowance
against net deferred tax assets if based upon the available evidence it is more
likely than not that some or all of the deferred tax assets will not be
realized.
Foreign Currency
The functional currency of each foreign subsidiary is the local
currency. Accordingly, assets and liabilities of foreign subsidiaries are
translated to U.S. dollars at period end exchange rates. Revenues and expenses
are translated using the average rates during the period. The effects of foreign
currency translation adjustments have been accumulated and are included as a
separate component of stockholders' equity (deficit).
Computation of Earnings Per Share
For the year ended December 31, 1997, the Company adopted Statement of
Accounting Standards No. 128 ("FAS 128"), which requires the presentation of
Basic and Dilutive earnings per share, which replaces primary and fully diluted
earnings per share. Earnings per share have been restated for all periods
presented to reflect the adoption of FAS 128. Basic net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Dilutive net loss per share is computed using the weighted average
number of common shares outstanding during the period, plus the dilutive effect
of common stock equivalents. Common stock equivalent shares consist of
convertible debentures, preferred stock, stock options and warrants. The
dilutive computations do not include common stock equivalents for the years
ended December 31, 1997, 1996 and 1995 as their inclusion would be antidilutive.
40
<PAGE> 41
(2) BUSINESS COMBINATIONS
Creative Wonders
On October 23, 1997, the Company acquired control of Creative Wonders,
L.L.C. ("Creative Wonders"), an educational software company that publishes,
among other titles, the Sesame Street line of products. The purchase price was a
total of $37,799 including the value of employee stock options assumed and
estimated transaction costs. The purchase price included cash payments of
$33,883.
Other 1997 Combinations
On September 19, 1997, the Company acquired Learning Services Inc.
("Learning Services"), a national school software catalog for teachers, in
exchange for the issuance of 709,976 shares of common stock. On September 29,
1997, the Company acquired Skills Bank Corporation ("Skills Bank"), a developer
of educational and remedial software products for adult, adolescent and K to 12
students, in exchange for the issuance of 1,069,286 shares of common stock. On
October 2, 1997, the Company acquired Microsystems Software, Inc.
("Microsystems"), a developer of Internet filtering software, in exchange for
the issuance of 955,819 shares of common stock. On December 30, 1997, the
Company acquired TEC Direct, Inc. ("TEC Direct"), an educational consumer
software catalog, in exchange for the issuance of 429,733 shares of common
stock. Each of these transactions was accounted for using the
pooling-of-interests method of accounting. The consolidated financial statements
of the Company for the years prior to December 31, 1997 do not include the
results and balances of these companies as they were deemed to be immaterial to
the consolidated financial statements for those periods.
MECC
On May 17, 1996, the Company acquired Minnesota Educational Computing
Corporation (MECC) ("MECC"), a publisher and developer of high quality
children's educational software sold to consumers and schools, in exchange for
9,214,007 shares of the Company's common stock. The total purchase price was
$284,631, including estimated transaction costs, value of stock options assumed
and deferred income taxes related to certain identifiable intangible assets
acquired. Approximately 1,048,000 MECC employee stock options were converted
into stock options to purchase approximately 1,198,000 shares of TLC common
stock. This transaction was accounted for as a purchase.
Compton's
On December 28, 1995, the Company acquired Compton's New Media, Inc.
and Compton's Learning Company (collectively, "Compton's"), developers and
publishers of multimedia software titles. In and in connection with the
acquisition, the Company issued a total of 5,052,697 shares of the Company's
common stock, which included 587,036 shares of common stock to settle $14,000 of
intercompany debt due to Tribune Company and executed a promissory note for
$3,000 in cancellation of the remaining intercompany debt. The total purchase
price was $104,394, including estimated transaction costs, deferred income taxes
related to certain identifiable intangible assets acquired, settlement of
certain intercompany debt to Tribune Company and the fair value of net
liabilities assumed. The promissory note was repaid in 1996. This transaction
was accounted for as a purchase.
The Learning Company
On December 22, 1995, the Company acquired control of The Learning
Company (the "The Former Learning Company"), a leading developer of educational
software products for use at home and school. Under the terms of the merger
agreement, the Company acquired, in a two-step business combination, all of the
outstanding shares of The Former Learning Company for total consideration of
approximately $684,066, including the value of stock options assumed, estimated
transaction related costs and deferred income taxes related to certain
identifiable intangible assets acquired. Approximately 1.1 million unvested
employee stock options of The Former Learning Company were converted into
options to purchase 3,123,000 shares of the Company's common stock, based on the
merger consideration of $67.50 per share and were vested on or before January
26, 1996. Approximately $543,163 of the purchase price was settled in cash. This
transaction was accounted for as a purchase.
41
<PAGE> 42
tewi Verlag GmbH
On July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi"), a
publisher and distributor of CD-ROM software and computer-related books, located
in Munich, Germany. The purchase price was settled by a combination of cash and
issuance of common stock. The Company issued 99,045 shares of common stock
valued at $3,640 and may issue additional shares of common stock to a former
shareholder of tewi pursuant to an earn-out agreement. The Company paid cash
consideration of $12,688 for tewi. The additional shares issuable under the
earn-out agreement have been treated as contingent consideration and will be
recorded if and when certain future conditions are met. During 1997 and 1996,
$498 and $540, respectively, of consideration related to the contingent
consideration was earned and recorded as expense by the Company. This
transaction was accounted for as a purchase.
The purchase price for the 1997 acquisition of Creative Wonders has
been allocated based on fair values as follows:
Purchase price $ 37,799
Less: fair value of net liabilities assumed (7,257)
--------
Excess to allocate 45,056
Less: excess allocated to
Incomplete technology 1,050
Brands and related content rights 44,006
--------
Goodwill $ --
========
The purchase price for the 1996 acquisitions has been allocated based
on fair values as follows:
<TABLE>
<CAPTION>
MECC Others Total
--------- --------- ---------
<S> <C> <C> <C>
Purchase Price $ 284,631 $ 15,681 $ 300,312
Less: fair value of net tangible assets
(liabilities) 13,990 (15,424) (1,434)
--------- --------- ---------
270,641 31,105 301,746
Excess to allocate to:
Less: excess to allocate
Incomplete technology 56,688 -- 56,688
Completed technology 88,501 285 88,786
Brands and related content rights 894 -- 894
--------- --------- ---------
146,083 285 146,368
--------- --------- ---------
Goodwill $ 124,558 $ 30,820 $ 155,378
========= ========= =========
</TABLE>
42
<PAGE> 43
The Company engaged a nationally recognized independent appraiser to
express an opinion with respect to the estimated fair value of a substantial
portion of the assets acquired, to serve as a basis for the allocation of the
purchase price for Creative Wonders and MECC. The Company primarily used the
income approach to determine the fair value of the identified intangible assets
acquired. The debt-free cash flows, net of provision for operating expenses,
were discounted to a net present value. The value of certain completed
technology was based upon comparable fair values in the open market. The value
of software technology and products under development not considered to have
reached technological feasibility and having no future alternative use was
expensed on acquisition.
Unaudited pro forma results of operations for the transactions
accounted for using the purchase method of accounting as though the acquisitions
had occurred at the beginning of the Years Ended December 31, 1996 and 1995 are
below. The pro forma adjustments detailed below include the effect of
amortization of intangible assets and goodwill related to the acquisitions over
their estimated useful lives of two years and the interest expense related to
the issue of the $500,000 of debt for the period prior to 1995 and 1996
acquisitions or issuance, net of any related income tax effects. Pro forma
results for the 1997 acquisitions were immaterial.
<TABLE>
<CAPTION>
The Former
Year Ended Learning Pro forma Pro forma
December 31, 1996 TLC tewi Compton's Company MECC Adjustment Combined
- ------------------------ -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $343,321 $ -- $ -- $ -- $ 7,800 $ -- $ 351,121
Operating loss (381,312) -- -- -- (9,212) (41,128) (431,652)
Net loss (405,451) -- -- -- (7,021) (34,009) (446,481)
Net loss per share (9.94) -- -- -- -- -- (10.12)
<CAPTION>
Year Ended
December 31, 1995
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $167,042 $ 3,720 $ 23,204 $60,698 $33,815 $ -- $ 288,479
Operating loss (60,870) (3,589) (13,904) 10,874 6,079 (428,239) (489,649)
Net loss (65,960) (3,643) (9,626) 7,398 5,070 (398,195) (464,956)
Net loss per share (2.65) -- -- -- -- -- (12.01)
</TABLE>
Future Vision Holding, Inc.
On August 31, 1995, the Company acquired all of the issued and
outstanding capital stock of Future Vision Holding, Inc. ("Future Vision"), a
multimedia software company, in exchange for the issuance of 1,088,149 shares of
common stock of the Company. This acquisition has been accounted for using the
pooling-of-interests method of accounting. The financial statements for periods
prior to the Year Ended December 31, 1995 do not include amounts for this
acquisition as they were deemed to be immaterial to the consolidated financial
statements for those periods.
43
<PAGE> 44
(3) FIXED ASSETS AND OTHER
December 31,
-------------------------
1997 1996
-------- --------
Building, land and leasehold improvements $ 6,127 $ 4,516
Computer equipment 30,707 26,362
Furniture and fixtures 7,820 9,062
-------- --------
44,654 39,940
Less: accumulated depreciation
and amortization (24,065) (22,273)
-------- --------
20,589 17,667
Other 11,717 5,308
-------- --------
$ 32,306 $ 22,975
======== ========
Included in computer equipment is equipment under capital lease of
$1,952 and $2,207 at December 31, 1997 and 1996, respectively. Depreciation
expense was $4,966, $6,491 and $6,767 in each of the Years Ended December 31,
1997, 1996 and 1995, respectively.
(4) LINE OF CREDIT
TLC Multimedia, Inc., a wholly-owned subsidiary of the Company, has a
revolving line of credit (the "Line"), to provide for a maximum availability of
$50,000, of which $35,150 was utilized at December 31, 1997. Borrowings under
the Line become due on July 1, 1999 and bear interest at the prime rate (8 1/2%
at December 31, 1997). The Line is subject to certain financial covenants, is
secured by a general security interest in the assets of The Learning Company,
Inc. and certain other subsidiaries of the Company and by a pledge of the stock
of certain of its subsidiaries. The Line is guaranteed by the Company.
(5) LONG-TERM DEBT
December 31,
--------------------------
1997 1996
-------- --------
Senior Convertible Notes $303,650 $331,650
Obligations under capital leases 1,423 2,099
-------- --------
305,073 333,749
Less: current portion (10,717) (819)
-------- --------
$294,356 $332,930
======== ========
The Company has outstanding $303,650 principal amount 5 1/2% Senior
Convertible Notes due 2000 (the "Notes"), which are unsecured. The Notes will be
redeemable by the Company on or after November 2, 1998 at redemption prices of
102.2% on November 2, 1998, 101.1% on November 1, 1999 and 100% on or after
November 1, 2000 and are convertible into common stock at a price of $53 per
share. Interest is payable on the Notes semi-annually on May 1 and November 1
each year. The long-term principal portion of the Notes declined by a total of
$38,000 and $18,350 during the years Ended December 31, 1997 and 1996,
respectively. Current portion of long-term debt includes $10,000 of the Notes as
the Company intends to repurchase the amount before December 31, 1998.
44
<PAGE> 45
(6) RELATED PARTY TRANSACTIONS
On December 28, 1995, Tribune Company made an investment in the Company
in the form of $150,000 principal amount 5 1/2% Senior Convertible/Exchangeable
Notes due 2000 (the "Private Notes"). The Private Notes were redeemable by the
Company on or after November 2, 1998 at redemption prices of 102.2% on November
2, 1998, 101.1% on November 1, 1999 and 100% on November 1, 2000 and were
convertible into common stock at a price of $53 per share. The Private Notes
were sold during 1997 in a private transaction to an investor group prior to
issuance by the Company of 750,000 shares of Series A Convertible Participating
Preferred Stock (the "Preferred Stock") and were surrendered by the investor
group for issue of the Preferred Stock. In connection with the issuance of the
Preferred Stock, the Company paid a transaction fee to the investor group
totaling $1,845, of which $1,125 was paid to one of the investors where a
director of the Company is an officer. The loss resulting from the exchange of
the Private Notes for the Preferred Stock, net of tax benefit, was immaterial.
(7) COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases office facilities and equipment under operating and
capital leases. Rental expense for operating leases was approximately $4,523,
$3,234 and $2,308 and for the Years Ended December 31, 1997, 1996 and 1995,
respectively. Future annual payments under capital and operating leases are as
follows:
Capital Operating
Leases Leases
------- --------
1998 $ 788 $ 7,424
1999 601 6,280
2000 142 5,467
2001 2 4,643
2002 2 909
Thereafter -- 8,070
------ -------
1,535 $32,793
=======
Less: interest (112)
Less: current portion (717)
------
$ 706
======
(8) COMMON AND PREFERRED STOCK
Common Stock
The Company has reserved 19,279,847 shares of its common stock for
issuance related to the Exchangeable Shares, employee stock options and warrants
at year end. The Exchangeable Shares are represented by the one share of Special
Voting Stock. In addition, the Company has reserved a total of 20,729,245 shares
of its common stock for issuance related to the Notes and the Preferred Stock at
year end.
Exchangeable Shares
On February 4, 1994, the Company completed a three-way business
combination (the "Three-Party Combination") among SoftKey Software Products Inc.
("Former SoftKey"), WordStar International Incorporated ("WordStar") and
Spinnaker Software Corporation ("Spinnaker"). In connection with the Three-Party
Combination, Former SoftKey stockholders were entitled to elect to receive
shares of the Company's common stock or Exchangeable Non-Voting Shares (the
"Exchangeable Shares") of SoftKey Software Products Inc. ("SoftKey Software"),
the successor by amalgamation to Former SoftKey. The Company also issued a
special voting share (the "Voting Share") which has a number of votes equal to
the number of Exchangeable Shares outstanding. The holder of the Voting Share is
not entitled to dividends and shall vote with the common stockholders as a
single class. The Exchangeable Shares may be exchanged
45
<PAGE> 46
for the Company's common stock on a one-for-one basis until February 4, 2005, at
which time any outstanding Exchangeable Shares automatically convert to shares
of the Company's common stock. At year end there were 1,478,929 Exchangeable
Shares outstanding and not held by the Company and its subsidiaries.
On November 6, 1997, SoftKey Software issued in a private placement
4,072,000 special warrants for net proceeds of $57,462, each of which is
exercisable without additional payment for one Exchangeable Share.
Preferred Stock
On December 4, 1997, the Company issued an aggregate of 750,000 shares
of Series A Convertible Participating Preferred Stock (the "Preferred Stock") to
an investor group in exchange for the Private Notes. Each share of the Preferred
Stock has an initial liquidation preference of $200 and is initially convertible
into 20 shares of common stock, or 15,000,000 shares of common stock in the
aggregate on an as-converted basis, subject to adjustment for certain minimum
returns on investment. The Preferred Stock is non-redeemable, bears no dividend,
is subject to restrictions on resale for a period of at least eighteen months
and is manditorily convertible into common stock upon satisfaction of certain
conditions.
The Company obtained an independent appraisal from a nationally
recognized appraisal firm on the value of the Preferred Stock. Using the
independent appraisal, the Company estimated the extraordinary loss for
financial reporting purposes to be approximately $61,000. The Company also
estimated that the resulting benefit for income tax purposes was approximately
$61,000. As a result, the extraordinary loss, net of tax, was determined to be
immaterial.
(9) STOCK OPTIONS AND WARRANTS
Stock Option Plans
1990 Long-Term Equity Incentive Plan
The Company has a Long-Term Equity Incentive Plan (the "LTIP"). The
LTIP allows for incentive stock options, non-qualified stock options and various
other stock awards. Administration of the LTIP is conducted by the Company's
Compensation Committee of the Board of Directors. The Compensation Committee
determines the amount and type of option or award and terms and conditions and
vesting schedules (generally 3 years) of the award or option. The maximum term
of an option is 10 years. Upon a change of control, as defined, awards and
options then outstanding become fully vested, subject to certain limitations.
On December 4, 1997, the stockholders of the Company approved an
amendment to increase the maximum number of shares of common stock issuable
under the LTIP to 9,000,000 from 7,000,000. The total number of shares of common
stock reserved for issuance under the LTIP at year end was 6,538,716 shares,
2,039,645 of which remained available for grant.
1996 Non-Qualified Stock Option Plan
The Company initiated a non-qualified stock option plan (the "1996
Plan") that was approved by the Company's Board of Directors on February 5,
1996. The 1996 Plan allows for non-qualified stock options and various other
stock awards. Administration of the 1996 Plan is conducted by the Company's
Compensation Committee of the Board of Directors. The administrator determines
the amount and type of option or award and terms and conditions and vesting
schedules (generally 3 years) of the award or option. The maximum term of an
option is 10 years. Upon a change of control, as defined, awards and options
then outstanding become fully vested, subject to certain limitations. The
maximum number of shares issuable under the 1996 Plan is 5,000,000. The total
number of shares of common stock reserved under the 1996 Plan at year end was
4,612,949 shares, 585,183 of which remained available for grant.
1994 Non-Employee Director Stock Option Plans
On April 26, 1994, the Board of Directors approved a non-employee
director stock option plan (the "1994 Non-Employee Director Plan"). The 1994
Non-Employee Director Plan provides for an initial grant of 20,000 options at
fair market value to be issued to each non-employee director who first became a
director of the Company after February 1, 1994 ("Initial Grants"). During the
Year Ended December 31, 1995, a further 100,000 options were granted to each of
46
<PAGE> 47
the non-employee directors. During the Year Ended December 31, 1996, a further
26,667 options were granted to each of the non-employee directors. The maximum
number of common shares issuable under the 1994 Non-Employee Director Plan is
500,000, all of which were granted at year end. Options granted to non-employee
directors as Initial Grants were 100% exercisable at the time of grant and
options issued as subsequent grants become exercisable over a three-year period.
All such options are exercisable for a period of 10 years from date of grant.
1996 Non-Employee Director Stock Option Plan
On July 31, 1996, Board of Directors approved the Company's 1996
Non-Employee Director Option Plan (the "1996 Non-Employee Director Plan"), which
was approved by stockholders on December 4, 1997. Under the 1996 Non-Employee
Director Plan, certain directors who are not officers or employees of the
Company or any affiliate of the Company (the "Non-Employee Directors") are
eligible to receive stock options. The 1996 Non-Employee Director Plan provides
that each Non-Employee Director who became a director after May 16, 1996, but
prior to August 16, 1996 ( the "Effective Date") was entitled to receive a
non-statutory stock option (the "Initial Option") to purchase 50,000 shares of
common stock on the Effective Date. The 1996 Non-Employee Director Plan further
provides that each Non-Employee Director who becomes a director after the
Effective Date is entitled to receive the Initial option to purchase 50,000
shares of common stock on the date that he or she first becomes a member of the
Board of Directors. In addition, the 1996 Non-Employee Director Plan provides
that each Non-Employee Director is entitled to receive a non-statutory option to
purchase 25,000 shares of common stock upon initial appointment to a committee
of the Board of Directors (the "Committee Option"). The Board of Directors may
also grant additional non-statutory options (the "Discretionary Options") to
Non-Employee Directors in its or the Committee's sole discretion. Initial
options, Committee Options and Discretionary Options are exercisable in eight
quarterly installments, with the first of such installments becoming exercisable
three months after the date grant (provided that, for each such installment, the
optionee continues to serve as a director). The total number of shares of common
stock reserved for issuance under the 1996 Non-Employee Director Plan as of year
end was 500,000, 100,000 of which remain available for grant.
47
<PAGE> 48
The following table summarizes the stock option activity under the
LTIP, the 1996 Plan, the 1996 Non-Employee Director Plan and the 1994
Non-Employee Director Plan:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
--------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning 10,077,951 $17.22 6,663,769 $14.30 2,599,980 $11.62
Assumed in
acquisitions 716,856 4.78 1,197,852 8.39 3,123,938 8.10
Granted 6,617,773 10.57 7,202,103 17.79 2,446,996 25.72
Exercised (1,116,050) 8.03 (3,198,476) 7.73 (1,394,035) 28.76
Canceled (5,621,075) 17.61 (1,787,297) 19.77 (113,110) 19.81
---------- ------ ---------- ------ ---------- ------
Ending 10,675,455 $12.96 10,077,951 $17.22 6,663,769 $14.30
========== ====== ========== ====== ========== ======
</TABLE>
The following table summarizes information about stock options
outstanding at year end:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/97 Life Price at 12/31/97 Price
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.05 - $ 9.8750 2,496,383 8.66 $ 7.17 769,409 $ 6.63
10.21 - 15.8750 4,156,021 7.86 10.58 2,865,111 10.62
16.0625 - 28.750 4,023,051 7.45 19.00 1,344,569 23.09
- -------- -------- ---------- ---- ------ --------- ------
$ 0.05 - $ 28.750 10,675,455 7.89 $12.96 4,979,089 $13.37
======== ======== ========== ==== ====== ========= ======
</TABLE>
Options to purchase 4,979,089, 4,035,729 and 1,697,054 shares of common
stock were exercisable at December 31, 1997, 1996 and 1995, respectively.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", in accounting for its plans. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation expense has been recognized for the stock
option plans as calculated under SFAS 123. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995 consistent with the provisions of
SFAS 123, the Company's net loss and basic and diluted net loss per share would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net loss - as reported $(475,667) $(405,451) $(65,960)
Net loss - pro forma (511,575) (430,765) (80,670)
Net loss per share - as reported (9.59) (9.94) (2.65)
Net loss per share - pro forma (10.07) (10.56) (3.25)
</TABLE>
The above compensation cost does not include the fair value of the
stock options assumed in connection with the acquisitions, as the fair value of
such options have been included in the purchase price of the acquired companies.
48
<PAGE> 49
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Dividend yield -- -- --
Expected volatility .7500 .7857 .6827
Risk free interest rate 6.00% 5.47% 5.31%
Expected lives 4 yrs 4 yrs 4 yrs
Weighted average grant-date
fair value of options granted $10.57 $10.79 $15.61
</TABLE>
The effects of applying SFAS 123 in this disclosure are not indicative
of future amounts. Additional grants in future years are anticipated.
On March 13, 1997, in order to continue to provide a competitive
employment environment for staff retention and hiring, the Company instituted an
Option Exchange Program under which certain employees (other than employees who
are directors) with options exercisable at $10.40 per share or higher were given
the opportunity to exchange such options for options with an exercise price of
$10.40 per share. A total of 3,627,020 employee stock options were exchanged and
are included in the cancelled and re-granted employee stock options in the above
table.
1997 Employee Stock Purchase Plan
On December 4, 1997, the Company's stockholders approved the 1997
Employee Stock Purchase Plan, which provides for six offerings, one beginning
every six months commencing December 1, 1997 until and including November 30,
2000, that provides certain eligible employees with the opportunity to purchase
shares of the Company's common stock at a price of 85% of the price listed on
the New York Stock Exchange at various specified purchase dates. A maximum of
1,000,000 shares of common stock has been authorized for issuance under the 1997
Employee Stock Purchase Plan.
Warrants
On November 6, 1997, the Company's Canadian subsidiary, SoftKey
Software issued in a private placement in Canada 4,072,000 special warrants for
net proceeds of approximately $57,462. Each special warrant is exercisable
without additional payment for one Exchangeable Share and automatically was
exercised in accordance with their provisions subsequent to year end. The
Exchangeable Shares are exchangeable at the option of the holder on a
one-for-one basis for common stock of the Company without additional payment.
On July 31, 1995, the Company announced that it would redeem all of its
2,925,000 publicly traded warrants for $0.10 per warrant on August 31, 1995 in
accordance with the terms and conditions of the warrants. Holders of such
warrants received in exchange for the warrants an aggregate of 289,959 shares of
common stock. The remaining 25,410 warrants were redeemed by the Company.
49
<PAGE> 50
(10) AMORTIZATION, MERGER AND OTHER CHARGES
During the Year Ended December 31, 1997, the Company completed the acquisition
of Creative Wonders using the purchase method of accounting and the acquisitions
of Learning Services, Skills Bank, TEC Direct and Microsystems using the
pooling-of-interests method of accounting. During the year ended December 31,
1996 the Company completed the acquisitions of MECC and Edusoft S.A. using the
purchase method. During the Year Ended December 31, 1995, the Company completed
the acquisitions of The Former Learning Company, Compton's and tewi using the
purchase method of accounting and Future Vision using the pooling-of-interest
method of accounting. Amortization, merger and other charges were expensed as
incurred or were recorded when it became probable that the transaction would
occur and the expense could be reasonably estimated. Amortization, merger and
other related charges are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Amortization of goodwill and other intangible assets $457,393 $434,866 $ 31,968
Exit and restructuring costs 48,571 4,260 1,304
Charge for incomplete technology 1,050 56,688 60,483
Provision for earn-outs 5,497 2,917 --
Professional fees and other costs 2,505 2,599 9,417
-------- -------- --------
$515,016 $501,330 $103,172
======== ======== ========
</TABLE>
The amortization of goodwill and other intangible assets in 1997, 1996
and 1995 represents primarily the amortization of the goodwill and acquired
intangible assets in connection with the acquisitions of Creative Wonders, MECC,
The Former Learning Company and Compton's.
Exit and restructuring costs related to charges during the year for
employee severance, discontinued products, termination of certain supplier
relations and other charges related to the Company's acquisition strategy and
integration of the acquired Companies. The charge has increased in the Year
Ended December 31, 1997 as compared to the Year Ended December 31, 1996 due to
the change in strategy related to the school channel and product discontinuation
due primarily to the 1997 acquisitions. A total of 59 employees were terminated
in the areas of development, marketing, operations, sales and administration as
part of the integration process. Employee severance costs in the Year Ended
December 31, 1996 related to termination of employees of the Company in
connection with the acquisitions of The Former Learning Company and MECC and the
related changes in strategy. A total of 108 employees were terminated in the
areas of operations, marketing, sales, technical support and product
development. Employee severance costs in the Year Ended December 31, 1995
related to termination of employees in connection with the acquisitions of
Future Vision and certain severances related to changes in the Company's
operations related to the acquisitions and changes in strategy. A total of 63
employees were terminated in the areas of operations, product development and
administration. The exit and restructuring costs related to the Year Ended
December 31, 1997 are expected to be paid by December 31, 1998.
The charge for incomplete technology in the Year Ended December 31,
1997 related to products being developed by Creative Wonders, in the Year Ended
December 31, 1996 related to products being developed by MECC and in the Year
Ended December 31, 1995 related to products being developed by The Former
Learning Company and Compton's. In each case the Company believes the products
in development had not reached technological feasibility at the date of
acquisition, had no alternative future use and additional development would be
required to complete the software technology. The Company engaged a nationally
recognized valuation firm to determine the value of the complete and incomplete
technology and other identifiable intangible assets.
The provision for earn-outs related to the amounts earned by the former
owners of certain acquisitions based upon the achievement of certain revenue and
operating goals achieved. These amounts are expected to be paid in common stock
of the Company prior to December 31, 1998.
Professional fees and other costs in the Year Ended December 31, 1997
related to investment banking, legal, accounting fees and other transaction
related costs incurred in connection with the acquisitions of Skills Bank,
Learning Services, TEC Direct and Microsystems. Professional fees and other
transaction related costs in the Year Ended December 31, 1996 relate to
additional legal and accounting costs incurred in connection with the
acquisition of MECC.
50
<PAGE> 51
Professional fees and other transaction related costs in the Year Ended December
31, 1995 relate to the investment banking, legal and accounting costs incurred
to such date for the proposed merger with MECC and the professional fees
associated with the acquisition of Future Vision on August 31, 1995.
At December 31, 1997, the Company had merger related accruals of
$12,533. The accruals consisted of amounts due for legal and accounting fees,
employee severance and lease termination costs related to the acquisitions. The
Company expects to substantially pay the remaining amounts prior to December 31,
1998.
(11) INCOME TAXES
The Company's net loss for the years ended December 31, 1997, 1996 and
1995 includes amortization, merger and other charges of $515,016, $501,330, and
$103,172, respectively, certain of which are not deductible for income tax
purposes. The Company's loss before income taxes consisted of the following:
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
--------- --------- ---------
United States $(433,842) $(420,905) $ (64,987)
Foreign 19,409 15,454 4,822
--------- --------- ---------
$(414,433) $(405,451) $ (60,165)
========= ========= =========
The provision for income taxes consists of the following:
Years Ended December 31,
--------------------------------------
1997 1996 1995
------- -------- -------
Current income taxes:
Federal $37,498 $ 16,777 $ 6,000
State 6,687 2,868 1,500
Foreign 1,512 4,000 250
------- -------- -------
45,697 23,645 7,750
------- -------- -------
Deferred income taxes (benefit):
Federal 15,537 (23,645) (1,955)
State -- -- --
Foreign -- -- --
------- -------- -------
15,537 (23,645) (1,955)
------- -------- -------
$61,234 $ -- $ 5,795
======= ======== =======
The significant components of deferred income tax expense are primarily
from changes in deferred tax liabilities related to the acquired technology,
depreciation, certain allowances and reserves not currently deductible, and
changes in the deferred tax asset valuation reserve.
51
<PAGE> 52
The Company's actual tax as compared to the 1997, 1996 and 1995
statutory tax rate reported on income is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Tax provision (benefit) at statutory federal income tax rate (35%) $(145,052) $(141,908) $(21,058)
State income tax, net of federal benefit 5,834 5,571 2,500
Net foreign earnings taxed at rates different than federal tax rate 1,700 2,319 700
Non deductible amortization, merger and other charges 121,461 175,465 36,110
Effect of change in valuation allowance 61,234 -- --
Utilization of prior year tax benefits -- (41,447) (12,457)
Other 16,057 -- --
--------- --------- --------
$ 61,234 $ -- $ 5,795
========= ========= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
Years Ended December 31,
-------------------------
1997 1996
--------- --------
Deferred tax assets:
Net operating losses and credits $ 112,196 $ 49,582
Other reserves and accruals 25,918 8,104
--------- --------
138,114 57,686
Less: valuation allowance (131,269) (53,350)
--------- --------
6,845 4,336
--------- --------
Tax liabilities:
Deferred intangible assets (8,732) (54,429)
Deferred foreign taxes -- (3,941)
Other deferred taxes (7,008) --
--------- --------
(15,740) (58,370)
--------- --------
Net deferred tax liability $ (8,895) $(54,034)
========= ========
The valuation allowance relates to uncertainties surrounding the
recoverability of deferred tax assets. In assessing the realizability of
deferred assets, management considers whether it is more likely than not that
some or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during periods in which benefits from net operating loss
carryforwards are available and temporary differences become deductible. The
Company considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and other matters in making this assessment. As a result
of its evaluation of these factors at December 31, 1997 the Company recorded a
valuation reserve for deferred tax assets of $131,269 (including $16,600 for
items related to additional paid-in-capital in the Year Ended December 31,
1997). At December 31, 1997, the Company had worldwide net operating loss
carryforwards and other tax benefits of approximately $280,400 for income tax
purposes, expiring from the year 2000 through 2012. The Company expects to
reduce its deferred tax liability in proportion to the amortization taken on
certain intangible assets established in the acquisitions. The reduction of the
intangible assets and the deferred tax liability will not impact future cash
flows of the Company. The utilization of tax loss carryforwards is subject to
limitations under Section 382 of the U.S. Internal Revenue Code, the U.S.
consolidated tax return provisions, and foreign country tax regulations.
(12) SUBSEQUENT EVENTS
On March 6, 1998, the Company announced that it had entered into an
agreement to acquire Mindscape, Inc. and its subsidiaries for a total purchase
price of $150,000,000, payable in cash and the remainder through the issuance of
shares of common stock. The transaction will be accounted for using the purchase
method of accounting. The Company
52
<PAGE> 53
has not yet completed its allocation of the purchase price related to the
transaction. The closing of the transaction is subject to certain conditions,
including expiration of applicable waiting periods under pre-merger
notification.
On March 6, 1998, the Company also announced that its Canadian
subsidiary, SoftKey Software Products Inc., agreed to sell to certain Canadian
institutional investors approximately 6.25 million special warrants for
aggregate proceeds of approximately U.S. $104 million. Each special warrant is
exercisable without additional payment for one SoftKey Exchangeable Share.
SoftKey's Exchangeable Shares are exchangeable on a one-for-one basis for common
stock of the Company without additional payment. The private placement is
ultimately subject to certain conditions, including receipt of certain
regulatory approvals.
53
<PAGE> 54
(13) GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment - software for
use with microcomputers. The following table presents information concerning the
Company's North American, European and other operations during the Years Ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
North
America Europe Other Eliminations Consolidated
--------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Revenues:
Customers $ 318,256 $73,524 $ 658 $ -- $ 392,438
Inter-company 59 11,325 -- (11,384) --
--------- ------- ------- -------- ---------
Total $ 318,315 $84,849 $ 658 $(11,384) $ 392,438
========= ======= ======= ======== =========
Loss from
operations $(496,713) $22,306 $(1,260) $ -- $(475,667)
========= ======= ======= ======== =========
Identifiable assets $ 373,306 $44,738 $(1,253) $ -- $ 416,791
========= ======= ======= ======== =========
DECEMBER 31, 1996
Revenues:
Customers $ 284,537 $57,094 $ 1,690 $ -- $ 343,321
Inter-company 383 6,698 -- (7,081) --
--------- ------- ------- -------- ---------
Total $ 284,920 $63,792 $ 1,690 $ (7,081) $ 343,321
========= ======= ======= ======== =========
Loss from
operations $(392,905) $10,531 $ 1,062 $ -- $(381,312)
========= ======= ======= ======== =========
Identifiable assets $ 769,338 $23,096 $ 1,084 $ -- $ 793,518
========= ======= ======= ======== =========
DECEMBER 31, 1995
Revenues:
Customers $ 140,811 $27,380 $ 1,227 $ (2,376) $ 167,042
Inter-company 696 (3,071) (1) 2,376 --
--------- ------- ------- -------- ---------
Total $ 141,507 $24,309 $ 1,226 $ -- $ 167,042
========= ======= ======= ======== =========
Loss from
operations $ (64,754) $ 3,256 $ 628 $ -- $ (60,870)
========= ======= ======= ======== =========
Identifiable assets $ 891,266 $ 9,062 $ 85 $ -- $ 900,413
========= ======= ======= ======== =========
</TABLE>
The Company conducts a portion of its operations outside the United
States. At December 31, 1997, $20,209 of cash and cash equivalents were subject
to foreign currency fluctuations. Sales and transfers between geographic areas
are generally priced at market less an allowance for marketing costs. No single
customer accounted for greater than 10% of revenues for any of the periods
presented.
54
<PAGE> 55
Schedule II
-----------
THE LEARNING COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
------------------------------------------
Charged
Balance at to cost Charged Balance
beginning and to other at end
of period expenses accounts Deductions(1) of period
---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowance for returns and
doubtful accounts $15,191 $67,773 -- $(53,738) $29,226
YEAR ENDED DECEMBER 31, 1996
Allowance for returns and
doubtful accounts $ 6,851 $38,112 -- $(29,772) $15,191
YEAR ENDED DECEMBER 31, 1995
Allowance for returns and
doubtful accounts $ 6,744 $22,358 -- $(22,251) $ 6,851
</TABLE>
(1) Deductions relate to credits issued for returns and allowances against
accounts receivable.
55
<PAGE> 56
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item appears in sections captioned
"Nominees," "Other Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement to be
delivered to stockholders in connection with the 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement"). Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item appears in sections captioned
"Directors' Compensation," "Compensation Committee Interlocks and Insider
Participation," "Compensation Committee Report on Executive Compensation,"
"Comparative Stock Performance," "Executive Compensation," "Employment
Arrangements," "Stock Option Grants," "Option Exercises and Year-End Option
Table," "Repricing of Options" and "Compensation Committee Report on Option
Repricing" in the 1998 Proxy Statement. Such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item appears in section captioned
"Security Ownership of the Company" in the 1998 Proxy Statement. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item appears in sections captioned
"Directors' Compensation" and "Certain Relationships and Related Transactions"
in the 1998 Proxy Statement. Such information is incorporated herein by
reference.
56
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants 32
Consolidated Balance Sheets as of December 31,
1997 and 1996 33
Consolidated Statements of Operations for the
Years Ended December 31, 1997, 1996 and 1995 34
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended December 31, 1997,
1996 and 1995 35
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 36
Notes to Consolidated Financial Statements 38
(2) FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED SUPPLEMENTARY FINANCIAL SCHEDULE:
Schedule II - Valuation and Qualifying Accounts 55
57
<PAGE> 58
(3) EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation, as amended(1)
3.2 Certificate of Designation of Series A Convertible Participating
Preferred Stock Setting Forth the Powers, Preferences, Rights,
Qualifications, Limitations and Restrictions of such Series of
Preferred Stock (15)
3.3 Bylaws of the Company, as amended
4.1 Indenture dated as of October 16, 1995 between the Company and State
Street Bank and Trust Company, as Trustee, for 5 1/2% Senior
Convertible Notes due 2000 (the "Indenture")(2)
4.2 First Supplemental Indenture to the Indenture, dated as of November
22, 1995, by and between the Company and State Street Bank and Trust
Company, as Trustee(3)
4.3 Note Resale Registration Rights Agreement dated as of October 23,
1995 by and between the Company, on the one hand, and the Initial
Purchasers set forth therein, on the other hand (the "Registration
Rights Agreement")(3)
4.4 Letter Agreement dated November 22, 1995 amending the Registration
Rights Agreement(3)
4.5 Form of Securities Resale Registration Rights Agreement by and among
the Company and Tribune Company(4)
4.6 Voting and Exchange Trust Agreement dated as of February 4, 1994
among the Company and SoftKey Software Products Inc. and R-M Trust
Company, as Trustee(5)
4.7 Plan of Arrangement of SoftKey Software Products Inc. under Section
182 of the Business Corporations Act (Ontario)(5)
4.8 Form of Special Warrant dated November 6, 1997 of SoftKey Software
Products Inc.
4.9 Special Warrant Indenture dated November 6, 1997 between SoftKey
Software Products Inc. and CIBC Mellon Trust Company
4.10 Registration Rights Agreement dated as of August 26, 1997 among the
Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III,
L.P., Thomas H. Lee Foreign Fund III, L.P., Bain Capital Fund V,
L.P., Bain Capital V-B. L.P., BCIP Associates, L.P., BCIP Trust
Associates, L.P., 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.
10.1 Employment Agreement dated as of April 9, 1997 by and between the
Company and Michael Perik(6)*
10.2 Employment Agreement dated as of April 9, 1997 by and between the
Company and Kevin O'Leary (6)*
10.3 Employment Agreement dated as of May 22, 1997 by and between the
Company and R. Scott Murray (7)*
10.4 Employment Agreement dated October 8, 1993 by and between SoftKey
Software Products Inc. and David E. Patrick (8)*
10.5 Employment Agreement dated March 1, 1994 by and between SoftKey
Software Products Inc. and Robert Gagnon (13)*
58
<PAGE> 59
10.6 Employment Agreement dated as of February 6, 1997 by and between the
Company and Neal S. Winneg*
10.7 Employment Agreement dated as of March 5, 1997 by and between the
Company and Anthony Bordon (14)*
10.8 Credit Agreement dated as of September 30, 1994 between SoftKey Inc.
and Fleet Bank of Massachusetts, N.A. (10)
10.9 Second Amendment dated as of May 17, 1995 by and between SoftKey
Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
as of September 30, 1994 (11)
10.10 Third Amendment dated as of December 22, 1995 by and among SoftKey
Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
as of September 30, 1994 (9)
10.11 Fourth Amendment dated as of February 28, 1996 by and among SoftKey
Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
as of September 30, 1994 (9)
10.12 Fifth Amendment dated as of October 4, 1996 by and among SoftKey
Inc. and Fleet National Bank, as successor in interest to Fleet Bank
of Massachusetts, to Credit Agreement dated as of September 30,
1994 (12)
10.13 Sixth Amendment dated December 31, 1997 by and among SoftKey Inc.
and Fleet National Bank, as successor in interest to Fleet Bank of
Massachusetts, NA to Credit Agreement dated September 30, 1994
10.14 Sublease Agreement dated as of January 5, 1995 by and between Mellon
Financial Services Corporation #1 and SoftKey Inc. (13)
10.15 Continuing Guaranty of Lease dated as of January 5, 1995 by the
Company in favor of Mellon Financial Services Corporation #1 (13)
10.16 1994 Non-Employee Director Stock Option Plan, as amended and
restated effective February 5, 1996 (9)*
10.17 Form of Stock Option Agreement under 1994 Non-Employee Director
Stock Option Plan (9)*
10.18 1990 Long Term Equity Incentive Plan, as amended through December 4,
1997*
10.19 Form of Stock Option Agreement under 1990 Long Term Equity Incentive
Plan (9)*
10.20 1996 Stock Option Plan, as amended and restated through October 31,
1996 (14)*
10.21 Form of Stock Option Agreement under 1996 Stock Option Plan (9)*
10.22 1996 Non-Employee Director Stock Option Plan (15)*
10.23 Form of Stock Option Agreement under 1996 Non-Employee Director
Stock Option Plan*
10.24 1997 Employee Stock Purchase Plan (15)*
10.25 Form of Standstill Agreement by and between the Company and Tribune
Company (4)
10.26 Securities Purchase Agreement dated as of August 26, 1997 among the
Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III,
L.P. and Thomas H. Lee Foreign Fund III, L.P. (16)
10.27 Securities Purchase Agreement dated as of August 26, 1997 among the
Company and Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP
Associates, L.P. and BCIP Trust Associates, L.P. (16)
10.28 Securities Purchase Agreement dated as of August 26, 1997 among the
Company and Centre Capital Investors II, L.P., Centre Capital
Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II,
L.P. , State Board of Administration of Florida, Centre Parallel
Management Partners, L.P. and Centre Partners Coinvestment, L.P.
(16)
59
<PAGE> 60
10.29 Receivables Purchase Agreement dated as of June 30, 1997 by and
among The Learning Company Funding, Inc. ("Funding"), Lexington
Partner Capital Company ("Lexington"), Fleet National Bank
("Fleet"), TLC Multimedia Inc. and the Company (7)
10.30 Receivables Sales Agreement dated as of June 30, 1997 by and between
TLC Multimedia Inc. and Funding (7)
10.31 Capital Contribution Agreement dated as of June 30, 1997 by and
among TLC Multimedia Inc., Funding and the Company (7)
21.1 Subsidiaries of the Company
23.1 Written Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
- -------------------------
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 6,
1996.
(2) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995.
(3) Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-3 (Reg . No. 333-145) filed January
26, 1996.
(4) Filed as exhibits to the Agreement and Plan of Merger dated November
30, 1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc.,
Tribune Company, Compton's NewMedia, Inc. and Compton's Learning
Company, incorporated by reference to exhibits filed with the Company's
Current Report on Form 8-K dated December 11, 1995.
(5) Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-3 (Reg . No. 333-40549) filed December
3, 1997.
(6) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 5,
1997.
(7) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 5,
1997.
(8) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 2,
1994.
(9) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 6, 1996.
(10) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 1,
1994.
(11) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 1,
1995.
(12) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 5,
1996.
(13) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
60
<PAGE> 61
(14) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 4, 1997.
(15) Incorporated by reference to exhibits filed with the Company's
Definitive Proxy Statement filed October 24, 1997.
(16) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated August 26, 1997.
(b) REPORTS ON FORM 8-K
The registrant filed a Current Report on Form 8-K reporting that, on November 6,
1997, it sold 4,072,000 special warrants to certain Canadian institutional
investors pursuant to Regulation S under the Securities Act of 1933, as amended.
61
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
THE LEARNING COMPANY, INC.
By: /s/ Michael Perik
-----------------------------
Michael Perik
Chief Executive Officer and
Chairman of the Board
(principal executive officer)
Date: March 12, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 12, 1998.
Signature Title
- --------- -----
/s/ MICHAEL PERIK Director, Chief Executive Officer
- ----------------------------- and Chairman of the Board of
Michael Perik Directors
/s/ KEVIN O'LEARY Director and President
- -----------------------------
Kevin O'Leary
/s/ R. SCOTT MURRAY Executive Vice President and Chief
- ----------------------------- Financial Officer (principal
R. Scott Murray financial officer and principal
accounting officer)
/s/ LAMAR ALEXANDER Director
- -----------------------------
Lamar Alexander
/s/ MICHAEL BELL Director
- -----------------------------
Michael Bell
/s/ ANTHONY J. DINOVI Director
- -----------------------------
Anthony J. DiNovi
/s/ JAMES DOWDLE Director
- -----------------------------
James Dowdle
/s/ ROBERT GAGNON Director
- -----------------------------
Robert Gagnon
/s/ MARK E. NUNNELLY Director
- -----------------------------
Mark E. Nunnelly
/s/ CHARLES PALMER Director
- -----------------------------
Charles Palmer
/s/ CAROLYNN N. REID-WALLACE Director
- -----------------------------
Carolynn N. Reid Wallace
/s/ ROBERT RUBINOFF Director
- -----------------------------
Robert Rubinoff
62
<PAGE> 63
/s/ SCOTT SPERLING Director
- -----------------------------
Scott Sperling
/s/ PAUL J. ZEPF Director
- -----------------------------
Paul J. Zepf
63
<PAGE> 64
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation, as amended (1)
3.2 Certificate of Designation of Series A Convertible Participating
Preferred Stock Setting Forth the Powers, Preferences, Rights,
Qualifications, Limitations and Restrictions of such Series of
Preferred Stock (15)
3.3 Bylaws of the Company, as amended
4.1 Indenture dated as of October 16, 1995 between the Company and State
Street Bank and Trust Company, as Trustee, for 5 1/2% Senior
Convertible Notes due 2000 (the "Indenture") (2)
4.2 First Supplemental Indenture to the Indenture, dated as of November
22, 1995, by and between the Company and State Street Bank and Trust
Company, as Trustee (3)
4.3 Note Resale Registration Rights Agreement dated as of October 23,
1995 by and between the Company, on the one hand, and the Initial
Purchasers set forth therein, on the other hand (the "Registration
Rights Agreement") (3)
4.4 Letter Agreement dated November 22, 1995 amending the Registration
Rights Agreement(3)
4.5 Form of Securities Resale Registration Rights Agreement by and among
the Company and Tribune Company (4)
4.6 Voting and Exchange Trust Agreement dated as of February 4, 1994
among the Company and SoftKey Software Products Inc. and R-M Trust
Company, as Trustee (5)
4.7 Plan of Arrangement of SoftKey Software Products Inc. under Section
182 of the Business Corporations Act (Ontario) (5)
4.8 Form of Special Warrant dated November 6, 1997 of SoftKey Software
Products Inc.
4.9 Special Warrant Indenture dated November 6, 1997 between SoftKey
Software Products Inc. and CIBC Mellon Trust Company
4.10 Registration Rights Agreement dated as of August 26, 1997 among the
Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III,
L.P., Thomas H. Lee Foreign Fund III, L.P., Bain Capital Fund V,
L.P., Bain Capital V-B. L.P., BCIP Associates, L.P., BCIP Trust
Associates, L.P., 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.
10.1 Employment Agreement dated as of April 9, 1997 by and between the
Company and Michael Perik (6)*
10.2 Employment Agreement dated as of April 9, 1997 by and between the
Company and Kevin O'Leary (6)*
10.3 Employment Agreement dated as of May 22, 1997 by and between the
Company and R. Scott Murray (7)*
10.4 Employment Agreement dated October 8, 1993 by and between SoftKey
Software Products Inc. and David E. Patrick (8)*
64
<PAGE> 65
10.5 Employment Agreement dated March 1, 1994 by and between SoftKey
Software Products Inc. and Robert Gagnon (13)*
10.6 Employment Agreement dated February 6, 1997 by and between the
Company and Neal S. Winneg*
10.7 Employment Agreement dated March 5, 1997 by and between the Company
and Anthony Bordon (14)*
10.8 Credit Agreement dated as of September 30, 1994 between SoftKey Inc.
and Fleet Bank of Massachusetts, N.A. (10)
10.9 Second Amendment dated as of May 17, 1995 by and between SoftKey
Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
as of September 30, 1994 (11)
10.10 Third Amendment dated as of December 22, 1995 by and among SoftKey
Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
as of September 30, 1994 (9)
10.11 Fourth Amendment dated as of February 28, 1996 by and among SoftKey
Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated
as of September 30, 1994 (9)
10.12 Fifth Amendment dated as of October 4, 1996 by and among SoftKey
Inc. and Fleet National Bank, as successor in interest to Fleet Bank
of Massachusetts, to Credit Agreement dated as of September 30,
1994 (12)
10.13 Sixth Amendment dated December 31, 1997 by and among SoftKey Inc.
and Fleet National Bank, as successor in interest to Fleet Bank of
Massachusetts, NA to Credit Agreement dated September 30, 1994
10.14 Sublease Agreement dated as of January 5, 1995 by and between Mellon
Financial Services Corporation #1 and SoftKey Inc. (13)
10.15 Continuing Guaranty of Lease dated as of January 5, 1995 by the
Company in favor of Mellon Financial Services Corporation #1 (13)
10.16 1994 Non-Employee Director Stock Option Plan, as amended and
restated effective February 5, 1996 (9)*
10.17 Form of Stock Option Agreement under 1994 Non-Employee Director
Stock Option Plan (9)*
10.18 1990 Long Term Equity Incentive Plan, as amended through December 4,
1997*
10.19 Form of Stock Option Agreement under 1990 Long Term Equity Incentive
Plan (9)*
10.20 1996 Stock Option Plan, as amended and restated through October 31,
1996 (14)*
10.21 Form of Stock Option Agreement under 1996 Stock Option Plan (9)*
10.22 1996 Non-Employee Director Stock Option Plan (15)*
10.23 Form of Stock Option Agreement under 1996 Non-Employee Director
Stock Option Plan*
10.24 1997 Employee Stock Purchase Plan (15)*
10.25 Form of Standstill Agreement by and between the Company and Tribune
Company (4)
10.26 Securities Purchase Agreement dated as of August 26, 1997 among the
Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III,
L.P. and Thomas H. Lee Foreign Fund III, L.P. (16)
10.27 Securities Purchase Agreement dated as of August 26, 1997 among the
Company and Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP
Associates, L.P. and BCIP Trust Associates, L.P. (16)
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10.28 Securities Purchase Agreement dated as of August 26, 1997 among the
Company and Centre Capital Investors II, L.P., Centre Capital
Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II,
L.P. , State Board of Administration of Florida, Centre Parallel
Management Partners, L.P. and Centre Partners Coinvestment, L.P.
(16)
10.29 Receivables Purchase Agreement dated as of June 30, 1997 by and
among The Learning Company Funding, Inc. ("Funding"), Lexington
Partner Capital Company ("Lexington"), Fleet National Bank
("Fleet"), TLC Multimedia Inc. and the Company (7)
10.30 Receivables Sales Agreement dated as of June 30, 1997 by and between
TLC Multimedia Inc. and Funding (7)
10.31 Capital Contribution Agreement dated as of June 30, 1997 by and
among TLC Multimedia Inc., Funding and the Company (7)
21.1 Subsidiaries of the Company
23.1 Written Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
- -------------------------
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 6,
1996.
(2) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995.
(3) Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-3 (Reg . No. 333-145) filed January
26, 1996.
(4) Filed as exhibits to the Agreement and Plan of Merger dated November
30, 1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc.,
Tribune Company, Compton's NewMedia, Inc. and Compton's Learning
Company, incorporated by reference to exhibits filed with the Company's
Current Report on Form 8-K dated December 11, 1995.
(5) Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-3 (Reg . No. 333-40549) filed December
3, 1997.
(6) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 5,
1997.
(7) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 5,
1997.
(8) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 2,
1994.
(9) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 6, 1996.
(10) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 1,
1994.
(11) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 1,
1995.
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(12) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 5,
1996.
(13) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(14) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 4, 1997.
(15) Incorporated by reference to exhibits filed with the Company's
Definitive Proxy Statement filed October 24, 1997.
(16) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated August 26, 1997.
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Exhibit 3.3
BYLAWS
OF
THE LEARNING COMPANY, INC.
REGISTERED OFFICE AND REGISTERED AGENT
1. REGISTERED OFFICE. The registered office of the corporation shall
be in the City of Wilmington, County of New Castle, State of Delaware.
2. OTHER OFFICES. The corporation may also have offices at such other
places, both within or without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the
corporation may require.
MEETINGS OF STOCKHOLDERS
3. TIME AND PLACE OF MEETINGS. All meetings of the stockholders shall
be held at such time and place, either within or without the State of
Delaware, as shall be fixed by the Board of Directors and stated in the
notice or waiver of notice of the meeting.
4. ANNUAL MEETING. An annual meeting of the stockholders for the
election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting
shall be held on such date and at such time and place as the Board of
Directors shall each year designate.
5. SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes prescribed in the notice of meeting, may be called by
the Board of Directors, the Chairman of the Board, the President, or the
holders of shares entitled to cast not less than fifteen percent of the
votes at the meeting, and shall be held on such date and at such time and
place as they or he or she shall designate.
6. NOTICE. Written notice of the place, date, and time of all meetings
of the stockholders shall be given not less than ten nor more than sixty
days before the date on which the meeting is to be held, to each
stockholder entitled to vote at such meeting, except as otherwise provided
herein or required by law (meaning, here and hereinafter, as required from
time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the corporation).
When a meeting is adjourned to another place, date, or time, written
notice need not be given of the adjourned meeting if the place, date, and
time thereof are announced at the meeting at which the adjournment is taken
and the adjournment is not for more than thirty days; provided, however,
that if the date of any adjourned meeting is more than thirty days after
the date of which the meeting was originally noticed, or if a
<PAGE> 2
new record date is fixed for the adjourned meeting, written notice of the
place, date, and time of the adjourned meeting shall be given in conformity
herewith. At any adjourned meeting, any business may be transacted which
might have been transacted at the original meeting.
7. QUORUM AND REQUIRED VOTE. At any meeting of the stockholders, the
holders of a majority of all of the shares of the stock entitled to vote on
the subject matter at the meeting, present in person or by proxy, shall
constitute a quorum, unless or except to the extent that the presence of a
larger number may be required by law. The affirmative vote of the majority
of shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the
stockholders. Where a separate vote by class is required by law, the
affirmative vote of the majority of shares of such class present in person
or represented by proxy at the meeting shall be the act of the class.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to
vote who are present, in person or by proxy, may adjourn the meeting to
another place, date, or time.
If a notice of any adjourned special meeting of stockholders is sent
to all stockholders entitled to vote thereat, stating that it will be held
with those present constituting a quorum, then except as otherwise required
by law, those present at such adjourned meeting shall constitute a quorum,
and all matters shall be determined by a majority of the votes cast at such
meeting.
8. ORGANIZATION. Such person as the Board of Directors may have
designated or, in the absence of such a person, the Chairman of the Board
or the chief executive officer of the corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the
shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the
meeting. In the absence of the Secretary of the corporation, the secretary
of the meeting shall be such person as the chairman appoints.
9. CONDUCT OF BUSINESS. The chairman of any meeting of stockholders
shall determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct of
discussion as seem to him or her in order.
10. PROXIES AND VOTING. At any meeting of the stockholders, every
stockholder entitled to vote may vote in person or by proxy authorize by an
instrument in writing filed in accordance with the procedure established
for the meeting.
Each stockholder shall have one vote for every share of stock entitled
to vote on the subject matter which is registered in his or her name on the
record date for the
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<PAGE> 3
meeting, except as otherwise provided herein or required by law. Except as
required by law, all matters shall be determined by a majority of the votes
cast.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that
upon demand therefor by a stockholder entitled to vote or his or her proxy,
a stock vote shall be taken. Every stock vote shall be taken by ballots,
each of which shall state the name of the stockholder or proxy voting and
such other information as may be required under the procedure established
for the meeting. Every vote taken by ballots shall be counted by an
inspector or inspectors appointed by the chairman of the meeting.
11. STOCK LIST. A complete list of stockholders entitled to vote at
any meeting of stockholders, arranged in alphabetical order for each class
of stock and showing the address of each such stockholder and the number of
shares registered in his or her name, shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which
place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The stock list
shall also be kept at the place of the meeting during the whole time
thereof and shall be open to the examination of any such stockholder who is
present.
12. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise
provided by law, any action required to be taken, or any action which may
be taken, at an annual or special meeting of the stockholders of the
corporation may be taken without a meeting, without prior notice and
without a vote, if a consent in writing setting forth the action so taken
shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize to take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to
those stockholders who have not consented in writing.
BOARD OF DIRECTORS
13. POWERS. The business and affairs of the corporation shall be
managed by or under the direction of its Board of Directors.
14. NUMBER, CLASSIFICATION, AND TERM OF OFFICE. The number of
directors who shall constitute the whole board shall be not less than six
nor more than fifteen, as the Board of Directors shall at the time have
designated, except that in the absence of any such designation, such number
shall be six. Each director shall be elected for a term of one year and
until his or her successor is elected and qualified, except as otherwise
provided herein or required by law.
3
<PAGE> 4
Whenever the authorized number of directors is increased between
annual meetings of the stockholders, a majority of the directors then in
office shall have the power to elect such new directors for the balance of
a term and until their successors are elected and qualified. Any decrease
in the authorized number of directors shall not become effective until the
expiration of the term of the directors then in office unless, at the time
of such decrease, there shall be vacancies on the board which are being
eliminated by the decrease.
15. RESIGNATIONS. A director may resign at any time by giving written
notice to the corporation and such resignation shall be effective when
given unless the director specifies a later time. The resignation shall be
effective regardless of whether it is accepted by the corporation.
16. VACANCIES. If the office of any director becomes vacant by reason
of death, resignation, disqualification, removal or other cause, a majority
of the directors remaining in the office, although less than a quorum, may
elect a successor for the unexpired term and until his or her successor is
elected and qualified; provided, however, that if the vacancy is caused by
the removal of a director by the stockholders, then the stockholders shall
have the right to elect a successor.
17. REGULAR MEETINGS. Regular meetings of the Board of Directors shall
be held at such place or places, on such date or dates, and at such time or
times as shall have been established by the Board of Directors and
publicized among all directors. A notice of each regular meeting shall not
be required.
18. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by the Chairman of the Board, the President, the Secretary, any
Vice President, and any two directors.
19. NOTICE OF MEETINGS. Special meetings, and regular meetings not
fixed as provided in Section 17 of these Bylaws, shall be held upon four
days notice by mail or 48 hours notice delivered personally or by telephone
or telegraph to each director who does not waive such notice. The notice
shall state the place, date and time of the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at
a special meeting.
Notice of an adjourned meeting need not be given if the place, date,
and time of the adjourned meeting are announced at the meeting at which the
adjournment is taken and the adjournment is not for more than twenty-four
hours. If a meeting is adjourned for more than twenty-four hours, notice of
the adjourned meeting shall be given prior to the time of that meeting to
the directors who were not present at the time of the adjournment.
20. ACTION WITHOUT MEETING. Except as required by law, any action
required or permitted to be taken at any meeting of the Board of Directors
or any committee thereof may be taken without a meeting if all members of
the Board of Directors or committee
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<PAGE> 5
thereof, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of
Directors or committee thereof.
21. MEETING BY TELEPHONE. Except as required by law, members of the
Board of Directors or any committee thereof may participate in the meeting
of the Board of Directors or committee thereof by means of conference
telephone or similar communications equipment if all persons who
participate in the meeting can hear each other and such participation in a
meeting shall constitute presence in person at such meeting.
22. QUORUM AND MANNER OF ACTING. At any meeting of the Board of
Directors, a majority of the directors then in office shall constitute a
quorum for all purposes. A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of
directors. If a quorum shall fail to attend any meeting, a majority of
those present may adjourn the meeting to another place, date, or time,
without further notice or waiver thereof. Except as provided herein, the
act of the majority of the directors present at any meeting at which a
quorum is present shall be the act of the Board of Directors.
23. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors may
designate one or more committees of the Board, each committee to consist of
one or more of the directors of the corporation, with such lawfully
delegable powers and duties as the Board thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others
provided for herein, elect a director or directors to serve as the member
or members, designating, if it desires, other directors as alternate
members who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of any member of any
committee and any alternate member in his place, the member or members of
the committee present at the meeting and not disqualified from voting,
whether or not he or she or they constitute a quorum, may by unanimous vote
appoint another member of the Board of Directors to act at the meeting in
the place of the absent or disqualified member. The principles set forth in
Sections 13 through 23 of these Bylaws shall apply to committees of the
Board of Directors and to actions taken by such committees.
24. CONDUCT OF BUSINESS OF COMMITTEES. Each committee may determine
the procedural rules for meeting and conducting its business and shall act
in accordance therewith, except as otherwise provided herein or required by
law. A majority of the members of the committee shall constitute a quorum,
and all matters shall be determined by a majority vote of the members
present.
25. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to fix the compensation of directors. The directors may
be paid their expenses, if any, of attendance at each meeting of the Board
of Directors or a committee thereof, and may receive fixed fees and other
compensation for their services as directors. No such payment shall
5
<PAGE> 6
preclude any director from serving the corporation in any other capacity
and receiving compensation therefor.
OFFICERS
26. TITLES. The officers of the corporation shall be chosen by the
Board of Directors and shall include a Chairman of the Board or a President
or both, a Secretary, and a Treasurer. The Board of Directors may also
appoint one or more Vice-Presidents, Assistant Secretaries, Assistant
Treasurers or other officers. Any number of offices may be held by the same
person. All officers shall perform their duties and exercise their powers
subject to the Board of Directors.
27. ELECTION, TERM OF OFFICE, AND VACANCIES. The officers shall be
elected annually by the Board of Directors at its regular meeting following
the annual meeting of the stockholders, and each officer shall hold office
until the next annual election of officers and until the officer's
successor is elected and qualified, or until the officer's death,
resignation, or removal. Any officer may be removed at any time, with or
without cause, by the Board of Directors. Any vacancy occurring in any
office may be filled by the Board of Directors.
28. RESIGNATION. Any officer may resign at any time upon notice to the
corporation without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. The resignation of an
officer shall be effective when given unless the officer specifies a later
time. The resignation shall be effective regardless of whether it is
accepted by the corporation.
29. CHAIRMAN OF THE BOARD; PRESIDENT. If the Board of Directors elects
a Chairman of the Board, such officer shall preside over all meetings of
the Board of Directors and of stockholders. If there be no Chairman of the
Board, the President shall perform such duties. The Board of Directors
shall designate either the Chairman of the Board or the President as the
chief executive officer and may prescribe the duties and powers of the
chief executive officer. In the absence of such a designation, the
President shall be the chief executive officer. If there be no Chairman of
the Board, the President shall be the chief executive officer.
Subject to the provisions of these Bylaws and to the direction of the
Board of Directors, the chief executive officer shall have the
responsibility for the general management and control of the business and
affairs of the corporation and shall perform all duties and have all powers
which are commonly incident to the office of chief executive or which are
delegated to him or her by the Board of Directors. He or she shall have
power to sign all stock certificates, contracts, and other instruments of
the corporation which are authorized and shall have general supervision and
direction of all of the other officers, employees, and agents of the
corporation.
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<PAGE> 7
30. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall issue all
authorized notices for, and shall keep minutes of, all meetings of the
stockholders and the Board of Directors. He or she shall have charge of the
corporate books and shall perform such other duties as the Board of
Directors may from time to time prescribe. At the request of the Secretary,
or in the Secretary's absence or disability, any Assistant Secretary shall
perform any of the duties of the Secretary and when so acting, shall have
all the powers of, and be subject to all the restrictions upon, the
Secretary.
31. TREASURER AND ASSISTANT TREASURERS. Unless the Board of Directors
designates another chief financial officer, the Treasurer shall be the
chief financial officer of the corporation. Unless otherwise determined by
the Board of Directors or the chief executive officer, the Treasurer shall
have custody of the corporate funds and securities, shall keep adequate and
correct accounts of the corporation's properties and business transactions,
shall disburse such funds of the corporation as may be ordered by the Board
or the chief executive officer (taking proper vouchers for such
disbursements), and shall render to the chief executive officer and the
Board, at regular meetings of the Board or whenever the Board may require,
an account of all transactions and the financial condition of the
corporation. At the request of the Treasurer or in the Treasurer's absence
or disability, any Assistant Treasurer may perform any of the duties of the
Treasurer and when so acting shall have all the powers of, and be subject
to all the restrictions upon, the Treasurer.
32. OTHER OFFICERS. The other officers of the corporation, if any,
shall exercise such powers and perform such duties as the Board of
Directors or the chief executive officer shall prescribe.
33. COMPENSATION. The Board of Directors shall fix the compensation of
the chief executive officer and may fix the compensation of other employees
of the corporation, including the other officers. If the Board does not fix
the compensation of the other officers, the chief executive officer shall
fix such compensation.
34. ACTIONS WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, the Chairman of the Board,
the President, or any officer of the corporation authorized by the Chairman
of the Board or the President, shall have power to vote and otherwise act
on behalf of the corporation, in person or by proxy, at any meeting of
stockholders of, or with respect to any action of stockholders of, any
other corporation in which this corporation may hold securities and
otherwise shall have power to exercise any and all rights and powers which
this corporation may possess by reason of its ownership of securities in
such other corporation.
STOCK AND DIVIDENDS
35. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a
certificate signed by, or in the name of the corporation by, the Chairman,
the President, or a Vice President, and by the Secretary or an Assistant
Secretary, or the Treasurer or an Assistant Treasurer,
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<PAGE> 8
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be facsimile.
36. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the
transfer books of the corporation and kept at an office of the corporation
or by transfer agents designated to transfer shares of the stock of the
corporation. Except where a certificate is issued in accordance with the
next sentence of this Section, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new
certificate is issued therefor. In the event of the loss, theft, or
destruction of any certificate of stock, another may be issued in its place
pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft, or destruction and concerning the
giving of a satisfactory bond or bonds of indemnity.
37. REGULATIONS. The issue, transfer, conversion, and registration of
certificates of stock shall be governed by such other regulations as the
Board of Directors may establish.
RECORD DATE
38. RECORD DATE. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion, or exchange of
stock or for the purpose of any other lawful action, the Board of Directors
may fix in advance, a record date, which shall not be more than sixty nor
less than ten days before the date of such meeting, nor more than sixty
days prior to any other action. If no record date is fixed, the record date
(1) for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held, (2) for determining stockholders entitled to express consent to
corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which the first
written consent is expressed, (3) for determining stockholders for any
other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided that
the Board of Directors may fix a new record date for the adjourned meeting.
WAIVER OF NOTICE
39. WAIVER OF NOTICE. Whenever notice is required to be given by law
or these Bylaws, a written waiver of notice, signed by the person entitled
to notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute
a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the
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<PAGE> 9
meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Unless so required by the Certificate of
Incorporation or these Bylaws, neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice.
AMENDMENTS
40. AMENDMENTS. These Bylaws may be amended or repealed or new bylaws
may be adopted, by the stockholders at any meeting or by the Board of
Directors at any meeting.
MISCELLANEOUS
41. FISCAL YEAR. The fiscal year of the corporation shall be as fixed
by the Board of Directors.
42. TIME PERIODS. In applying any provision of these Bylaws which
require that an act be done or not done a specified number of days prior to
an event or that an act be done during a period of a specified number of
days prior to an event, calendar days shall be used, the day of the doing
of the act shall be excluded, and the day of the event shall be included.
43. FACSIMILE SIGNATURES. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the corporation may be
used whenever and as authorized by the Board of Directors or a committee
thereof.
44. CORPORATE SEAL. The Board of Directors may provide a suitable
seal, containing the name of the corporation, which seal shall be in the
charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.
45. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each
member of any committee designated by the Board of Directors, and each
officer of the corporation shall, in the performance of his duties, be
fully protected in relying in good faith upon the books of account or other
records of the corporation, including reports made to the corporation by
any of its officers, by an independent certified public accountant, or by
an appraiser selected with reasonable care.
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Exhibit 4.8
FORM OF WARRANT CERTIFICATE
The following is the form of Warrant certificate referred to in Section
2.02 of the Warrant Indenture:
EXERCISABLE ONLY DURING THE PERIOD COMMENCING ON THE BUSINESS DAY FOLLOWING THE
DATE ON WHICH TRANSACTION APPROVAL (AS DEFINED HEREIN) IS OBTAINED AND ENDING AT
5:00 P.M. (LOCAL TIME) ON THE DATE THAT IS THE EARLIER OF (I) THE FIRST
ANNIVERSARY OF THE DATE HEREOF AND (II) THE SIXTH BUSINESS DAY FOLLOWING THE
DATE OF ISSUANCE OF A RECEIPT BY THE SECURITIES REGULATORY AUTHORITY IN THE
PROVINCE OF RESIDENCE OF THE HOLDER HEREOF (WHICH MAY ONLY BE ONE OF THE
PROVINCES OF BRITISH COLUMBIA, ONTARIO AND QUEBEC AND WILL, IN THE CASE OF
PERSONS RESIDENT OUTSIDE CANADA, BE DEEMED TO BE THE PROVINCE OF ONTARIO) FOR A
(FINAL) PROSPECTUS RELATING TO THE DISTRIBUTION OF THE EXCHANGEABLE NON-VOTING
SHARES OF SOFTKEY SOFTWARE PRODUCTS INC. TO BE ISSUED UPON THE EXERCISE OF THE
SPECIAL WARRANTS, IMMEDIATELY AT WHICH TIME THESE SPECIAL WARRANTS SHALL BE
DEEMED CONCLUSIVELY TO HAVE BEEN EXERCISED.
NO._____________ Representing ________________ Special
Warrants, each such warrant entitling
the holder to acquire one Exchangeable
Share (or in the circumstances described
below 1.09 Exchangeable Shares), subject
to adjustment, of SoftKey Software
Products Inc. for no additional
consideration.
NOTE: THESE SPECIAL WARRANTS ARE NON-TRANSFERABLE EXCEPT AS SET FORTH
HEREIN.
SPECIAL WARRANT
OF
SOFTKEY SOFTWARE PRODUCTS INC.
THIS CERTIFIES that, for value received, the holder hereof, ______________
____________________________ , (the "holder") of the Special Warrants (the
"Warrants") of SoftKey Software Products Inc. (the "Corporation") represented
hereby is entitled at any time during the period (the "Exercise Period")
commencing on the Business Day following the date on which Transaction Approval
(as defined herein) is obtained and ending at 5:00 p.m. (local time) (the
"Expiry Time") on the date (the "Expiry Date") that is the earlier of (i)
November 6, 1998 and (ii) the date that is the sixth Business Day following the
date (the "Clearance Date") upon which a receipt is issued by the securities
regulatory authority in the province of residence of the holder hereof (which
may only be one of the Provinces of British Columbia, Ontario and Quebec and
will, in the case of persons resident outside Canada, be deemed to be the
Province of Ontario) for the (final) prospectus (the "Final Prospectus") of the
Corporation qualifying the exchangeable non-voting shares (the "Exchangeable
Shares") of the Corporation to be issued upon the exercise of the Warrants, to
acquire in accordance with the provisions of the Warrant Indenture (as defined
<PAGE> 2
-2-
below) one Exchangeable Share (or 1.09 Exchangeable Shares to be issued by the
Corporation in the circumstances described below), subject to adjustment, for
each Warrant represented hereby without payment of any consideration in addition
to the issue price of such Warrant by surrendering to CIBC Mellon Trust Company
(the "Trustee") at its principal office in the City of Toronto this Warrant
certificate together with an executed exercise form in the form of the attached
Exercise Form or any other written notice in a form satisfactory to the Trustee,
in either case duly completed and executed PROVIDED THAT UNLESS THE HOLDER HAS
SURRENDERED THE WARRANTS REPRESENTED HEREBY FOR EXERCISE PURSUANT TO THE
PROVISIONS HEREOF AND OF THE WARRANT INDENTURE DURING THE EXERCISE PERIOD, THE
WARRANTS REPRESENTED HEREBY SHALL BE DEEMED TO HAVE BEEN EXERCISED BY THE HOLDER
AT THE EXPIRY TIME WITHOUT FURTHER NOTICE TO OR ACTION ON THE PART OF THE
HOLDER. For the purposes of this Warrant certificate, "Underwriters" means,
collectively, Griffiths McBurney & Partners and First Marathon Securities
Limited.
Upon the exercise or deemed exercise of the Warrants evidenced hereby, the
Corporation shall cause to be issued to the person(s) in whose name(s) the
Exchangeable Shares so subscribed for are to be issued (provided that, if the
Exchangeable Shares are to be issued to a person other than a holder of this
Warrant certificate, the holder's signature on the Exercise Form herein shall be
guaranteed by a Canadian chartered bank, by a Canadian trust company or by a
member firm of The Toronto Stock Exchange) the number of Exchangeable Shares to
be issued to such person(s) and such person(s) shall become a holder in respect
of Exchangeable Shares with effect from the date of such exercise and upon due
surrender of this Warrant certificate. The Corporation will cause a
certificate(s) representing such Exchangeable Shares to be made available for
pick-up by such person(s) at 393 University Avenue, 5th Floor, Toronto, Ontario
M5G 2M7, or mailed to such person(s) at the address(es) specified in such
Exercise Form, within two Business Days after receipt of notice from the Trustee
of the exercise of this Warrant.
The net proceeds of sale of the Warrants will be deposited on the date
hereof in escrow with the Trustee to be held and invested by the Trustee in
accordance with the provisions of the Warrant Indenture. In the event that the
Corporation fails to obtain Transaction Approval on or prior to March 6, 1998 or
such later date as may be agreed upon in writing by the Corporation and the
Underwriters (the "Qualification Deadline") the Corporation shall redeem each
Warrant for an amount equal to the purchase price paid by the Warrantholder for
the Warrant, together with interest thereon as provided in the Warrant
Indenture. For the purposes of this Warrant certificate, "Transaction Approval"
means Shareholder Approval together with all such other consents and approvals
necessary to ensure that the rights and benefits of the holders of Underlying
Shares are substantially equivalent to the rights and benefits of the holders of
the existing Exchangeable Shares; provided that, for greater certainty
Transaction Approval shall not include the filing of, or the obtaining of a
receipt for, the Final Prospectus. For the purposes of this Warrant certificate,
"Shareholder Approval" means the approval of the holders of the Exchangeable
Shares to, among other things, the issue by the Corporation, from time to time,
of Exchangeable Shares in addition to those shares outstanding on the record
date for the Shareholder Meeting, such approval to be given by resolution passed
by not less than two-thirds of the votes cast on such resolution at the
<PAGE> 3
-3-
Shareholder Meeting, as required by and in accordance with the rights,
privileges, restrictions and conditions attaching to the Exchangeable Shares.
For the purposes of this Warrant certificate, "Shareholder Meeting" means the
special meeting or meeting (including any adjournments thereof) of the holders
of the Exchangeable Shares to be called and held in accordance with the articles
and by-laws of the Corporation for the purpose of obtaining Shareholder
Approval.
In the event that the Corporation satisfies the Transaction Support
Condition or obtains Shareholder Approval prior to the Qualification Deadline,
the Trustee shall, upon receipt of written notice and supporting documents, in
prescribed form, release the Escrowed Funds to the Corporation for the purpose
of completing the purchase of Creative Wonders L.L.C. If the Escrowed Funds are
not released to the Corporation as aforesaid, the Escrowed Funds will be
released to the Corporation on the first to occur of (a) the last Clearance Date
to occur in British Columbia, Ontario and Quebec and (b) the Qualification
Deadline, provided only that the Corporation has obtained Transaction Approval
by such date. For the purpose of this Warrant certificate, "Transaction Support
Condition" means the obtaining by the Corporation of irrevocable proxies
executed by holders of not less than 50.1% of the Exchangeable Shares
outstanding on the record date for, and eligible to vote at, the Shareholder
Meeting, indicating that such shareholders will vote such shares at the
Shareholder Meeting in favour of, among other things, the issue by the
Corporation, from time to time, of Exchangeable Shares in addition to those
shares outstanding on the record date for the Shareholder Meeting. For the
purpose of this Warrant certificate, "escrowed funds" means the net proceeds of
sale of the Warrants deposited in escrow with the Trustee, and all proceeds of
investment and reinvestment thereof from time to time.
If, notwithstanding Transaction Approval having been obtained, the
Clearance Date does not occur by 5:00 p.m. (local time) on the Qualification
Deadline, or for any reason the Corporation is unable to file the Final
Prospectus with the securities regulatory authority of the holder's province
(which may only be one of the Provinces of British Columbia, Ontario and Quebec
and will, in the case of non-Canadian resident holders of Warrants, be deemed to
be the Province of Ontario) by 5:00 p.m. (local time) on the Qualification
Deadline, each Warrant represented hereby shall thereafter entitle the holder
upon the exercise or deemed exercise thereof, without further action being
required to be taken hereunder or under the Warrant Indenture, to acquire 1.09
Exchangeable Shares (subject to adjustment) at no additional cost provided that
no fractional Exchangeable Shares will be issued but a cash payment will be made
in lieu thereof. IN SUCH CASE, BUT WITHOUT DEROGATING FROM THE CORPORATION'S
OBLIGATION TO USE ITS REASONABLE EFFORTS TO OBTAIN FROM EACH OF THE SECURITIES
REGULATORY AUTHORITIES OF THE PROVINCES OF BRITISH COLUMBIA, ONTARIO AND QUEBEC,
AS SOON AS PRACTICABLE, A RECEIPT OR SIMILAR DOCUMENT FOR THE FINAL PROSPECTUS,
THE EXCHANGEABLE SHARES ISSUED UPON THE EXERCISE OR DEEMED EXERCISE OF THE
WARRANTS WILL BE SUBJECT TO RESTRICTIONS ON THE RESALE THEREOF IN ACCORDANCE
WITH APPLICABLE SECURITIES LAWS OF CANADA AND THE UNITED STATES OF AMERICA AND
MAY BEAR A LEGEND TO SUCH EFFECT.
<PAGE> 4
-4-
This Warrant certificate represents Warrants of the Corporation issued or
issuable under the provisions of a warrant indenture (which indenture together
with all other instruments supplemental or ancillary thereto is herein referred
to as the "Warrant Indenture") made as of November 6, 1997 between the
Corporation and the Trustee, as trustee, TO WHICH WARRANT INDENTURE REFERENCE IS
HEREBY MADE FOR SPECIFIC PARTICULARS OF THE RIGHTS OF THE HOLDERS OF THE
WARRANTS AND THE CORPORATION AND OF THE TRUSTEE IN RESPECT THEREOF AND THE TERMS
AND CONDITIONS UPON WHICH THE WARRANTS ARE ISSUED AND HELD (WHICH RIGHTS, TERMS
AND CONDITIONS ARE SUMMARIZED ONLY IN THIS WARRANT CERTIFICATE), ALL TO THE SAME
EFFECT AS IF THE PROVISIONS OF THE WARRANT INDENTURE WERE HEREIN SET FORTH, TO
ALL OF WHICH THE HOLDER OF THIS WARRANT CERTIFICATE BY ACCEPTANCE HEREOF
ASSENTS. A copy of the Warrant Indenture will be available for inspection at 393
University Avenue, 5th Floor, Toronto, Ontario M5G 2M7. If any conflict exists
between the provisions contained herein and the provisions of the Warrant
Indenture, the provisions of the Warrant Indenture shall govern.
The Warrant Indenture provides for adjustments to the right of exercise,
including the amount of and class and kind of Exchangeable Shares and other
shares, securities or property issuable upon exercise, upon the happening of
certain stated events including the subdivision or consolidation of the
Exchangeable Shares, certain distributions of Exchangeable Shares or securities
convertible into Exchangeable Shares or of other securities or assets of the
Corporation, certain offerings of rights, warrants or options and certain
capital reorganizations and for payment of an amount to compensate for dividends
paid on Exchangeable Shares.
If, immediately prior to the expiry of the Exercise Period, the Warrants
represented by this Warrant certificate have not been exercised, the Warrants
represented hereby shall be deemed to have been exercised and surrendered by the
holder immediately after that time without any further action on the part of the
holder.
THIS SPECIAL WARRANT, THE EXCHANGEABLE SHARES ISSUABLE UPON EXERCISE HEREOF
AND THE SHARES OF COMMON STOCK, PAR VALUE U.S.$0.01 PER SHARE, OF THE LEARNING
COMPANY, INC. (THE "COMMON STOCK") ISSUABLE UPON EXCHANGE OF THE EXCHANGEABLE
SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF
THE UNITED STATES OF AMERICA (THE "U.S. SECURITIES ACT"); THE SPECIAL WARRANT,
THE EXCHANGEABLE SHARES AND THE COMMON STOCK MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S
PROMULGATED UNDER THE U.S. SECURITIES ACT) UNLESS SUCH OFFER, SALE OR TRANSFER
IS COVERED BY OR MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
U.S. SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE U.S.
SECURITIES ACT, NOR MAY ANY SPECIAL WARRANT OR ANY EXCHANGEABLE SHARE BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED
<PAGE> 5
-5-
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S.
PERSON UNLESS THE ISSUANCE OF THE COMMON STOCK IS REGISTERED UNDER AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE U.S. SECURITIES ACT OR AN EXEMPTION FROM
REGISTRATION UNDER THE U.S. SECURITIES ACT IS AVAILABLE FOR THE EXCHANGE OF THE
EXCHANGEABLE SHARES.
Upon presentation at 393 University Avenue, 5th Floor, Toronto, Ontario M5G
2M7, subject to the provisions of the Warrant Indenture and upon compliance with
the reasonable requirements of the Trustee, Warrants may be exchanged for
Warrants entitling the holder thereof to acquire an equal aggregate number of
Exchangeable Shares (subject to adjustment) or, in the circumstances described
above, Warrants entitling the holder thereof to acquire an aggregate number of
Exchangeable Shares equal to the product of 1.09 and the aggregate number of
Warrants (subject to adjustment) rounded down to the nearest whole number. The
Corporation and the Trustee may treat the registered holder of this Warrant
certificate for all purposes as the absolute owner hereof. The holding of this
Warrant certificate shall not constitute the holder hereof a holder of
Exchangeable Shares nor entitle him to any right or interest in respect thereof
except as herein and in the Warrant Indenture expressly provided.
The transfer of the Warrants evidenced hereby is restricted by applicable
securities laws of Canada and the United States of America. In addition, no
Warrant may be transferred to a person resident in any Province of Canada other
than British Columbia, Ontario or Quebec. Warrants may only be transferred, upon
compliance with the conditions prescribed in the Warrant Indenture, on the
register to be kept at the principal offices of the Trustee in the City of
Toronto by the registered holder thereof or his executors or administrators or
other legal representatives or his or their attorney duly appointed by an
instrument in writing in form and execution satisfactory to the Trustee with the
signature guaranteed by a Canadian chartered bank, a Canadian trust company or a
member firm of The Toronto Stock Exchange and upon compliance with such
reasonable requirements as the Trustee may prescribe (including, without
limitation, the requirement to provide evidence of satisfactory compliance with
applicable securities laws of Canada and the United States of America).
PRIOR TO THE EARLIER OF THE CLEARANCE DATE AND THE FIRST ANNIVERSARY OF THE
DATE HEREOF, THE TRANSFER OF EXCHANGEABLE SHARES ISSUABLE UPON EXERCISE OF THE
WARRANTS EVIDENCED HEREBY IS RESTRICTED BY APPLICABLE SECURITIES LEGISLATION.
The Warrant Indenture contains provisions making binding upon all holders
of Warrants outstanding thereunder resolutions passed at meetings of such
holders held in accordance with such provisions and instruments in writing
signed by the Warrantholders holding a specified percentage of outstanding and
unexercised Warrants.
<PAGE> 6
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The Warrant Indenture identifies and provides for certain restrictive
legends that will appear on the certificates for the Exchangeable Shares.
The Warrants and the Warrant Indenture shall be governed by and performed,
construed and enforced in accordance with the laws of the Province of Ontario
and shall be treated in all respects as Ontario contracts. Time shall be of the
essence hereof and of the Warrant Indenture.
This Warrant certificate shall not be valid for any purpose until it has
been certified by or on behalf of the Trustee for the time being under the
Warrant Indenture.
IN WITNESS WHEREOF the Corporation has caused this Warrant certificate to
be signed by its duly authorized officers as of the 6th day of November, 1997.
SOFTKEY SOFTWARE PRODUCTS INC.
By ________________________________
Authorized Signing Officer
This Warrant certificate represents Warrants referred
to in the Warrant Indenture within mentioned.
CIBC MELLON TRUST COMPANY
Trustee
By ____________________________________
Authorized Signing Officer
date of signing____________________________
<PAGE> 7
- 7 -
TRANSFER FORM
FOR VALUE RECEIVED, _________________________________________
hereby sells, assigns and transfers unto
_________________________________________________________________
PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE
_________________________________________________________________
_________________________________________________________________
________________________ Warrants represented by the within Warrant certificate
and does hereby irrevocably constitute and appoint ______________
_________________________________________________________________
attorney to transfer the said Warrants on the books of the Trustee with full
power of substitution in the premises.
DATED _________________________________ , 199__.
In the presence of )
) _____________________________
_________________________________ ) Signature of Warrantholder
guaranteed by:
_________________________________ _____________________________
Name: (Authorized Signature Number)
Upon any due transfer of Warrants, the transferee of a Warrant shall be a
permitted assignee of the transferring holder and shall be entitled to the
benefits of the covenants of the
<PAGE> 8
-8-
Corporation referred to in section 5 of Schedule "A" of the Subscription
Agreements (as defined in the Warrant Indenture) and granted by the Corporation,
subject to the restrictions and limitations described therein.
NOTICE: The signature on this assignment must correspond exactly with the name
as written upon the face of this Warrant certificate. If Exchangeable Shares are
to be issued to a person other than the registered holder, the registered holder
must pay to the Trustee all exigible taxes and the signature of the registered
holder must be guaranteed by a Canadian chartered bank, a Canadian trust company
or a member firm of The Toronto Stock Exchange.
<PAGE> 9
- 9 -
EXERCISE FORM
TO: SoftKey Software Products Inc.
c/o CIBC Mellon Trust Company
393 University Avenue
5th Floor
Toronto, Ontario
M5G 2M7
Attention: Stock and Bond Transfer Department
The undersigned holder of the within Warrants hereby irrevocably exercises
the Warrants represented hereby and subscribes for the maximum number of
Exchangeable Shares (or other shares, securities or property issuable in
accordance with the Warrant Indenture) issuable pursuant to the exercise of such
Warrants on the terms specified in the said Warrants and the Warrant Indenture.
The undersigned hereby directs that the said Exchangeable Shares be issued
in the name of the undersigned and delivered as follows:
- --------------------------------------------------------------------------------
NAME(S) IN FULL ADDRESS(ES) NUMBER OF
(include Postal Code) EXCHANGEABLE
SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
<PAGE> 10
-10-
Please note that if Exchangeable Shares are to be issued to a person other
than the registered holder, the registered holder must pay to the Trustee all
exigible taxes and the signature of the registered holder must be guaranteed.
DATED this ______ day of _____________________ , 199_.
- -------------------- ) ------------------------
Witness ) Signature
)
)
------------------------
Print full name
------------------------
Address in full
[ ] Please check box if these certificates are to be delivered to the
office where this Warrant certificate is surrendered, failing which the
certificates will be mailed to the address shown on the register.
(The Trustee may require that the signature above be guaranteed, in which event
the following must be completed.)
Signature of Warrantholder
guaranteed by: ________________________________
(Signature of Warrantholder)
______________________________ _________________________________
Name: (Authorized Signature Number)
Note: If the signature of the person executing this form is to be guaranteed, it
must be guaranteed by a Canadian chartered bank, a Canadian trust company
or a member firm of The Toronto Stock Exchange.
<PAGE> 1
EXHIBIT 4.9
SOFTKEY SOFTWARE PRODUCTS INC.
AND
CIBC MELLON TRUST COMPANY
-----------------------
SPECIAL WARRANT INDENTURE
PROVIDING FOR THE ISSUE OF
4,072,000 SPECIAL WARRANTS
-----------------------
NOVEMBER 6, 1997
DAVIES, WARD & BECK
CASSELS BROCK & BLACKWELL
<PAGE> 2
<TABLE>
<S> <C>
ARTICLE ONE
INTERPRETATION
Section 1.01 - Definitions ............................................. 2
Section 1.02 - Number and Gender ....................................... 8
Section 1.03 - Interpretation Not Affected by Headings, Etc ............ 8
Section 1.04 - Business Day ............................................ 8
Section 1.05 - Time of the Essence ..................................... 8
Section 1.06 - Applicable Law .......................................... 8
Section 1.07 - Severability ............................................ 8
ARTICLE TWO
ISSUE OF WARRANTS
Section 2.01 - Issue of Warrants ....................................... 9
Section 2.02 - Form and Terms of Warrants .............................. 9
Section 2.03 - Signing of Warrant Certificates ......................... 10
Section 2.04 - Certification by the Trustee ............................ 10
Section 2.05 - Warrantholder Not a Shareholder, Etc .................... 11
Section 2.06 - Issue in Substitution for Lost Warrant Certificates ..... 11
Section 2.07 - Warrants to Rank Pari Passu ............................. 11
Section 2.08 - Registers for Warrants .................................. 11
Section 2.09 - Transferee Entitled to Registration ..................... 12
Section 2.10 - Registers Open for Inspection ........................... 12
Section 2.11 - Exchange of Warrants .................................... 13
Section 2.12 - Ownership of Warrants ................................... 13
Section 2.13 - Adjustment of Exercise Rights ........................... 14
Section 2.14 - Adjustment Rules ........................................ 15
Section 2.15 - Proceedings Prior to Any Action Requiring Adjustment .... 16
Section 2.16 - Notice of Adjustment of Exercise Rights ................. 16
Section 2.17 - No Duty to Inquire, Liability ........................... 17
ARTICLE THREE
ESCROW OF NET PROCEEDS AND REDEMPTION OF SPECIAL WARRANTS
Section 3.01 - Deposit of Net Proceeds in Escrow ....................... 17
Section 3.03 - Release of Escrowed Funds to the Corporation ............ 18
Section 3.04 - Redemption of Warrants .................................. 18
Section 3.05 - Corporation to Fund Shortfall ........................... 20
Section 3.06 - Transaction Approval .................................... 20
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE FOUR
TRIGGERING EVENT
Section 4.01 - Triggering Event ........................................ 20
Section 4.02 - Change in Exercise Rights ............................... 20
ARTICLE FIVE
EXERCISE OF WARRANTS
Section 5.01 - Method of Exercise of Warrants .......................... 21
Section 5.02 - Automatic Exercise ...................................... 22
Section 5.03 - Effect of Exercise of Warrants .......................... 22
Section 5.04 - Cancellation of Warrant Certificates .................... 23
Section 5.05 - Notice to Trustee of Extension of
Qualification Deadline .................................. 23
Section 5.06 - Legend on Exchangeable Shares ........................... 23
ARTICLE SIX
COVENANTS
Section 6.01 - General Covenants ....................................... 24
Section 6.02 - Notice to Securities Commissions ........................ 25
Section 6.03 - Trustee's Remuneration and Expenses ..................... 25
Section 6.04 - Performance of Covenants by Trustee ..................... 26
Section 6.05 - Right to Dividends or Distributions ..................... 26
ARTICLE SEVEN
ENFORCEMENT
Section 7.01 - Suits by Warrantholders ................................. 26
Section 7.02 - Immunity of Shareholders, Etc ........................... 27
Section 7.03 - Limitation of Liability ................................. 27
ARTICLE EIGHT
MEETINGS OF WARRANTHOLDERS
Section 8.01 - Right to Convene Meetings ............................... 27
Section 8.02 - Notice .................................................. 28
Section 8.03 - Chair ................................................... 28
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Section 8.04 - Quorum .................................................. 28
Section 8.05 - Power to Adjourn ........................................ 29
Section 8.06 - Show of Hands ........................................... 29
Section 8.07 - Poll and Voting ......................................... 29
Section 8.08 - Regulations ............................................. 30
Section 8.09 - Corporation, Trustee and Counsel May Be Represented ..... 30
Section 8.10 - Powers Exercisable by Extraordinary Resolution .......... 31
Section 8.11 - Meaning of Extraordinary Resolution ..................... 32
Section 8.12 - Powers Cumulative ....................................... 32
Section 8.13 - Minutes ................................................. 33
Section 8.14 - Instruments in Writing .................................. 33
Section 8.15 - Binding Effect of Resolutions ........................... 33
Section 8.16 - Holdings by the Corporation or Subsidiaries
of the Corporation Disregarded .......................... 34
ARTICLE NINE
SUPPLEMENTAL INDENTURES
Section 9.01 - Supplemental Indentures ................................. 34
Section 9.02 - Successor Corporations .................................. 35
ARTICLE TEN
CONCERNING THE TRUSTEE
Section 10.01 - Trust Indenture Legislation ............................ 35
Section 10.02 - Rights and Duties of Trustee ........................... 36
Section 10.03 - Evidence, Experts and Advisers ......................... 37
Section 10.04 - Documents, Money, Etc. Held by Trustee ................. 37
Section 10.05 - Actions by Trustee to Protect Interests ................ 38
Section 10.06 - Trustee Not Required to Give Security .................. 38
Section 10.07 - Protection of Trustee .................................. 38
Section 10.08 - Replacement of Trustee ................................. 39
Section 10.09 - Conflict of Interest ................................... 40
Section 10.10 - Acceptance of Trusts ................................... 40
Section 10.11 - Trustee Not to Be Appointed Receiver ................... 40
Section 10.12 - Indemnity of Trustee ................................... 40
ARTICLE ELEVEN
GENERAL
Section 11.01 - Notice ................................................. 41
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
Section 11.02 - Accidental Failure to Give Notice to Warrantholders .... 42
Section 11.03 - Counterparts and Formal Date ........................... 42
Section 11.04 - Satisfaction and Discharge of Indenture ................ 43
Section 11.05 - Provisions of Indenture and Warrants for the
Sole Benefit of Parties and Warrantholders ............. 43
Section 11.06 - Language ............................................... 43
SCHEDULE A - Form of Warrant Certificate
SCHEDULE B - Form of Release Certificate
</TABLE>
<PAGE> 6
THIS SPECIAL WARRANT INDENTURE made as of November 6, 1997.
B E T W E E N:
SOFTKEY SOFTWARE PRODUCTS INC.
a corporation existing under the laws
of the Province of Ontario,
(hereinafter called the "CORPORATION"),
OF THE FIRST PART,
- and -
CIBC MELLON TRUST COMPANY,
a trust company incorporated under
the laws of Canada and having an
office in the City of Toronto,
Ontario,
(hereinafter called the "TRUSTEE"),
OF THE SECOND PART.
WHEREAS the Corporation proposes to issue and sell 4,072,000 special
warrants (the "Warrants") entitling the holders thereof to acquire upon exercise
thereof without additional payment exchangeable non-voting shares in the capital
of the Corporation upon the terms and subject to the conditions contained
herein;
AND WHEREAS for such purpose the Corporation deems it necessary to
create and issue Warrants to be constituted and issued in the manner hereinafter
set forth;
AND WHEREAS the Corporation is duly authorized to create and issue the
Warrants to be issued as herein provided;
AND WHEREAS all things necessary have been done and performed to make
the Warrants, when certified by the Trustee and issued as in this Indenture
provided, legal, valid and binding upon the Corporation with the benefits of and
subject to the terms of this Indenture;
<PAGE> 7
- 2 -
AND WHEREAS the Trustee has agreed to enter into this Indenture and to
hold all rights, interests and benefits contained herein for and on behalf of
those persons who from time to time become holders of Warrants issued pursuant
to this Indenture;
AND WHEREAS the foregoing recitals are made as representations and
statements of fact by the Corporation and not by the Trustee;
NOW THEREFORE THIS INDENTURE WITNESSES that for good and valuable
consideration mutually given, the receipt and sufficiency of which are hereby
acknowledged, the Corporation hereby appoints the Trustee as warrant trustee for
the holders of Warrants, to hold all rights, interests and benefits contained
herein for and on behalf of those persons who from time to time become holders
of Warrants issued pursuant to this Indenture, and it is hereby agreed and
declared as follows:
ARTICLE ONE
INTERPRETATION
SECTION 1.01 - DEFINITIONS
In this Indenture, unless there is something in the subject matter or
context inconsistent therewith, the following phrases and words shall have the
following meanings:
"AGGREGATE PURCHASE PRICE" means the aggregate Purchase Price received by the
Corporation upon the issue and sale of the Warrants by the Corporation on the
Closing Date, being $87,548,000;
"APPLICABLE LEGISLATION" has the meaning ascribed thereto in subsection
10.01(1);
"BUSINESS DAY" means a day other than a Saturday, Sunday or statutory or banking
holiday in Toronto, Ontario;
"CAPITAL REORGANIZATION" has the meaning ascribed thereto in Section 2.13;
"CLEARANCE DATE" means, in respect of a Warrantholder, the date on which a
receipt for the Final Prospectus has been issued by the Securities Commission of
the Designated Province in which such Warrantholder resides or is deemed to
reside, as herein provided;
"CLOSING DATE" means the date hereof;
<PAGE> 8
- 3 -
"CLOSING TIME" means 10:00 a.m. (Toronto time) on the Closing Date or such other
time on the Closing Date as the Corporation and the Underwriters may agree
pursuant to the Underwriting Agreement;
"CORPORATION" means SoftKey Software Products Inc., a corporation existing under
the laws of the Province of Ontario, and its successors from time to time;
"CORPORATION'S AUDITORS" means the independent chartered accountant or firm of
chartered accountants duly appointed as auditor or auditors of the Corporation
from time to time;
"COUNSEL" means a barrister or solicitor or a firm of barristers or solicitors
(who may be counsel for the Corporation) acceptable to the Trustee, acting
reasonably;
"CREATIVE WONDERS" means Creative Wonders, L.L.C., a limited liability company
existing under the laws of the State of Delaware;
"DESIGNATED PROVINCES" means the Provinces of British Columbia, Ontario and
Quebec;
"DIRECTOR" means a director of the Corporation for the time being and, unless
otherwise specified herein, reference herein to an "ACTION BY THE DIRECTORS"
means an action by the directors of the Corporation as a board or, whenever duly
empowered, an action by a committee of directors;
"ESCROWED FUNDS" means the Net Proceeds and all proceeds of investment and
reinvestment thereof from time to time;
"EVENT OF FORCE MAJEURE" means any event resulting from a cause beyond the
Corporation's control which prevents the Corporation from obtaining a receipt
for the Final Prospectus from any of the Securities Commissions in the
Designated Provinces by 5:00 o'clock p.m. on the Qualification Deadline
including, without limitation, an act of God, war, riot, sabotage, flood, fire
or other like event or any general strike or lockout of the Securities
Commissions in any of the Designated Provinces, but for greater certainty does
not include any administrative action or inaction by any of such Securities
Commissions.
"EXCHANGEABLE SHARES" means the fully paid and non-assessable exchangeable
non-voting shares without nominal or par value in the capital of the
Corporation, as currently constituted;
"EXERCISE DATE" means, with respect to any Warrant, the date during the Exercise
Period on which such Warrant is surrendered for exercise or the date upon which
such Warrant is automatically exercised, in each case, in accordance with the
provisions of Article Five;
<PAGE> 9
- 4 -
"EXERCISE PERIOD" means, with respect to any Warrant, the period beginning on
the Business Day following the date on which Transaction Approval is obtained
and ending at the Time of Expiry;
"EXPIRY DATE" means, in respect of a Designated Province, the date that is the
first to occur of (i) the sixth Business Day following the Clearance Date and
(ii) the first anniversary of the Closing Date;
"EXTRAORDINARY RESOLUTION" has the meaning ascribed thereto in Section 8.11;
"FINAL PROSPECTUS" means the (final) prospectus of the Corporation relating to
the distribution of the Underlying Shares;
"INTEREST AMOUNT" means, at any time and with respect to the determination of
the Redemption Amount:
(a) if at such time all of the Net Proceeds remain in escrow with the
Trustee pursuant to Article Three hereof:
(i) interest on the Purchase Price in an amount equal to (a)
the aggregate interest or other return actually earned
(expressed as a dollar amount) on the Permitted Investments
in which the Net Proceeds were invested during the
Redemption Period divided by (b) 4,072,000; plus
(ii) interest on the Purchase Price in an amount equal to (A)
the weighted average annual interest rate or other annual
rate of return (expressed as a percentage) applicable to
the Permitted Investments in which the Net Proceeds were
invested during the Redemption Period multiplied by (B) the
Underwriters' Fees and Expenses, which product shall then
be multiplied by (C) the number of days in the Redemption
Period, which resulting product shall then be divided by
(D) 365, which quotient shall be then divided by (E)
4,072,000; and
(b) if at such time LESS THAN all of the Net Proceeds remain in
escrow pursuant to Article Three hereof, interest on the Purchase
Price in an amount equal to (A) the annual interest rate
applicable to that Government of Canada treasury bill which could
have been purchased on the Closing Date with an original term to
maturity which most closely approximates the Redemption Period
multiplied by (B) the Aggregate Purchase Price, which product
shall then be multiplied by (C) the number of days in the
Redemption Period, which resulting product shall then be divided
by (D) 365, which quotient shall then be divided by (E)
4,072,000;
<PAGE> 10
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"NET PROCEEDS" means the Aggregate Purchase Price less the Underwriters' Fees
and Expenses, such Net Proceeds being $83,458,340;
"NOTICE DATE" has the meaning ascribed thereto in subsection 3.04(1);
"PERMITTED INVESTMENTS" means Government of Canada treasury bills or such other
investments rated at least R1 middle by DBRS Inc. and having an original term to
maturity of 120 days or less;
"PERSON" includes an individual, a corporation, a partnership, a trustee, any
unincorporated organization or any other juridical entity and words importing
persons have a similar meaning;
"PURCHASE PRICE" has the meaning ascribed thereto in Section 2.01;
"QUALIFICATION DEADLINE" means March 6, 1998 or such later date as may be agreed
upon in writing by the Corporation and the Underwriters;
"REDEMPTION AMOUNT" means an amount per Warrant equal to the Purchase Price plus
the Interest Amount;
"REDEMPTION PERIOD" means the period from the Closing Date to but excluding the
first date of mailing by the Trustee of a cheque or bank draft in payment of the
Redemption Amount pursuant to subsection 3.04(1);
"RELEASE CERTIFICATE" means a certificate and request for payment substantially
in the form of Schedule B hereto, executed and delivered to the Trustee by the
Corporation and by Griffiths McBurney & Partners on behalf of the Underwriters;
"SECURITIES COMMISSIONS" means, collectively, the securities commission or
comparable securities regulatory authority in each of the Designated Provinces
and "SECURITIES COMMISSION" means any such authority;
"SECURITIES LAWS" means, collectively, the applicable securities laws of each of
the Designated Provinces and the respective regulations and rules made and forms
prescribed thereunder together with all applicable published policy statements
and blanket orders and rulings of the Securities Commissions;
"SHAREHOLDER" means a holder of record on the books of the Corporation of one or
more Exchangeable Shares;
<PAGE> 11
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"SHAREHOLDER APPROVAL" means the approval of the holders of the Exchangeable
Shares to, among other things, the issue by the Corporation, from time to time,
of Exchangeable Shares in addition to those shares outstanding on the record
date for the Shareholder Meeting, such approval to be given by resolution passed
by not less than two-thirds of the votes cast on such resolution at the
Shareholder Meeting, as required by and in accordance with the rights,
privileges, restrictions and conditions attaching to the Exchangeable Shares;
"SHAREHOLDER MEETING" means the special meeting or meetings (including any
adjournments thereof) of the holders of the Exchangeable Shares to be called and
held in accordance with the articles and by-laws of the Corporation for the
purpose of obtaining Shareholder Approval;
"SUBSCRIPTION AGREEMENTS" means, collectively, the subscription agreements or
other agreements entered into between the Corporation, the Underwriters and each
Warrantholder pursuant to which the Warrantholders agree to purchase Warrants
from the Corporation;
"SUCCESSOR" has the meaning ascribed thereto in Section 9.02;
"THIS WARRANT INDENTURE", "THIS INDENTURE", "HEREIN", "HEREBY" and similar
expressions mean and refer to this indenture and any indenture, deed or
instrument supplemental or ancillary hereto; and the expressions "ARTICLE",
"SECTION", "SUBSECTION" and "CLAUSE" followed by a number mean and refer to the
specified Article, Section, subsection or clause of this Indenture;
"TIME OF EXPIRY" means 5:00 p.m. (local time) on the Expiry Date;
"TRANSACTION APPROVAL" means Shareholder Approval together with all such other
consents and approvals necessary to ensure that the rights and benefits of the
holders of Underlying Shares are substantially equivalent to the rights and
benefits of the holders of the existing Exchangeable Shares; provided that, for
greater certainty, Transaction Approval shall not include the filing of, or the
obtaining of a receipt for, the Final Prospectus;
"TRANSACTION SUPPORT CONDITION" means the obtaining by the Corporation of
irrevocable proxies executed by holders of not less than 50.1% of the
Exchangeable Shares outstanding on the record date for, and eligible to vote at,
the Shareholder Meeting, indicating that such holders will vote such shares at
the Shareholder Meeting in favour of, among other things, the issue by the
Corporation, from time to time, of Exchangeable Shares in addition to those
shares outstanding on the record date for the Shareholder Meeting;
"TRIGGERING EVENT" has the meaning ascribed thereto in Section 4.01;
<PAGE> 12
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"TRUSTEE" means CIBC Mellon Trust Company, a corporation incorporated under the
laws of Canada, or its successors for the time being in the trusts hereby
created;
"UNDERLYING SHARES" means the Exchangeable Shares issuable upon the exercise or
deemed exercise of the Warrants, including any other shares, securities or
property issuable upon the exercise of the Warrants as a result of any
adjustment of exercise rights pursuant to Section 2.13 and 2.14;
"UNDERWRITERS" means, collectively, Griffiths McBurney & Partners and First
Marathon Securities Limited;
"UNDERWRITERS' FEES AND EXPENSES" means the fee of $3,939,660 together with the
Underwriters' estimated expenses in the amount of $150,000, paid to the
Underwriters by the Corporation in connection with the issue and sale of the
Warrants, being the aggregate amount of $4,089,660;
"UNDERWRITING AGREEMENT" means the underwriting agreement made as of October 23,
1997 between the Corporation, The Learning Company, Inc. and the Underwriters;
"U.S. SECURITIES LAWS" means, collectively, the applicable federal and state
securities laws of the United States of America and the rules and regulations
promulgated thereunder, and including without limitation the Securities Act of
1933, as amended.
"WARRANT CERTIFICATES" has the meaning ascribed thereto in subsection 2.02(1);
"WARRANTHOLDER" or "HOLDER" means a person whose name is entered for the time
being in the register maintained pursuant to clause 2.08(2)(a) and, for greater
certainty, in respect of any action to be taken by a holder in respect of his
Warrants, means the holder or his executors, administrators or other legal
representatives or his or their attorney duly appointed by instrument in writing
in form, substance and execution satisfactory to the Trustee with signatures
guaranteed by a Canadian chartered bank, a Canadian trust company or a member
firm of The Toronto Stock Exchange;
"WARRANTHOLDERS' REQUEST" means an instrument signed in one or more counterparts
by Warrantholders holding in the aggregate not fewer than 25% of the then
outstanding Warrants, requesting the Trustee to take some action or proceeding
specified therein;
"WARRANTS" means the special warrants of the Corporation entitling registered
holders thereof upon exercise thereof in accordance herewith to acquire
Underlying Shares; and
"WRITTEN ORDER OF THE CORPORATION", "WRITTEN REQUEST OF THE CORPORATION",
"WRITTEN CONSENT OF THE CORPORATION", "CERTIFICATE OF THE CORPORATION" and any
other document required to be signed by the Corporation means, respectively, a
written order, request, consent, certificate or other
<PAGE> 13
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document signed in the name of the Corporation by any one of the chairman of the
board, the vice-chairman of the board, the president or a vice-president of the
Corporation, and may consist of one or more instruments so executed.
SECTION 1.02 - NUMBER AND GENDER
Unless elsewhere herein otherwise expressly provided or unless the
context otherwise requires, words importing the singular include the plural and
vice versa and words importing the masculine gender include the feminine and
neuter genders.
SECTION 1.03 - INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Indenture into Articles, Sections, subsections and
clauses, the provision of a table of contents and the insertion of headings are
for convenience of reference only and shall not affect the construction or
interpretation of this Indenture.
SECTION 1.04 - BUSINESS DAY
In the event that any day on or before which any action is required or
permitted to be taken hereunder is not a Business Day, then such action shall be
required or permitted to be taken on or before the requisite time on the next
succeeding day that is a Business Day.
SECTION 1.05 - TIME OF THE ESSENCE
Time shall be of the essence in all respects in this Indenture and the
Warrants.
SECTION 1.06 - APPLICABLE LAW
This Indenture and the Warrants shall be governed by and construed and
enforced in accordance with the laws of Ontario and shall be treated in all
respects as Ontario contracts.
SECTION 1.07 - SEVERABILITY
The invalidity or unenforceability of any particular provision of this
Indenture shall not affect or limit the validity or enforceability of the
remaining provisions of this Indenture.
<PAGE> 14
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ARTICLE TWO
ISSUE OF WARRANTS
SECTION 2.01 - ISSUE OF WARRANTS
4,072,000 Warrants entitling the holders thereof to acquire, on the
terms and subject to the conditions herein provided, 4,072,000 Exchangeable
Shares (or, in the circumstances described in Article Four, 4,438,480
Exchangeable Shares), or such other kind and amount of Underlying Shares as may
be herein provided, are hereby created and authorized to be issued hereunder
upon the terms and conditions set forth herein at a purchase price of $21.50 per
Warrant (the "Purchase Price"). Certificates evidencing the Warrants shall be
executed by the Corporation and certified by or on behalf of the Trustee upon
the written order of the Corporation and delivered by the Corporation in
accordance with Sections 2.03 and 2.04 against payment of the Aggregate Purchase
Price.
SECTION 2.02 - FORM AND TERMS OF WARRANTS
(1) The certificates representing the Warrants (the "WARRANT CERTIFICATES")
shall be substantially in the form set out in Schedule A hereto, shall
be dated as of the date hereof (regardless of their actual date of
issue) and shall have such distinguishing letters and numbers as the
Corporation may prescribe with the approval of the Trustee. Warrant
certificates may be engraved, lithographed, printed or typewritten or
partly in one form and partly in another, as the Corporation with the
approval of the Trustee may determine.
(2) Each Warrant authorized to be issued hereunder shall entitle the holder
thereof to acquire (subject to subsection 5.01(2)), at no additional
cost, one Exchangeable Share (or, in the circumstances described in
Article Four, 1.09 Exchangeable Shares) or such other kind and amount
of Underlying Shares as may be provided in accordance with the
provisions of this Indenture.
(3) Fractional Warrants shall not be issued or otherwise provided for.
(4) Any legends to be typed onto the Warrant certificates or the Underlying
Shares shall be typed thereon upon the direction of the Corporation.
The Trustee and the Corporation have no duty to ensure that the
Warrantholders comply with the provisions of any such legend.
(5) All Warrant certificates shall have typed thereon the following legend:
"This Special Warrant, the Exchangeable Shares issuable upon exercise
hereof and the shares of Common Stock, par value US$0.01 per share, of
The Learning
<PAGE> 15
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Company, Inc. (the "Common Stock") issuable upon exchange of the
Exchangeable Shares have not been registered under the Securities Act
of 1933, as amended, of the United States of America (the "U.S.
Securities Act"); the Special Warrant, the Exchangeable Shares and the
Common Stock may not be offered, sold or otherwise transferred within
the United States or to, or for the account or benefit of, any U.S.
person (as such terms are defined in Regulation S promulgated under the
U.S. Securities Act) unless such offer, sale or transfer is covered by
or made pursuant to an effective registration statement under the U.S.
Securities Act or pursuant to an exemption from registration under the
U.S. Securities Act, nor may any Special Warrant or Exchangeable Share
be offered, sold or otherwise transferred within the United States or
to, or for the account or benefit of, any U.S. person unless the
issuance of the Common Stock is registered under an effective
registration statement under the U.S. Securities Act or an exemption
from registration under the U.S. Securities Act is available for the
exchange of the Exchangeable Shares."
SECTION 2.03 - SIGNING OF WARRANT CERTIFICATES
The Warrant certificates shall be signed by any of the chairman, chief
executive officer, president, secretary or a vice-president of the Corporation
and may but need not be under the corporate seal of the Corporation or a
reproduction thereof. The signature of such officer may be mechanically
reproduced in facsimile and Warrant certificates bearing such facsimile
signatures shall be binding upon the Corporation as if they had been manually
signed by such officer. Notwithstanding that the person whose manual or
facsimile signature appears on any Warrant certificate as such officer may no
longer hold office at the date of issue of such Warrant certificate or at the
date of certification or delivery thereof, any Warrant certificate signed as
aforesaid shall, subject to Section 2.04, be valid and binding upon the
Corporation and the registered holder thereof shall be entitled to the benefits
of this Indenture.
SECTION 2.04 - CERTIFICATION BY THE TRUSTEE
(1) No Warrant certificate shall be issued or, if issued, shall be valid
for any purpose or entitle the registered holder to the benefit hereof
or thereof until it has been certified by manual signature by or on
behalf of the Trustee in the form of the Warrant certificate set out in
Schedule A and such certification by the Trustee upon any Warrant
certificate shall be conclusive evidence as against the Corporation
that the Warrant certificate so certified has been duly issued
hereunder and the holder is entitled to the benefits hereof.
(2) The certification of the Trustee on Warrant certificates issued
hereunder shall not be construed as a representation or warranty by the
Trustee as to the validity of this Indenture or the Warrants (except
the due certification thereof) and the Trustee shall in no respect be
liable or
<PAGE> 16
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answerable for the use made of the Warrants or any of them or of the
consideration therefor except as otherwise specified herein.
SECTION 2.05 - WARRANTHOLDER NOT A SHAREHOLDER, ETC.
The holding of a Warrant shall not be construed as conferring upon a
Warrantholder any right or interest whatsoever as a Shareholder nor entitle the
holder to any right or interest in respect thereof except as expressly provided
herein and in the Warrants.
SECTION 2.06 - ISSUE IN SUBSTITUTION FOR LOST WARRANT CERTIFICATES
(1) In the case where any Warrant certificate shall become mutilated or be
lost, destroyed or stolen, the Corporation, subject to applicable law and
subsection 2.06(2), shall issue and thereupon the Trustee shall certify and
deliver a new Warrant certificate of like tenor as the one mutilated, lost,
destroyed or stolen in exchange for and in place of and upon cancellation of
such mutilated Warrant certificate, or in lieu of and in substitution for such
lost, destroyed or stolen Warrant certificate, and the substituted Warrant
certificate shall be in a form approved by the Trustee and shall entitle the
holder to the benefits hereof and shall rank equally in accordance with its
terms with all other Warrant certificates issued or to be issued hereunder.
(2) The applicant for the issue of a new Warrant certificate pursuant to
this Section 2.06 shall bear the cost of the issue thereof and in case of loss,
destruction or theft shall furnish to the Corporation and to the Trustee, as a
condition precedent to the issue thereof, such evidence of ownership and of the
loss, destruction or theft of the Warrant certificate so lost, destroyed or
stolen as shall be satisfactory to the Corporation and to the Trustee in their
sole discretion, and such applicant may also be required to furnish an indemnity
bond or security in amount and form satisfactory to the Corporation and the
Trustee in their sole discretion and shall pay the reasonable charges of the
Corporation and the Trustee in connection therewith.
SECTION 2.07 - WARRANTS TO RANK PARI PASSU
All Warrants shall rank pari passu, whatever may be the actual date of
issue of Warrant certificates evidencing the same.
SECTION 2.08 - REGISTERS FOR WARRANTS
(1) The Corporation hereby appoints the Trustee as transfer agent and
registrar of the Warrants. The Corporation may appoint hereafter, with the
consent of the Trustee, one or more additional transfer agents and/or registrars
of the Warrants.
<PAGE> 17
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(2) The Corporation shall cause to be kept by the Trustee at its principal
office in the City of Toronto (a) a register of Warrantholders in which shall be
entered the names and addresses of the Warrantholders and of the number of
Warrants held by them and (b) a register of transfers of Warrants in which shall
be entered the date and other particulars of each transfer of Warrants.
(3) No transfer of a Warrant shall be valid unless made by:
(a) the holder or his executors, administrators or other legal
representatives or his or their attorney duly appointed by an
instrument in writing in form and execution satisfactory to the Trustee
with signatures guaranteed by a Canadian chartered bank, a Canadian
trust company or a member firm of The Toronto Stock Exchange; or
(b) the liquidator of, or a trustee in bankruptcy for, a Warrantholder,
upon compliance with such reasonable requirements as the Trustee and the
Corporation may prescribe (including, without limitation, the requirement to
provide evidence of satisfactory compliance with applicable Securities Laws),
and unless recorded on the register of transfers maintained by the Trustee
pursuant to clause 2.08(2)(b), nor until all stamp taxes or governmental or
other charges arising by reason of such transfer have been paid.
(4) In all cases, no transfer of a Warrant shall be valid if made to, and
no Warrant may be transferred to, a person resident in any Province of Canada
other than a Designated Province.
SECTION 2.09 - TRANSFEREE ENTITLED TO REGISTRATION
The transferee of a Warrant shall be entitled to have his name entered
on the register of holders as the owner of such Warrant free from all equities
or rights of set-off or counterclaim between the Corporation and the transferor
or any previous holder of such Warrant, save in respect of equities of which the
Corporation or the transferee is required to take notice by statute or by order
of a court of competent jurisdiction after the transfer form attached to the
Warrant and any other form of transfer acceptable to the Trustee (which may
include the obligation of the transferee to provide representations and
warranties equivalent to those contained in Schedule C of the Subscription
Agreements) is duly completed and the Warrant is lodged with the Trustee and
upon compliance with all other conditions in that regard required by this
Indenture or by law.
SECTION 2.10 - REGISTERS OPEN FOR INSPECTION
The registers hereinbefore referred to shall be open during normal
business hours for inspection by the Corporation, the Trustee or any
Warrantholder. The Trustee shall furnish the Corporation with a list of the
names and addresses of holders of Warrants entered in the register of
<PAGE> 18
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holders kept by the Trustee and showing the number of Underlying Shares that
might be acquired upon the exercise of the Warrants held by each such holder
from time to time when requested to do so in writing by the Corporation.
SECTION 2.11 - EXCHANGE OF WARRANTS
(1) Warrant certificates may be exchanged for Warrant certificates in any
other authorized denomination representing in the aggregate the same number of
Warrants upon compliance with the reasonable requirements of the Trustee. The
Corporation shall sign and the Trustee shall certify, in accordance with
Sections 2.03 and 2.04, all Warrant certificates necessary to carry out the
exchanges contemplated herein.
(2) Warrant certificates may be exchanged only at the principal office of
the Trustee in the City of Toronto or at any other place that is designated by
the Corporation with the approval of the Trustee. Any Warrant certificates
tendered for exchange shall be surrendered to the Trustee and cancelled.
(3) No charge will be levied by the Corporation or the Trustee upon a
presenter of a Warrant certificate pursuant to this Indenture for the transfer
of any Warrant or for the exchange of any Warrant certificate, however
reimbursement of the Trustee or the Corporation for any and all taxes or
governmental or other charges required to be paid shall be made by the person
requesting such exchange as a condition precedent to such exchange.
SECTION 2.12 - OWNERSHIP OF WARRANTS
The Corporation and the Trustee shall deem and treat the registered
holder of any Warrant certificate as the absolute owner of the Warrant
represented thereby for all purposes, and the Corporation and the Trustee shall
not be affected by any notice or knowledge to the contrary except where the
Corporation or the Trustee is required to take notice by statute or by order of
a court of competent jurisdiction. A Warrantholder shall be entitled to the
rights evidenced by such Warrant free from all equities or rights of set-off or
counterclaim between the Corporation and the original or any intermediate holder
thereof and all persons may act accordingly and the receipt by any such
Warrantholder of Underlying Shares pursuant to such Warrant shall be a good
discharge to the Corporation and the Trustee for the same and neither the
Corporation nor the Trustee shall be bound to inquire into the title of any such
holder except where the Corporation or the Trustee is required to take notice by
statute or by order of a court of competent jurisdiction.
<PAGE> 19
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SECTION 2.13 - ADJUSTMENT OF EXERCISE RIGHTS
Subject to Sections 2.14 and 2.15, if at any time after the date hereof
and prior to the Time of Expiry, and provided any Warrants remain outstanding,
there shall occur:
(a) a reclassification of the Exchangeable Shares outstanding at any time
or a change of the Exchangeable Shares into other shares or securities
or a subdivision or consolidation of the Exchangeable Shares into a
greater or lesser number of shares or any other capital reorganization;
(b) a consolidation, amalgamation or merger of the Corporation with or into
any other person (other than a consolidation, amalgamation or merger
that does not result in any reclassification of the outstanding
Exchangeable Shares or a change of the Exchangeable Shares into other
shares or securities);
(c) a transfer of the undertaking or assets of the Corporation as an
entirety or substantially as an entirety to another corporation or
other entity; or
(d) an issue or distribution to the holders of all or substantially all the
Corporation's outstanding Exchangeable Shares of securities of the
Corporation, including rights, options or warrants to acquire
Exchangeable Shares, or securities convertible into or exchangeable for
Exchangeable Shares or any property or assets and any evidences of
indebtedness, excluding dividends (other than stock dividends) or other
distributions made in the ordinary course by the Corporation and
excluding securities issued pursuant to a stock option or stock
purchase plan of the Corporation or other stock acquisition
arrangements of the Corporation in effect as of the date hereof,
any of such events being called a "CAPITAL REORGANIZATION", the holder of any
Warrant who thereafter shall exercise his right to acquire Underlying Shares
shall be entitled to receive, and shall accept for no extra cost, in lieu of the
number of Underlying Shares that he was theretofore entitled upon such exercise,
the kind and amount of Exchangeable Shares or other shares, securities or
property which such holder would have received had he been the registered holder
of the Underlying Shares in respect of his Warrants on such effective date or
record date, as the case may be. If determined appropriate by the Corporation,
acting reasonably, appropriate adjustments shall be made as a result of any such
Capital Reorganization in the application of the provisions set forth
hereinafter in this Article Two with respect to the rights and interests
thereafter of Warrantholders with the result that the provisions set forth
hereinafter in this Article Two shall thereafter correspondingly be made
applicable as nearly as may be reasonably possible in relation to any other
shares, securities or property thereafter deliverable upon the exercise of any
Warrant. Any such adjustments shall be made by and set forth in an indenture
supplemental hereto approved by the
<PAGE> 20
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directors and the Trustee and shall for all purposes be conclusively deemed to
be an appropriate adjustment absent manifest error.
SECTION 2.14 - ADJUSTMENT RULES
(1) The adjustments provided for in Section 2.13 are cumulative and shall
apply (without duplication) to successive Capital Reorganizations or other
events resulting in any adjustment under the provisions of Section 2.13 provided
that, notwithstanding any other provision of this Article Two, no adjustment
shall be made in the number of Underlying Shares that may be acquired on the
exercise of a Warrant unless it would result in a change of at least one
one-hundredth of an Underlying Share (provided, however, that any adjustments
that by reason of this subsection 2.14(1) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment).
(2) If any question shall arise with respect to the adjustments provided
for in this Article Two, such question, absent manifest error and subject to the
prior consent of The Toronto Stock Exchange, shall be conclusively determined by
a firm of chartered accountants appointed by the Corporation (who may be the
Corporation's auditors) and acceptable to the Trustee, acting reasonably; such
chartered accountants shall have access to all necessary records of the
Corporation and such determination shall be binding upon the Corporation, the
Trustee and the Warrantholders, absent manifest error. In the event that any
such determination is made, the Corporation shall deliver a certificate to the
Trustee describing such determination and confirming such consent.
(3) No adjustment in the number of Underlying Shares that may be acquired
upon exercise of a Warrant shall be made in respect of any event described in
Section 2.13 if Warrantholders are entitled to participate in such event on the
same terms mutatis mutandis as if Warrantholders had exercised their Warrants
prior to or on the effective date or record date of such event, such
participation being subject to the prior consent of The Toronto Stock Exchange.
(4) In case the Corporation after the date of this Indenture shall take any
action affecting the Exchangeable Shares other than an action described in this
Article Two, which in the opinion of the directors would materially affect the
rights of Warrantholders, the number of Underlying Shares that may be acquired
upon exercise of a Warrant shall be adjusted in such manner and at such time, by
action of the directors, in their sole discretion as they may determine to be
equitable in the circumstances, provided that no such adjustment will be made
unless prior approval of The Toronto Stock Exchange and any other stock exchange
on which the Exchangeable Shares are listed for trading or quoted has been
obtained. Failure of the directors to make such an adjustment shall be prima
facie evidence that the directors have determined that it is equitable to make
no adjustment in the circumstances.
<PAGE> 21
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(5) the Corporation shall set a record date to determine the holders of the
Exchangeable Shares for the purpose of entitling them to receive any issuance or
distribution or for the issuance of any rights, options or warrants and shall
thereafter and before such distribution or issuance to such shareholders abandon
its plan to make such distribution or issuance, then no adjustment in the number
of Underlying Shares that may be acquired upon exercise of any Warrant shall be
required by reason of the setting of such record date.
(6) The Corporation shall not be required to issue fractional securities in
satisfaction of its obligations hereunder. If any fractional interest in an
Underlying Share would, except for the provisions of this subsection, be
deliverable upon the exercise of a Warrant, the Corporation shall make a cash
payment equal to the fair value of the fraction of such Underlying Share not so
issued as determined by the board of directors in its sole discretion, acting
reasonably.
SECTION 2.15 - PROCEEDINGS PRIOR TO ANY ACTION REQUIRING ADJUSTMENT
As a condition precedent to the taking of any action which would
require an adjustment pursuant to Section 2.13, the Corporation shall take any
action that, in the opinion of counsel, may be necessary in order that the
Corporation may validly and legally issue as fully paid and non-assessable all
the Underlying Shares that the holders of the Warrants are entitled to receive
on the full exercise thereof in accordance with the provisions hereof.
SECTION 2.16 - NOTICE OF ADJUSTMENT OF EXERCISE RIGHTS
(1) At least seven days prior to the effective date or record date, as the
case may be, of any event that requires or that may require an adjustment in any
of the exercise rights pursuant to any of the Warrants, including the number of
Underlying Shares that may be acquired upon the exercise thereof, the
Corporation shall:
(a) file with the Trustee a certificate of the Corporation specifying the
particulars of such event and, if determinable, the required adjustment
and the computation of such adjustment; and
(b) give notice to the Warrantholders of the particulars of such event and,
if determinable, the required adjustment.
(2) In case any adjustment for which a notice in subsection 2.16(1) has
been given is not then determinable, the Corporation shall promptly after such
adjustment is determinable:
(a) file a certificate of the Corporation with the Trustee showing how such
adjustment was computed; and
<PAGE> 22
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(b) give notice to the Warrantholders of the adjustment.
(3) The Trustee may act and rely for all purposes upon any certificates and
any other documents filed by the Corporation pursuant to this Section 2.16.
SECTION 2.17 - NO DUTY TO INQUIRE, LIABILITY
(1) Except as provided in Section 9.02, the Trustee shall not at any time
be under any duty or responsibility to any Warrantholder to determine whether
any facts exist which may require any adjustment contemplated by Sections 2.13
and 2.14 or with respect to the nature or extent of any such adjustment when
made or with respect to the method employed in making the same.
(2) In case of any adjustment contemplated by Sections 2.13 and 2.14, the
Corporation shall:
(a) be accountable with respect to the validity or value (or the kind or
amount) of any securities or property which may at any time be issued
or delivered upon the exercise or deemed exercise of any Warrant; and
(b) be responsible for any failure to make any cash payment or to issue,
transfer or deliver security certificates upon the surrender of any
Warrant for the purpose of exercise or deemed exercise, or to comply
with any of the covenants contained in this Article Two.
ARTICLE THREE
ESCROW OF NET PROCEEDS AND REDEMPTION OF SPECIAL WARRANTS
SECTION 3.01 - DEPOSIT OF NET PROCEEDS IN ESCROW
The Corporation hereby deposits the Net Proceeds in escrow with the
Trustee, and the Trustee hereby acknowledges receipt thereof. The Corporation
hereby irrevocably authorizes and instructs the Trustee to hold and deal with
the Net Proceeds in trust for the benefit of the Warrantholders and the
Corporation as their respective interests may appear and in accordance with and
subject to the provisions of this Article.
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SECTION 3.02 - INVESTMENT OF NET PROCEEDS
The Net Proceeds deposited with the Trustee hereunder, pending any
release or application thereof as required in accordance with the provisions of
this Article, shall be invested by the Trustee in its name in Permitted
Investments in accordance with any written directions of the Corporation from
time to time given to the Trustee or, in the absence of any such directions,
shall be invested by the Trustee in its name in accordance with Section 10.04.
SECTION 3.03 - RELEASE OF ESCROWED FUNDS TO THE CORPORATION
(1) If the Corporation satisfies the Transaction Support Condition or
obtains Shareholder Approval, in each case, to be evidenced by the execution and
delivery to the Trustee by the Corporation and Griffiths McBurney & Partners on
behalf of the Underwriters of the Release Certificate, prior to the
Qualification Deadline, the Trustee shall release the Escrowed Funds to the
Corporation, for the purpose of completing the acquisition of Creative Wonders.
(2) If the Escrowed Funds are not released to the Corporation pursuant to
subsection 3.03(1), the Trustee shall release the Escrowed Funds to the
Corporation on the first to occur of (a) the last Clearance Date to occur in the
Designated Provinces and (b) the Qualification Deadline, provided only that the
Corporation has obtained Transaction Approval on or before such date. The
occurrence of such date and the satisfaction of such proviso shall be
conclusively evidenced by the execution and delivery to the Trustee of a
certificate of an officer of the Corporation to such effect.
SECTION 3.04 - REDEMPTION OF WARRANTS
(1) If the Corporation fails to obtain Transaction Approval on or prior to
the Qualification Deadline, the Corporation shall forthwith after such failure
(but in any event within five business days following the Qualification
Deadline) give notice thereof to each of the Warrantholders and to the Trustee
(the date of such notice being hereafter referred to as the "Notice Date"). Such
notice shall specify (i) that the Corporation shall be deemed to have redeemed
all of the Warrants on the Notice Date, and that each Warrantholder shall be
deemed to have sold his Warrants to the Corporation on the Notice Date and, in
connection therewith, to have surrendered his Warrants for cancellation, in each
case, for a redemption price per Warrant equal to the Redemption Amount and (ii)
that the Trustee shall, not later than three Business Days after the Notice
Date, send by ordinary mail to each such Warrantholder, or to such person as
such holder may otherwise specify by written notice to the Trustee prior to such
mailing, at the address of such holder or, if so specified, of such person, a
cheque or bank draft made payable to or to the order of such holder or, if so
specified, such person, in an aggregate amount equal to the Redemption Amount
for each unexercised Warrant held by such Warrantholder less applicable
withholding taxes, if any.
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(2) If the Corporation fails to obtain Transaction Approval on or prior to
the Qualification Deadline as contemplated by subsection 3.04(1), on the Notice
Date the Corporation shall redeem, and shall be deemed to have redeemed, all of
the Warrants outstanding on such date and each Warrantholder shall sell, and be
deem to have sold, his Warrants to the Corporation on such date and, in
connection therewith, to have surrendered his Warrants for cancellation, in each
case, for a redemption price per Warrant equal to the Redemption Amount and, in
each case, without any further action on the part of the Corporation or any
Warrantholder. Within three Business Days of the Corporation having given the
notice contemplated by subsection 3.04(1), the Trustee shall send by ordinary
mail to each Warrantholder, or to such person as such holder may otherwise
specify by written notice to the Trustee prior to such mailing, at the address
of such holder or, if so specified, such person, a cheque or bank draft made
payable to or to the order of such holder or, if so specified, such person, in
an aggregate amount equal to the Redemption Amount for each unexercised Warrant
held by such Warrantholder less applicable withholding taxes, if any. Subject to
the Corporation's obligations pursuant to Section 3.05, the Corporation hereby
authorizes and directs the Trustee, and the Trustee is hereby authorized and
directed, to use the Escrowed Funds to satisfy all such cheques and/or bank
drafts issued in payment of the aggregate Redemption Amount as aforesaid.
(3) Upon such payment and the cheque or bank draft being satisfied at par
on presentation, all rights under any Warrant in respect of which such payment
has been made will wholly cease and terminate and the Warrant certificate
therefor will be void and of no further force or effect.
(4) If a Warrantholder requests that a cheque or bank draft referred to
above be made payable to a person other than the registered Warrantholder, the
Warrantholder's signature on his written notice to the Trustee specifying such
other person should be guaranteed by a Canadian chartered bank, by a trust
company or a member firm of The Toronto Stock Exchange.
(5) Any payment made in accordance with these provisions shall, to the
extent of the sum represented thereby, satisfy and discharge all liability of
the Corporation with respect to such payment, unless the cheque or bank draft is
not paid at par on presentation. In the event of non-receipt of any cheque or
bank draft by a person to whom it is so sent as aforesaid, or the loss or
destruction thereof, the Trustee will issue to such person a replacement cheque
or bank draft for like amount upon being furnished with such evidence of
non-receipt, loss or destruction and with such indemnity as the Trustee may
reasonably require. The balance of the funds held by the Trustee, if any, after
any payments referred to above, will be paid to the Corporation not later than
12:00 (noon) (Toronto time) on June 1, 1998.
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SECTION 3.05 - CORPORATION TO FUND SHORTFALL
To the extent that the Escrowed Funds are insufficient to permit the
Trustee to pay the aggregate Redemption Amount as aforesaid, the Corporation
shall provide to the Trustee, by certified cheque or bank draft, sufficient
funds in sufficient time to permit the Trustee to pay and satisfy the aggregate
Redemption Amount as aforesaid.
SECTION 3.06 - TRANSACTION APPROVAL
For greater certainty, if the Corporation obtains Transaction Approval
on or prior to the Qualification Deadline, the Corporation shall have no further
obligation, nor any right, to redeem the Warrants and the provisions of
subsection 3.04(1) hereof shall be of no further force or effect. In such case,
the Corporation shall have no obligation to give notice of the obtaining of
Transaction Approval to any Warrantholder or to the Trustee.
ARTICLE FOUR
TRIGGERING EVENT
SECTION 4.01 - TRIGGERING EVENT
If for any reason, other than by reason of an Event of Force Majeure
(in which case the Clearance Date shall be extended by a period of time equal to
the period during which such Event of Force Majeure exists), Transaction
Approval has been obtained but the Clearance Date does not occur by 5:00 p.m.
(local time) on the Qualification Deadline or the Corporation is unable to file
the Final Prospectus with the Securities Commission of any Designated Province
by 5:00 p.m. (local time) on the Qualification Deadline (a "TRIGGERING EVENT"),
the Corporation shall forthwith give notice of that fact to the Trustee and to
each of the Warrantholders resident in the relevant Designated Province(s)
(non-Canadian resident holders of Warrants being deemed to be resident in the
Province of Ontario for this purpose), which notice shall also describe the
change in the exercise rights attaching to the Warrants held by such
Warrantholders as a result of such Triggering Event.
SECTION 4.02 - CHANGE IN EXERCISE RIGHTS
Upon the occurrence during the Exercise Period of a Triggering Event
with respect to a Designated Province, each Warrant held by a holder resident or
deemed resident in such province shall thereafter entitle the holder, without
further action being required to be taken hereunder, to acquire (subject to
subsection 5.01(2)), at no additional cost, 1.09 Exchangeable Shares or such
other kind and amount of Underlying Shares as is herein provided in accordance
with the
<PAGE> 26
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provisions of this Indenture. In such case, but without derogating from the
Corporation's obligation to use its reasonable efforts to obtain from each of
the Securities Commissions in the Designated Provinces, as soon as practicable,
a receipt or similar document for the Final Prospectus, the Exchangeable Shares
issued upon the exercise or deemed exercise of the Warrants will be subject to
restrictions on the resale thereof in accordance with applicable Securities Laws
and U.S. Securities Laws and may bear a legend to such effect.
ARTICLE FIVE
EXERCISE OF WARRANTS
SECTION 5.01 - METHOD OF EXERCISE OF WARRANTS
(1) The holder of any Warrant may exercise during the Exercise Period the
right thereby conferred on such holder to acquire without further payment
(except as provided in subsection 5.01(2)) the Underlying Shares to which such
Warrant entitles the holder by surrendering such Warrant to the Trustee at any
time during the Exercise Period at its principal stock and bond transfer office
in the City of Toronto (or at such additional place or places as may be decided
by the Corporation from time to time with the approval of the Trustee) with a
duly completed and executed exercise form substantially in the form set out in
the Warrant certificate. A Warrant with the duly completed and executed exercise
form shall be deemed to be surrendered only upon personal delivery thereof to,
or if sent by mail or other means of transmission upon actual receipt thereof
by, the Trustee.
(2) Any exercise form referred to in subsection 5.01(1) shall be signed by
the Warrantholder. If any of the Underlying Shares issuable upon the exercise of
Warrants by a holder are to be issued to a person or persons other than the
Warrantholder, the signatures set out in the exercise form referred to in
subsection 5.01(1) shall be guaranteed by a Canadian chartered bank, a Canadian
trust company or a member firm of The Toronto Stock Exchange and the
Warrantholder shall pay to the Corporation or the Trustee all applicable
transfer or similar taxes and the Corporation shall not be required to issue or
deliver certificates evidencing Underlying Shares unless or until such
Warrantholder shall have paid to the Corporation or the Trustee on behalf of the
Corporation the amount of such tax or shall have established to the satisfaction
of the Corporation that such tax has been paid or that no such tax is due. The
exercise form attached to the Warrant certificate shall be completed to specify
the person or persons in whose name or names the Underlying Shares to be issued
upon exercise are to be registered, such person's or persons' address or
addresses and the number of Underlying Shares to be issued to each person if
more than one is so specified.
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SECTION 5.02 - AUTOMATIC EXERCISE
(1) If at the Time of Expiry the holder of a Warrant certificate has not
exercised his right to acquire Underlying Shares during the Exercise Period in
accordance with the provisions of Section 5.01, the Warrants held by such
Warrantholder shall be deemed to have been exercised by such Warrantholder,
without any further action on the part of such Warrantholder, immediately prior
to the expiry of the Exercise Period.
(2) If a Clearance Date occurs during the Exercise Period, the Corporation
shall forthwith give notice of such occurrence, together with copies of the
receipts for the Final Prospectus, to the Trustee.
(3) As soon as practicable following the automatic exercise of the Warrants
pursuant to this Section 5.02, the Trustee shall notify each of the holders of
such Warrants as have been automatically exercised to the effect that such
Warrants have been automatically exercised and that the holders thereof have
acquired the Underlying Shares and shall be entered in the relevant register(s)
of holders of Underlying Shares, in each case, effective as at the Expiry Time,
and shall receive certificates for the Underlying Shares to which they have
become entitled.
SECTION 5.03 - EFFECT OF EXERCISE OF WARRANTS
(1) Upon compliance by the Warrantholder with the provisions of Section
5.01 or the automatic exercise of the Warrants pursuant to Section 5.02, the
Underlying Shares issuable upon the exercise of the Warrants shall be deemed to
have been issued and the person to whom such Underlying Shares are to be issued
shall be deemed to have become the holder of record of such Underlying Shares on
the Exercise Date unless the transfer registers of the Corporation for the
Exchangeable Shares shall be closed on such date, in which case the Underlying
Shares subscribed for shall be deemed to have been issued and such person shall
be deemed to have become the holder of record of such Underlying Shares on the
date on which such transfer registers are reopened.
(2) Forthwith following the due exercise by a Warrantholder of Warrants in
accordance with Section 5.01 or the automatic exercise of the Warrants pursuant
to Section 5.02, the Trustee shall deliver to the Corporation a notice setting
out the particulars of the Warrants exercised, the person in whose name the
Underlying Shares are to be issued and the address of such person.
(3) Within three Business Days of receipt of the notice referred to in
subsection 5.03(2), the Corporation shall cause to be mailed to the person in
whose name the Underlying Shares issuable upon the exercise of the Warrants are
to be issued, as specified in the exercise form completed on the Warrant, at the
address specified therein, or, if so specified in such exercise form, cause to
be delivered to such person at the office of the Trustee where such Warrant was
surrendered, or in the
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event of the automatic exercise of the Warrants pursuant to Section 5.02, to the
applicable Warrantholder at his address specified in the register for the
Warrants, a certificate or certificates for the Underlying Shares to which the
Warrantholder is entitled.
(4) If at the time of any exercise of the Warrants there remain trading
restrictions on the Underlying Shares pursuant to applicable Securities Laws,
the Corporation may, upon the advice of counsel, endorse any certificates
representing the Underlying Shares to such effect.
SECTION 5.04 - CANCELLATION OF WARRANT CERTIFICATES
All Warrant certificates surrendered to the Trustee pursuant to Section
2.06, 2.11 or 5.01 shall be cancelled by the Trustee. All Warrant certificates
deemed to have been exercised pursuant to Section 5.02 shall be deemed to have
been cancelled by the Trustee. All Warrants represented by Warrant certificates
that have been cancelled or have been deemed to have been cancelled pursuant to
this Section 5.04 shall be without further force or effect whatsoever.
SECTION 5.05 - NOTICE OF EXTENSION OF QUALIFICATION DEADLINE
If the Corporation and the Underwriters extend the Qualification
Deadline, the Corporation shall forthwith give notice in writing thereof to the
Trustee and the Warrantholders.
SECTION 5.06 - LEGEND ON EXCHANGEABLE SHARES
All certificates representing Exchangeable Shares shall have typed
thereon the following legend:
"The Exchangeable Shares issuable upon exercise of the Special Warrants
and the shares of Common Stock, par value U.S.$0.01 per share, of The
Learning Company, Inc. (the "Common Stock") issuable upon exchange of
the Exchangeable Shares have not been registered under the Securities
Act of 1933, as amended, of the United States of America (the "U.S.
Securities Act"); the Exchangeable Shares and the Common Stock may not
be offered, sold or otherwise transferred within the United States or
to, or for the account or benefit of, any U.S. person (as such terms
are defined in Regulation S promulgated under the U.S. Securities Act)
unless such offer, sale or transfer is covered by or made pursuant to
an effective registration statement under the U.S. Securities Act or
pursuant to an exemption from registration under the U.S. Securities
Act, nor may any Exchangeable Share be offered, sold or otherwise
transferred
<PAGE> 29
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within the United States or to, or for the account or benefit of, any
U.S. person unless the issuance of the Common Stock is registered under
an effective registration statement under the U.S. Securities Act or an
exemption from registration under the U.S. Securities Act is available
for the exchange of the Exchangeable Shares. Any holder that surrenders
this certificate in exchange for Common Stock prior to effectiveness of
a registration statement filed under the U.S. Securities Act covering
such exchange must certify that the holder is not a U.S. person."
ARTICLE SIX
COVENANTS
SECTION 6.01 - GENERAL COVENANTS
The Corporation covenants with the Trustee that so long as any Warrants
remain outstanding:
(1) It will at all times maintain its corporate existence and will carry on
and conduct its business in accordance with good business practice.
(2) It will send to each Warrantholder copies of all financial statements
and other material furnished to the holders of Exchangeable Shares after the
date of this Indenture.
(3) It will reserve and there will remain unissued out of its authorized
capital a sufficient number of Underlying Shares to satisfy the rights of
acquisition provided for herein.
(4) It will cause the Underlying Shares from time to time subscribed for
pursuant to the Warrants in the manner herein provided and the certificates
representing such Underlying Shares to be duly issued and delivered in
accordance with the Warrants and the terms hereof.
(5) All Exchangeable Shares that shall be issued upon exercise of the right
to acquire provided for herein shall be issued as fully paid and non-assessable
and the holders thereof shall not be liable to the Corporation or its creditors
in respect thereof.
(6) It shall use its reasonable efforts to obtain, as soon as practicable,
Transaction Approval and, as soon as practicable thereafter, to obtain from each
of the Securities Commissions in the Designated Provinces a receipt or similar
document for the Final Prospectus.
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(7) It will use its reasonable efforts to maintain the listing of the
Exchangeable Shares on The Toronto Stock Exchange and to ensure that the
Exchangeable Shares issuable upon the exercise of the Warrants will be listed
and posted for trading on such exchange simultaneously with or as soon as
practicable following their issue.
(8) It will use its reasonable best efforts to maintain its status as a
reporting issuer (or analogous entity) as set out in paragraph 4(i) of Schedule
"A" of the Subscription Agreements and to continue to be in compliance with its
obligations under the Securities Laws of such Provinces, without default, from
the date hereof up to and including the first anniversary of the Closing Date.
(9) Subject only to the obtaining by the Corporation of Shareholder
Approval, the issue and sale of the Warrants do not and will not result in a
breach by the Corporation of, and do not and will not create a state of facts
which, after notice or lapse of time or both, will result in a breach by the
Corporation of any applicable laws and do not and will not conflict with any of
the terms, conditions or provisions of the articles of the Corporation or
by-laws or resolutions of the Corporation or any trust indenture, loan agreement
or any other agreement or instrument to which the Corporation is a party or by
which it is contractually bound on the date hereof.
(10) It will call and hold the Shareholder Meeting prior to the
Qualification Deadline and, immediately following the holding of the Shareholder
Meeting, will inform the Trustee of the results thereof.
SECTION 6.02 - NOTICE TO SECURITIES COMMISSIONS
The Corporation will give written notice of the issue of Underlying
Shares pursuant to the exercise of Warrants in such detail as may be required to
The Toronto Stock Exchange and to each Securities Commission in each Designated
Province in which there is legislation requiring the giving of any such notice.
SECTION 6.03 - TRUSTEE'S REMUNERATION AND EXPENSES
The Corporation covenants that it will pay to the Trustee the fees
agreed to by the Corporation and the Trustee from time to time for the Trustee's
services hereunder and will pay or reimburse the Trustee upon its request for
all its reasonable expenses and disbursements arising from the administration or
execution of the trusts hereby created (including the reasonable compensation
and the disbursements of its counsel and all other advisers, experts,
accountants and assistants not regularly in its employ) both before any default
hereunder and thereafter until all duties of the Trustee hereunder shall be
finally and fully performed, except any such expense or disbursement in
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connection with or related to or required to be made as a result of the gross
negligence, wilful misconduct or bad faith of the Trustee.
SECTION 6.04 - PERFORMANCE OF COVENANTS BY TRUSTEE
If the Corporation shall fail to perform any of its covenants contained
in this Indenture and the Corporation has not rectified such failure within 15
Business Days after receiving written notice from the Trustee of such failure,
the Trustee may notify the Warrantholders of such failure on the part of the
Corporation or may itself perform any of the said covenants capable of being
performed by it but shall be under no obligation to perform said covenants or to
notify the Warrantholders of such performance by it. All reasonable sums
expended or disbursed by the Trustee in so doing shall be repayable as provided
in Section 6.03. No such performance, expenditure or disbursement by the Trustee
shall be deemed to relieve the Corporation of any default hereunder or of its
continuing obligations under the covenants herein contained.
SECTION 6.05 - RIGHT TO DIVIDENDS OR DISTRIBUTIONS
If, during the Exercise Period, the Corporation shall pay any dividend
or make any distribution to all or substantially all of the holders of
Exchangeable Shares or if the Corporation declares any dividend or provides for
any distribution payable to all or substantially all of the holders of
Exchangeable Shares of record during that period, Warrantholders who hold any
unexercised Warrants on the date of payment or date of record as the case may be
shall be entitled to a payment in compensation for the making of such dividend
or distribution mutatis mutandis, as if they had exercised their Warrants and
acquired Exchangeable Shares thereunder immediately prior to the effective date
or record date of the dividend or distribution. For cash dividends, this
entitlement shall be satisfied by the payment of such amounts by the Corporation
to the holders of the Warrants. For stock dividends or distributions in respect
of which an adjustment can be made in the number of Exchangeable Shares to be
delivered to the Warrantholder upon exercise of Warrants pursuant to paragraph
sections 2.13 and 2.14, this entitlement shall be satisfied by such an
adjustment.
<PAGE> 32
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ARTICLE SEVEN
ENFORCEMENT
SECTION 7.01 - SUITS BY WARRANTHOLDERS
All or any of the rights conferred upon a Warrantholder by the terms of
the Warrants held by such Warrantholder and/or this Indenture may be enforced by
such Warrantholder by appropriate legal proceedings, but subject to the rights
that are hereby conferred upon the Trustee and subject to the provisions of
Section 8.10.
SECTION 7.02 - IMMUNITY OF SHAREHOLDERS, ETC.
The Trustee and, by the acceptance of the Warrant certificates and as
part of the consideration for the issue of the Warrants, the Warrantholders
hereby waive and release any right, cause of action or remedy now or hereafter
existing in any jurisdiction against any person in his capacity as an
incorporator or any past, present or future Shareholder or other securityholder,
director, officer, employee or agent of the Corporation for the creation and
issue of the Underlying Shares pursuant to any Warrant or on any covenant,
agreement, representation or warranty by the Corporation herein or in the
Warrant certificates contained. The foregoing, with respect to the officers and
directors of the Corporation, shall be subject to rights of action for
rescission or damages which Warrantholders may have pursuant to applicable
Securities Laws.
SECTION 7.03 - LIMITATION OF LIABILITY
The obligations hereunder are not personally binding upon, nor shall
resort hereunder be had to, the directors or shareholders of the Corporation or
any of the past, present or future directors or shareholders of the Corporation
or any of the past, present or future officers, employees or agents of the
Corporation. Only the property of the Corporation shall be bound in respect
hereof.
ARTICLE EIGHT
MEETINGS OF WARRANTHOLDERS
SECTION 8.01 - RIGHT TO CONVENE MEETINGS
The Trustee may at any time and from time to time, and shall on receipt
of a written request of the Corporation or of a Warrantholders' Request, convene
a meeting of the Warrantholders provided that the Trustee is indemnified and
funded to its reasonable satisfaction by the Corporation
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or by the Warrantholders signing such Warrantholders' Request against the costs,
charges, expenses and liabilities that may be incurred in connection with the
calling and holding of such meeting. If within five Business Days after the
receipt of a written request of the Corporation or a Warrantholders' Request and
funding and indemnity given as aforesaid the Trustee fails to give the requisite
notice specified in Section 8.02 to convene a meeting, the Corporation or such
Warrantholders, as the case may be, may convene such meeting. Every such meeting
shall be held in the City of Toronto or at such other place as may be approved
by the Trustee.
SECTION 8.02 - NOTICE
At least 15 days' prior notice of any meeting of Warrantholders shall
be given to the Warrantholders in the manner provided for in Section 11.01 and a
copy of such notice shall be delivered to the Trustee unless the meeting has
been called by it and to the Corporation unless the meeting has been called by
it. Such notice shall state the time and place of the meeting, the general
nature of the business to be transacted and shall contain such information as is
reasonably necessary to enable the Warrantholders to make a reasoned decision on
the matter. It shall not be necessary for any such notice to set out the terms
of any resolution to be proposed or any of the provisions of this Article Eight.
The notice convening any such meeting may be signed by an appropriate officer of
the Trustee or of the Corporation or the person designated by such
Warrantholders, as the case may be.
SECTION 8.03 - CHAIR
The Trustee may nominate in writing an individual to be Chair of the
meeting and if no individual is so nominated, or if the individual so nominated
is not present within 15 minutes after the time fixed for the holding of the
meeting, the Warrantholders present in person or by proxy shall appoint an
individual present to be Chair.
SECTION 8.04 - QUORUM
Subject to the provisions of Section 8.11, at any meeting of the
Warrantholders a quorum shall consist of Warrantholders present in person or
represented by proxy and holding at least 10% of the aggregate number of
Warrants then unexercised and outstanding, provided that at least two persons
entitled to vote thereat are personally present. If a quorum of the
Warrantholders shall not be present within one half-hour from the time fixed for
holding any meeting, the meeting, if summoned by the Warrantholders or on a
Warrantholders' Request, shall be dissolved; but in any other case the meeting
shall be adjourned to the same day in the next week at the same time and place
to the extent possible and, subject to the provisions of Section 8.11, no notice
of the adjournment need be given. Any business may be brought before or dealt
with at an adjourned meeting which might have been dealt with at the original
meeting in accordance with the notice
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calling the same. At the adjourned meeting the Warrantholders present in person
or represented by proxy shall form a quorum and may transact the business for
which the meeting was originally convened notwithstanding that they may not hold
at least 10% of the aggregate number of Warrants then unexercised and
outstanding. No business shall be transacted at any meeting unless a quorum is
present at the commencement of business.
SECTION 8.05 - POWER TO ADJOURN
The Chair of any meeting at which a quorum of the Warrantholders is
present, with the consent of the meeting, may adjourn any such meeting and no
notice of such adjournment need be given except such notice, if any, as the
meeting may prescribe.
SECTION 8.06 - SHOW OF HANDS
Every question submitted to a meeting shall be decided in the first
place by a majority of the votes given on a show of hands except that votes on
an extraordinary resolution shall be given in the manner hereinafter provided.
At any such meeting, unless a poll is duly demanded as herein provided, a
declaration by the Chair that a resolution has been carried or carried
unanimously or by a particular majority or lost or not carried by a particular
majority shall be conclusive evidence of the fact.
SECTION 8.07 - POLL AND VOTING
On every extraordinary resolution, and when demanded by the Chair or by
one or more of the Warrantholders acting in person or by proxy on any other
question submitted to a meeting and after a vote by show of hands, a poll shall
be taken in such manner as the Chair shall direct. Questions other than those
required to be determined by extraordinary resolution shall be decided by a
majority of the votes cast on a poll. On a show of hands, every person who is
present and entitled to vote, whether as a Warrantholder or as proxy for one or
more absent Warrantholders, or both, shall have one vote. On a poll, each
Warrantholder present in person or represented by a proxy duly appointed by
instrument in writing shall be entitled to one vote in respect of each Warrant
that he (or the Warrantholder appointing him as proxy) holds. A proxyholder need
not be a Warrantholder. The Chair of any meeting shall be entitled to vote, both
on a show of hands and on a poll, in respect of any Warrants held or represented
by him.
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SECTION 8.08 - REGULATIONS
Subject to the provisions of this Indenture, the Trustee or the
Corporation with the approval of the Trustee from time to time may make and vary
such regulations as it shall consider necessary or appropriate:
(a) for the deposit of instruments appointing proxies at such place and
time as the Trustee, the Corporation or the Warrantholders convening
the meeting, as the case may be, may direct in the notice convening the
meeting;
(b) for the deposit of instruments appointing proxies at some approved
place other than the place at which the meeting is to be held and
enabling particulars of such instruments appointing proxies to be
mailed or telecopied before the meeting to the Corporation or to the
Trustee at the place where the meeting is to be held and for the voting
of proxies so deposited as though the instruments themselves were
produced at the meeting;
(c) for the form of the instrument of proxy; and
(d) generally for the calling of meetings of Warrantholders and the conduct
of business thereat.
Any regulations so made shall be binding and effective and the votes
given in accordance therewith shall be valid and shall be counted. Save as such
regulations may provide, the only persons who shall be recognized at any meeting
as a Warrantholder, or be entitled to vote or be present at the meeting in
respect thereof (subject to Section 8.09), shall be Warrantholders or persons
holding proxies of Warrantholders.
SECTION 8.09 - CORPORATION, TRUSTEE AND COUNSEL MAY BE REPRESENTED
The Corporation and the Trustee, by their respective employees,
directors and officers, and the counsel for each of the Corporation, the
Warrantholders and the Trustee may attend any meeting of the Warrantholders and
speak thereto but shall have no vote as such.
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SECTION 8.10 - POWERS EXERCISABLE BY EXTRAORDINARY RESOLUTION
In addition to all other powers conferred upon them by any other
provisions of this Indenture or by law, the Warrantholders at a meeting shall
have the power, exercisable from time to time by extraordinary resolution:
(a) to agree with the Corporation to any modification, abrogation,
alteration, compromise or arrangement of the rights of Warrantholders
and/or the Trustee in its capacity as Trustee hereunder (subject to the
consent of the Trustee) or on behalf of the Warrantholders against the
Corporation whether such rights arise under this Indenture or the
Warrants or otherwise, except that a change in the Exercise Period or
the Purchase Price of the Warrants shall not be binding upon a
Warrantholder who does not consent thereto;
(b) to amend or repeal any extraordinary resolution previously passed or
sanctioned by the Warrantholders;
(c)) to direct or authorize the Trustee, subject to receipt of funding and
indemnity, to enforce any of the covenants on the part of the
Corporation contained in this Indenture or the Warrants or to enforce
any of the rights of the Warrantholders in any manner specified in such
extraordinary resolution or to refrain from enforcing any such covenant
or right;
(d) to waive and direct the Trustee to waive any default on the part of the
Corporation in complying with any provisions of this Indenture or the
Warrants, either unconditionally or upon any conditions specified in
such extraordinary resolution;
(e) to restrain any Warrantholder from taking or instituting any suit,
action or proceeding against the Corporation for the enforcement of any
of the covenants on the part of the Corporation contained in this
Indenture or the Warrants or to enforce any of the rights of the
Warrantholders, except for a suit or action against the Corporation to
compel payment to a Warrantholder in respect of monies owing to him in
accordance with the provisions of Section 6.05;
(f) to direct any Warrantholder who, as such, has brought any suit, action
or proceeding to stay or discontinue or otherwise deal with any such
suit, action or proceeding, upon payment of the costs, charges and
expenses reasonably and properly incurred by such Warrantholder in
connection therewith, except for a suit or action against the
Corporation to compel payment to a Warrantholder in respect of monies
owing to him in accordance with the provisions of Section 6.05; and
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(g) to remove the Trustee and appoint a successor trustee.
SECTION 8.11 - MEANING OF EXTRAORDINARY RESOLUTION
(1) The expression "EXTRAORDINARY RESOLUTION" when used in this Indenture
means, subject to this Section 8.11 and Section 8.14, a resolution proposed at a
meeting of Warrantholders duly convened for that purpose and held in accordance
with the provisions of this Article Seven at which there are present in person
or represented by proxy Warrantholders holding at least 25% of the aggregate
number of then outstanding unexercised Warrants and passed by the affirmative
votes of Warrantholders holding not less than 66 2/3% of the aggregate number of
the then outstanding unexercised Warrants represented at the meeting and voted
on the poll upon such resolution.
(2) If, at any meeting called for the purpose of passing an extraordinary
resolution, Warrantholders holding at least 25% of the aggregate number of then
outstanding unexercised Warrants are not present in person or by proxy within
one half-hour after the time appointed for the meeting, then the meeting, if
convened by Warrantholders or on a Warrantholders' Request, shall be dissolved;
but in any other case it shall stand adjourned to such day, being not less than
four or more than 10 Business Days later, and to such place and time as may be
appointed by the Chair. Not less than three Business Days' prior notice shall be
given of the time and place of such adjourned meeting in the manner provided in
Article Eleven. Such notice shall state that at the adjourned meeting the
Warrantholders present in person or represented by proxy shall form a quorum but
it shall not be necessary to set forth the purposes for which the meeting was
originally called or any other particulars. At the adjourned meeting the
Warrantholders present in person or represented by proxy shall form a quorum and
may transact the business for which the meeting was originally convened and a
resolution proposed at such adjourned meeting and passed by the requisite vote
as provided in subsection 8.11(1) shall be an extraordinary resolution within
the meaning of this Indenture notwithstanding that Warrantholders holding at
least 25% of the aggregate number of then outstanding unexercised Warrants are
not present in person or represented by proxy at such adjourned meeting.
(3) Votes on an extraordinary resolution shall always be given on a poll
and no demand for a poll on an extraordinary resolution shall be necessary.
SECTION 8.12 - POWERS CUMULATIVE
It is hereby declared and agreed that any one or more of the powers or
any combination of the powers in this Indenture stated to be exercisable by the
Warrantholders by extraordinary resolution or otherwise may be exercised from
time to time and the exercise of any one or more of such powers or any
combination of powers from time to time shall not be deemed to
<PAGE> 38
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exhaust the right of the Warrantholders to exercise such powers or combination
of powers then or thereafter from time to time.
SECTION 8.13 - MINUTES
Minutes of all resolutions and proceedings at every meeting of
Warrantholders shall be made and duly entered in books to be from time to time
provided for that purpose by the Trustee at the reasonable expense of the
Corporation and any such minutes, if signed by the Chair of the meeting at which
such resolutions were passed or proceedings held or by the Chair of the next
succeeding meeting of the Warrantholders, shall be prima facie evidence of the
matters therein stated and, until the contrary is proved, every such meeting in
respect of the proceedings of which minutes shall have been made shall be deemed
to have been duly convened and held and all resolutions passed thereat or
proceedings taken shall be deemed to have been duly passed and taken.
SECTION 8.14 - INSTRUMENTS IN WRITING
All actions that may be taken and all powers that may be exercised by
the Warrantholders at a meeting held as provided in this Article Seven also may
be taken and exercised by Warrantholders holding at least 66 2/3% of the
aggregate number of then outstanding unexercised Warrants by an instrument in
writing signed in one or more counterparts by such Warrantholders in person or
by attorney duly appointed in writing and the expression "extraordinary
resolution" when used in this Indenture shall include an instrument so signed.
SECTION 8.15 - BINDING EFFECT OF RESOLUTIONS
Every resolution and every extraordinary resolution, subject to
subsection 8.10(a), passed in accordance with the provisions of this Article
Seven at a meeting of Warrantholders shall be binding upon all the
Warrantholders, whether present at or absent from such meeting, and every
instrument in writing signed by Warrantholders in accordance with Section 8.14
shall be binding upon all the Warrantholders, whether signatories thereto or
not, and each and every Warrantholder and the Trustee (subject to the provisions
for indemnity herein contained) shall be bound to give effect accordingly to
every such resolution and instrument in writing. In the case of an instrument in
writing, the Trustee shall give notice in the manner contemplated in Section
11.01 of the effect of the instrument in writing to all Warrantholders and the
Corporation as soon as is reasonably practicable.
<PAGE> 39
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SECTION 8.16 - HOLDINGS BY THE CORPORATION OR SUBSIDIARIES OF THE CORPORATION
DISREGARDED
In determining whether Warrantholders holding the required number of
outstanding Warrants are present at a meeting of Warrantholders for the purpose
of determining a quorum or the number of holders who have concurred in any
consent, waiver, extraordinary resolution, Warrantholders' Request or other
action under this Indenture, Warrants owned legally or beneficially by the
Corporation or any associate or affiliate (as those terms are defined in the
Securities Act (Ontario)) of the Corporation shall be disregarded. The Trustee
shall be protected in acting and relying upon a certificate of the Corporation,
to be provided on request of the Trustee, detailing the exact registration of
any Warrants owned legally or beneficially by the Corporation or any associate
or affiliate thereof.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 9.01 - SUPPLEMENTAL INDENTURES
Subject to the provisions of this Indenture, from time to time the
Corporation and the Trustee may execute and deliver and, when so directed by
this Indenture, they shall execute and deliver by their proper officers,
indentures or instruments supplemental hereto, which thereafter shall form part
hereof, for any one or more or all of the following purposes:
(a) setting forth adjustments in the application of Article Two;
(b) adding to the provisions hereof such additional covenants and
enforcement provisions as in the opinion of counsel are necessary or
advisable, provided that the same, in the opinion of the Trustee
relying on the opinion of counsel, are not prejudicial to the interests
of the Warrantholders as a group;
(c) giving effect to any extraordinary resolution passed as provided in
Article Eight;
(d) making such provisions not inconsistent with this Indenture as may be
necessary or desirable with respect to matters or questions arising
hereunder, provided that such provisions are not, in the opinion of the
Trustee relying on the opinion of counsel, prejudicial to the interests
of the Warrantholders as a group;
<PAGE> 40
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(e) adding to or amending the provisions hereof in respect of the transfer
of Warrants, making provision for the exchange of Warrants and making
any modification in the forms of the Warrant certificates that does not
affect the substance thereof;
(f) making any additions to, deletions from or alterations to the
provisions of this Indenture which, in the opinion of the Trustee
relying on the advice of counsel, do not materially and adversely
affect the interests of the Warrantholders and are necessary or
advisable in order to incorporate, reflect or comply with any
Applicable Legislation; and
(g) for any other purpose not inconsistent with the terms of this
Indenture, including the correction or rectification of any
ambiguities, defective or inconsistent provisions, errors or omissions
herein, provided that, in the opinion of the Trustee relying on the
opinion of counsel, the rights of the Trustee and of the Warrantholders
as a group are not prejudiced thereby.
SECTION 9.02 - SUCCESSOR CORPORATIONS
In the case of the consolidation, amalgamation, arrangement, merger or
transfer of the undertaking or assets of the Corporation as an entirety or
substantially as an entirety to another person (a "SUCCESSOR"), forthwith
following the occurrence of such event the successor resulting from such
consolidation, amalgamation, arrangement, merger or transfer (if not the
Corporation) shall expressly assume, by supplemental indenture satisfactory in
form to the Trustee relying on the advice of counsel and executed and delivered
to the Trustee, the due and punctual performance and observance of each and
every covenant and condition of this Indenture to be performed and observed by
the Corporation and, in any event, shall be bound by the provisions hereof and
all obligations for the due and punctual performance and observance of each and
every covenant and obligation contained in this Indenture to be performed by the
Corporation.
ARTICLE TEN
CONCERNING THE TRUSTEE
SECTION 10.01 - TRUST INDENTURE LEGISLATION
(1) In this Article, the term "APPLICABLE LEGISLATION" means the
provisions, if any, of the Business Corporations Act (Ontario) and any other
statute of Ontario or Canada and of regulations under any such named or other
statute relating to trust indentures and/or to the rights,
<PAGE> 41
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duties and obligations of trustees and of corporations under trust indentures to
the extent that such provisions are at the time in force and applicable to this
Indenture.
(2) If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with a mandatory requirement of Applicable Legislation,
such mandatory requirement shall prevail.
(3) The Corporation and the Trustee agree that at all times in relation to
this Indenture and any action to be taken hereunder each will observe and comply
with and be entitled to the benefit of Applicable Legislation.
SECTION 10.02 - RIGHTS AND DUTIES OF TRUSTEE
(1) In the exercise of the rights and duties prescribed or conferred by the
terms of this Indenture, the Trustee shall act honestly and in good faith with a
view to the best interests of the Warrantholders and shall exercise the degree
of care, diligence and skill that a reasonably prudent trustee would exercise in
comparable circumstances. No provision of this Indenture shall be construed to
relieve the Trustee from, or require any other person to indemnify the Trustee
against, liability for its own gross negligence, wilful misconduct or bad faith.
(2) Subject only to subsection 10.02(1), the Trustee shall not be bound to
do or take any act, action or proceeding for the enforcement of any of the
obligations of the Corporation under this Indenture unless and until it shall
have received a Warrantholders' Request specifying the act, action or proceeding
that the Trustee is requested to take. The obligation of the Trustee to commence
or continue any act, action or proceeding for the purpose of enforcing any
rights of the Trustee or the Warrantholders hereunder shall be conditional upon
the Warrantholders furnishing, when required by notice in writing by the
Trustee, sufficient funds to commence or continue such act, action or proceeding
and an indemnity reasonably satisfactory to the Trustee to protect and hold
harmless the Trustee against the costs, charges, expenses and liabilities to be
incurred thereby and any loss and damage it may suffer by reason thereof. None
of the provisions contained in this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties or in the exercise of any of its rights or
powers unless indemnified as aforesaid.
(3) The Trustee, before commencing or at any time during the continuance of
any such act, action or proceeding, may require the Warrantholders at whose
instance it is acting to deposit with the Trustee the Warrants held by them, for
which Warrants the Trustee shall issue receipts.
(4) Every provision of this Indenture that by its terms relieves the
Trustee of liability or entitles it to rely upon any evidence submitted to it is
subject to the provisions of Applicable Legislation, of this Section 10.02 and
of Section 10.03.
<PAGE> 42
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SECTION 10.03 - EVIDENCE, EXPERTS AND ADVISERS
(1) In addition to the reports, certificates, opinions and other evidence
required by this Indenture, the Corporation shall furnish to the Trustee such
additional evidence of compliance with any provision hereof in such form as may
be prescribed by Applicable Legislation or as the Trustee may reasonably require
by written notice to the Corporation.
(2) In the exercise of its rights and duties hereunder, the Trustee, if it
is acting in good faith, may rely as to the truth of the statements and the
accuracy of the opinions expressed therein, upon statutory declarations,
opinions, reports, written requests, consents or orders of the Corporation,
certificates of the Corporation or other evidence furnished to the Trustee
provided that such evidence complies with Applicable Legislation and the Trustee
examines the same and determines that such evidence complies with the applicable
requirements of this Indenture.
(3) Whenever Applicable Legislation requires that evidence referred to in
subsection 10.03(1) be in the form of a statutory declaration, the Trustee may
accept such statutory declaration in lieu of a certificate of the Corporation
required by any provision hereof. Any such statutory declaration may be made by
one or more of the chairman, chief executive officer, president or any
vice-president of the Corporation.
(4) Proof of the execution of an instrument in writing, including a
Warrantholders' Request, by any Warrantholder may be made by the certificate of
a notary public, or other officer with similar powers, that the person signing
such instrument acknowledged to him the execution thereof or by an affidavit of
a witness to such execution or in any other manner that the Trustee may consider
adequate.
(5) The Trustee may employ or retain such counsel, accountants or other
experts or advisers as it may reasonably require for the purpose of determining
and discharging its duties hereunder, may act on and rely upon, and shall be
protected in acting and relying in good faith upon, the advice or opinions so
obtained and may pay reasonable remuneration for all services so performed by
any of them (any such remuneration paid by the Trustee to be repaid by the
Corporation to the Trustee in accordance with Section 6.03), without taxation of
costs of any counsel, and shall not be responsible for any misconduct on the
part of any of them.
SECTION 10.04 - DOCUMENTS, MONEY, ETC. HELD BY TRUSTEE
(1) Any securities, documents of title or other instruments that may at any
time be held by the Trustee subject to the trusts hereof may be placed in the
deposit vaults of the Trustee or of any
<PAGE> 43
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Canadian chartered bank or trust company or deposited for safekeeping with any
such bank or trust company.
(2) Unless otherwise expressly provided herein, any monies so held pending
the application or withdrawal thereof under any provision of this Indenture
shall be held in the name of the Trustee in a segregated trust account with any
Canadian chartered bank or financial institution (which may be the Trustee or
any affiliate or related party), at the rate of interest then current on similar
deposits or, on the direction of the Corporation, may be invested in Permitted
Investments. Any such direction by the Corporation to the Trustee as to the
investment of the funds shall be in writing and shall be provided to the Trustee
no later than 9:00 a.m. on the day on which the investment is to be made. Any
such direction received by the Trustee after 9:00 a.m. or received on a
non-Business Day, shall be deemed to have been given prior to 9:00 a.m. the next
Business Day.
SECTION 10.05 - ACTIONS BY TRUSTEE TO PROTECT INTERESTS
The Trustee shall have the power to institute and to maintain such
actions and proceedings as it may consider necessary or expedient to preserve,
protect or enforce its interests and the interests of the Warrantholders.
SECTION 10.06 - TRUSTEE NOT REQUIRED TO GIVE SECURITY
The Trustee shall not be required to give any bond or security in
respect of the execution of the trusts and powers of this Indenture or
otherwise.
SECTION 10.07 - PROTECTION OF TRUSTEE
By way of supplement to the provisions of any law for the time being
relating to trustees, it is expressly declared and agreed as follows:
(1) The Trustee shall not be liable for or by reason of any statements of
fact or recitals in this Indenture or in the Warrants (except the representation
contained in Section 10.09 or in the certificate of the Trustee on the Warrants)
or be required to verify the same.
(2) Nothing herein contained shall impose any obligation on the Trustee to
see to or to require evidence of the registration or filing (or renewal thereof)
of this Indenture or any instrument ancillary or supplemental hereto.
(3) The Trustee shall not be bound to give notice to any person of the
execution hereof.
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(4) The Trustee shall not incur any liability or responsibility whatsoever
or be in any way responsible for the consequence of any breach on the part of
the Corporation of any of the covenants herein contained or of any acts of any
directors, officers, employees, agents or servants of the Corporation.
SECTION 10.08 - REPLACEMENT OF TRUSTEE
(1) The Trustee may resign its trust and be discharged from all further
duties and liabilities hereunder by giving to the Corporation not less than 45
days' prior notice in writing or such shorter prior notice as the Corporation
may accept as sufficient. The Warrantholders by extraordinary resolution shall
have the power at any time to remove the existing Trustee and to appoint a new
trustee. In the event of the Trustee resigning or being removed as aforesaid or
being dissolved, becoming bankrupt, going into liquidation or otherwise becoming
incapable of acting hereunder, the Corporation shall forthwith appoint a new
trustee unless a new trustee has already been appointed by the Warrantholders.
Failing such appointment by the Corporation, within 10 days the retiring Trustee
or any Warrantholder may apply to a justice of the Ontario Court (General
Division) at the Corporation's expense, on such notice as such justice may
direct, for the appointment of a new trustee. Any new trustee so appointed by
the Corporation or by the Court shall be subject to removal as aforesaid by the
Warrantholders. Any new trustee appointed under any provision of this Section
10.08 shall be a corporation authorized to carry on the business of a trust
company in the Province of Ontario and, if required by Applicable Legislation of
any other province, in such other province. On any such appointment, the new
trustee shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as Trustee without
any further assurance, conveyance, act or deed. In addition, there shall be
immediately executed, at the expense of the Corporation, all such conveyances or
other instruments as may be necessary or advisable, in the opinion of counsel,
for the purpose of assuring the same to the new trustee, provided that any
resignation or removal of the Trustee and appointment of a successor trustee
shall not become effective until the successor trustee shall have executed an
appropriate instrument accepting such appointment and, at the request of the
Corporation, the predecessor Trustee, upon payment of its outstanding
remuneration and expenses, shall execute and deliver to the successor trustee an
appropriate instrument transferring to such successor trustee all rights and
powers of the Trustee hereunder.
(2) Upon the appointment of a successor trustee, the Corporation shall
promptly notify the Warrantholders thereof.
(3) Any corporation into or with which the Trustee may be merged or
consolidated or amalgamated or any corporation succeeding to the trust business
of the Trustee shall be the successor to the Trustee hereunder without any
further act on its part or of any of the parties hereto, provided that such
corporation would be eligible for appointment as a new trustee under
subsection 10.08(1).
<PAGE> 45
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(4) Any Warrants certified but not delivered by a predecessor trustee may
be certified by the successor trustee in the name of the predecessor or
successor trustee.
SECTION 10.09 - CONFLICT OF INTEREST
(1) The Trustee represents to the Corporation that at the time of execution
and delivery hereof no material conflict of interest exists in the Trustee's
role as a fiduciary hereunder and agrees that in the event of a material
conflict of interest arising hereafter it will, within 90 days after
ascertaining that it has such a material conflict of interest, either eliminate
the same or resign its trust hereunder to a successor trustee approved by the
Corporation. If any such material conflict of interest exists or hereafter shall
exist, the validity and enforceability of this Indenture and the Warrants shall
not be affected in any manner whatsoever by reason thereof.
(2) Subject to subsection 10.09(1), the Trustee in its personal or any
other capacity may buy, lend upon and deal in securities of the Corporation and
generally may contract and enter into financial transactions with the
Corporation or any subsidiary of the Corporation without being liable to account
for any profit made thereby.
SECTION 10.10 - ACCEPTANCE OF TRUSTS
The Trustee hereby accepts the trusts in this Indenture declared and
provided for and agrees to perform the same upon the terms and conditions herein
set forth, and to hold all rights, interests and benefits contained herein for
and on behalf of those persons who become Warrantholders from time to time.
SECTION 10.11 - TRUSTEE NOT TO BE APPOINTED RECEIVER
The Trustee and any person related to the Trustee shall not be
appointed a receiver or receiver and manager or liquidator of all or any part of
the assets or undertaking of the Corporation.
SECTION 10.12 - INDEMNITY OF TRUSTEE
The Corporation hereby indemnifies and holds harmless the Trustee and
its officers, directors, employees and agents from and against all reasonable
costs, liabilities, expenses and disbursements (including reasonable legal fees
and disbursements) that it might incur or to which it might have become subject
in any action, suit or other similar legal proceeding that might be instituted
against the Trustee arising from or out of any act, omission or error of the
Trustee arising pursuant to this Indenture, provided that the Trustee acted in
accordance with the standards set forth
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in Section 9.02 and that any such act, omission or error did not constitute
negligence, wilful misconduct or bad faith on the part of the Trustee. This
Section 10.12 shall survive the resignation or removal of the Trustee or the
termination of this Indenture.
ARTICLE ELEVEN
GENERAL
SECTION 11.01 - NOTICE
(1) Unless herein otherwise expressly provided, any notice, document or
thing required or permitted to be given or delivered hereunder shall be deemed
to be properly given or delivered if:
(a) delivered in person to the address set out below and acknowledged by
written receipt signed by the person receiving such notice;
(b) telecopied and confirmed by prepaid registered letter addressed to the
party receiving such notice at its respective addresses set out below;
or
(c) sent by letter (provided that any notice to be so given is not unlikely
to reach its destination as a result of any actual or threatened
interruption of mail services) or courier delivery addressed to the
party receiving such notice at its respective address set out below:
the Corporation: SoftKey Software Products Inc.
c/o The Learning Company, Inc.
One Athenaeum Street
Cambridge, Massachusetts
U.S.A. 02142
ATTENTION: General Counsel
TELECOPY: (617) 494-5660
<PAGE> 47
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the Trustee: CIBC Mellon Trust Company
393 University Avenue
5th Floor
Toronto, Ontario
M5G 2M7
ATTENTION: Vice President, Client Services
TELECOPY: (416) 813-4555
a Warrantholder: the address appearing in the register of holders.
(2) Any notice or delivery given in accordance with the provisions of this
Section 11.01 shall be deemed to have been given and received:
(a) if delivered in person in accordance with the provisions of clause
11.01(1)(a), on the day of delivery in person (provided that such day
is a Business Day at the place of receipt and delivery occurs prior to
4:00 p.m. (local time of the recipient) and, if it is not, on the next
following Business Day);
(b) if telecopied in accordance with the provisions of clause 11.01(1)(b)
during the business hours of the recipient, on the date of receipt of
the telecopy (provided that such day is a Business Day at the place of
receipt and, if it is not, on the next following Business Day) and if
telecopied other than during business hours, on the next following
Business Day; and
(c) if sent by letter or courier delivery in accordance with the provisions
of clause 11.01(1)(c), on the date the letter is actually received by
the addressee.
(3) For greater certainty, a letter delivered by courier where such courier
obtains a written acknowledgement of receipt from the party receiving the letter
shall be considered a delivery in person in accordance with clause 11.01(1)(a)
rather than the sending of a letter in accordance with clause 11.01(1)(c).
(4) Any party may from time to time by notice in writing delivered in
accordance with the provisions of this Article Eleven change its address for
purposes hereof.
<PAGE> 48
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SECTION 11.02 - ACCIDENTAL FAILURE TO GIVE NOTICE TO WARRANTHOLDERS
Accidental error or omission in giving notice or accidental failure to
give notice to any Warrantholder shall not invalidate any action or proceeding
founded thereon.
SECTION 11.03 - COUNTERPARTS AND FORMAL DATE
This Indenture may be executed in several counterparts each of which
when so executed shall be deemed to be an original and such counterparts
together shall constitute one and the same instrument and notwithstanding their
date of execution shall be deemed to be dated as of the Closing Date.
SECTION 11.04 - SATISFACTION AND DISCHARGE OF INDENTURE
Upon the date by which all Warrants theretofore certified hereunder
have been cancelled or deemed to be cancelled in accordance with Section 5.04,
this Indenture, except to the extent that Exchangeable Shares and certificates
therefor have not been issued and delivered hereunder or the Corporation has not
performed any of its obligations hereunder, shall cease to be of further effect
in respect of the Corporation and the Trustee, on written demand of and at the
cost and expense of the Corporation and upon delivery to the Trustee of a
certificate of the Corporation stating that all conditions precedent to the
satisfaction and discharge of this Indenture have been complied with and upon
payment to the Trustee of the expenses, fees and other remuneration payable to
the Trustee, shall execute proper instruments acknowledging satisfaction of and
discharging this Indenture provided that, if the Trustee has not then performed
any of its obligations hereunder, any such satisfaction and discharge of the
Corporation's obligations hereunder shall not affect or diminish the rights of
any Warrantholder or the Corporation against the Trustee.
SECTION 11.05 - PROVISIONS OF INDENTURE AND WARRANTS FOR THE SOLE BENEFIT OF
PARTIES AND WARRANTHOLDERS
Except as provided in Sections 7.02 and 7.03, nothing in this Indenture
or the Warrants, expressed or implied, shall give or be construed to give to any
person other than the parties hereto and the holders from time to time of the
Warrants any legal or equitable right, remedy or claim under this Indenture or
under any covenant or provision therein contained, all such covenants and
provisions being for the sole benefit of the parties hereto and the
Warrantholders.
SECTION 11.06 - LANGUAGE
The parties hereto confirm their express wish that this Indenture and
all documents and agreements directly or indirectly relating thereto be drawn up
in the English language.
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Notwithstanding such express wish, the parties agree that any such document or
agreement or any part thereof or of this Indenture may be drawn up in the French
language.
Les parties aux presentes confirment leur volonte expresse que la
presente convention ainsi que tous les documents et conventions s'y rattachant
directement ou indirectement soient rediges en anglais. Nonobstant cette volonte
expresse, les parties aux presentes conviennent que la presente convention ainsi
que tous les documents et conventions s'y rattachant directement ou
indirectement, ou toute partie de ceux-ci, puissent etre rediges en francais.
IN WITNESS WHEREOF the parties hereto have executed this Indenture
under the hands of their proper officers in that behalf.
SOFTKEY SOFTWARE PRODUCTS INC.
By /s/ Neal S. Winneg
--------------------------
Authorized Signing Officer
CIBC MELLON TRUST COMPANY
By /s/ Rebecca Woollatt
--------------------------
Authorized Signing Officer
By /s/ Susan Clough
--------------------------
Authorized Signing Officer
<PAGE> 50
SCHEDULE A
FORM OF WARRANT CERTIFICATE
The following is the form of Warrant certificate referred to in Section
2.02 of the Warrant Indenture:
EXERCISABLE ONLY DURING THE PERIOD COMMENCING ON THE BUSINESS DAY FOLLOWING THE
DATE ON WHICH TRANSACTION APPROVAL (AS DEFINED HEREIN) IS OBTAINED AND ENDING AT
5:00 P.M. (LOCAL TIME) ON THE DATE THAT IS THE EARLIER OF (I) THE FIRST
ANNIVERSARY OF THE DATE HEREOF AND (II) THE SIXTH BUSINESS DAY FOLLOWING THE
DATE OF ISSUANCE OF A RECEIPT BY THE SECURITIES REGULATORY AUTHORITY IN THE
PROVINCE OF RESIDENCE OF THE HOLDER HEREOF (WHICH MAY ONLY BE ONE OF THE
PROVINCES OF BRITISH COLUMBIA, ONTARIO AND QUEBEC AND WILL, IN THE CASE OF
PERSONS RESIDENT OUTSIDE CANADA, BE DEEMED TO BE THE PROVINCE OF ONTARIO) FOR A
(FINAL) PROSPECTUS RELATING TO THE DISTRIBUTION OF THE EXCHANGEABLE NON-VOTING
SHARES OF SOFTKEY SOFTWARE PRODUCTS INC. TO BE ISSUED UPON THE EXERCISE OF THE
SPECIAL WARRANTS, IMMEDIATELY AT WHICH TIME THESE SPECIAL WARRANTS SHALL BE
DEEMED CONCLUSIVELY TO HAVE BEEN EXERCISED.
NO. ____________ Representing ______________ Special
Warrants, each such warrant entitling
the holder to acquire one Exchangeable
Share (or in the circumstances described
below 1.09 Exchangeable Shares), subject
to adjustment, of SoftKey Software
Products Inc. for no additional
consideration.
NOTE: THESE SPECIAL WARRANTS ARE NON-TRANSFERABLE EXCEPT AS SET FORTH HEREIN.
SPECIAL WARRANT
OF
SOFTKEY SOFTWARE PRODUCTS INC.
THIS CERTIFIES that, for value received, the holder hereof, ___________
_______________________________________________ , (the "holder") of the Special
Warrants (the "Warrants") of SoftKey Software Products Inc. (the "Corporation")
represented hereby is entitled at any time during the period (the "Exercise
Period") commencing on the Business Day following the date on which Transaction
Approval (as defined herein) is obtained and ending at 5:00 p.m. (local time)
(the "Expiry Time") on the date (the "Expiry Date") that is the earlier of (i)
November 6, 1998 and (ii) the date that is the sixth Business Day following the
date (the "Clearance Date") upon which a receipt is issued by the securities
regulatory authority in the province of residence of the holder hereof (which
may only be one of the Provinces of British Columbia, Ontario and Quebec and
will, in the case of persons resident outside Canada, be deemed to be the
Province of Ontario)
<PAGE> 51
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for the (final) prospectus (the "Final Prospectus") of the Corporation
qualifying the exchangeable non-voting shares (the "Exchangeable Shares") of the
Corporation to be issued upon the exercise of the Warrants, to acquire in
accordance with the provisions of the Warrant Indenture (as defined below) one
Exchangeable Share (or 1.09 Exchangeable Shares to be issued by the Corporation
in the circumstances described below), subject to adjustment, for each Warrant
represented hereby without payment of any consideration in addition to the issue
price of such Warrant by surrendering to CIBC Mellon Trust Company (the
"Trustee") at its principal office in the City of Toronto this Warrant
certificate together with an executed exercise form in the form of the attached
Exercise Form or any other written notice in a form satisfactory to the Trustee,
in either case duly completed and executed PROVIDED THAT UNLESS THE HOLDER HAS
SURRENDERED THE WARRANTS REPRESENTED HEREBY FOR EXERCISE PURSUANT TO THE
PROVISIONS HEREOF AND OF THE WARRANT INDENTURE DURING THE EXERCISE PERIOD, THE
WARRANTS REPRESENTED HEREBY SHALL BE DEEMED TO HAVE BEEN EXERCISED BY THE HOLDER
AT THE EXPIRY TIME WITHOUT FURTHER NOTICE TO OR ACTION ON THE PART OF THE
HOLDER. For the purposes of this Warrant certificate, "Underwriters" means,
collectively, Griffiths McBurney & Partners and First Marathon Securities
Limited.
Upon the exercise or deemed exercise of the Warrants evidenced hereby,
the Corporation shall cause to be issued to the person(s) in whose name(s) the
Exchangeable Shares so subscribed for are to be issued (provided that, if the
Exchangeable Shares are to be issued to a person other than a holder of this
Warrant certificate, the holder's signature on the Exercise Form herein shall be
guaranteed by a Canadian chartered bank, by a Canadian trust company or by a
member firm of The Toronto Stock Exchange) the number of Exchangeable Shares to
be issued to such person(s) and such person(s) shall become a holder in respect
of Exchangeable Shares with effect from the date of such exercise and upon due
surrender of this Warrant certificate. The Corporation will cause a
certificate(s) representing such Exchangeable Shares to be made available for
pick-up by such person(s) at 393 University Avenue, 5th Floor, Toronto, Ontario
M5G 2M7, or mailed to such person(s) at the address(es) specified in such
Exercise Form, within two Business Days after receipt of notice from the Trustee
of the exercise of this Warrant.
The net proceeds of sale of the Warrants will be deposited on the date
hereof in escrow with the Trustee to be held and invested by the Trustee in
accordance with the provisions of the Warrant Indenture. In the event that the
Corporation fails to obtain Transaction Approval on or prior to March 6, 1998 or
such later date as may be agreed upon in writing by the Corporation and the
Underwriters (the "Qualification Deadline") the Corporation shall redeem each
Warrant for an amount equal to the purchase price paid by the Warrantholder for
the Warrant, together with interest thereon as provided in the Warrant
Indenture. For the purposes of this Warrant certificate, "Transaction Approval"
means Shareholder Approval together with all such other consents and approvals
necessary to ensure that the rights and benefits of the holders of Underlying
Shares are substantially equivalent to the rights and benefits of the holders of
the existing Exchangeable Shares; provided that, for greater certainty
Transaction Approval shall not include the filing of, or the
<PAGE> 52
- 3 -
obtaining of a receipt for, the Final Prospectus. For the purposes of this
Warrant certificate, "Shareholder Approval" means the approval of the holders of
the Exchangeable Shares to, among other things, the issue by the Corporation,
from time to time, of Exchangeable Shares in addition to those shares
outstanding on the record date for the Shareholder Meeting, such approval to be
given by resolution passed by not less than two-thirds of the votes cast on such
resolution at the Shareholder Meeting, as required by and in accordance with the
rights, privileges, restrictions and conditions attaching to the Exchangeable
Shares. For the purposes of this Warrant certificate, "Shareholder Meeting"
means the special meeting or meeting (including any adjournments thereof) of the
holders of the Exchangeable Shares to be called and held in accordance with the
articles and by-laws of the Corporation for the purpose of obtaining Shareholder
Approval.
In the event that the Corporation satisfies the Transaction Support
Condition or obtains Shareholder Approval prior to the Qualification Deadline,
the Trustee shall, upon receipt of written notice and supporting documents, in
prescribed form, release the Escrowed Funds to the Corporation for the purpose
of completing the purchase of Creative Wonders L.L.C. If the Escrowed Funds are
not released to the Corporation as aforesaid, the Escrowed Funds will be
released to the Corporation on the first to occur of (a) the last Clearance Date
to occur in British Columbia, Ontario and Quebec and (b) the Qualification
Deadline, provided only that the Corporation has obtained Transaction Approval
by such date. For the purpose of this Warrant certificate, "Transaction Support
Condition" means the obtaining by the Corporation of irrevocable proxies
executed by holders of not less than 50.1% of the Exchangeable Shares
outstanding on the record date for, and eligible to vote at, the Shareholder
Meeting, indicating that such shareholders will vote such shares at the
Shareholder Meeting in favour of, among other things, the issue by the
Corporation, from time to time, of Exchangeable Shares in addition to those
shares outstanding on the record date for the Shareholder Meeting. For the
purpose of this Warrant certificate, "escrowed funds" means the net proceeds of
sale of the Warrants deposited in escrow with the Trustee, and all proceeds of
investment and reinvestment thereof from time to time.
If, notwithstanding Transaction Approval having been obtained, the
Clearance Date does not occur by 5:00 p.m. (local time) on the Qualification
Deadline, or for any reason the Corporation is unable to file the Final
Prospectus with the securities regulatory authority of the holder's province
(which may only be one of the Provinces of British Columbia, Ontario and Quebec
and will, in the case of non-Canadian resident holders of Warrants, be deemed to
be the Province of Ontario) by 5:00 p.m. (local time) on the Qualification
Deadline, each Warrant represented hereby shall thereafter entitle the holder
upon the exercise or deemed exercise thereof, without further action being
required to be taken hereunder or under the Warrant Indenture, to acquire 1.09
Exchangeable Shares (subject to adjustment) at no additional cost provided that
no fractional Exchangeable Shares will be issued but a cash payment will be made
in lieu thereof. IN SUCH CASE, BUT WITHOUT DEROGATING FROM THE CORPORATION'S
OBLIGATION TO USE ITS REASONABLE EFFORTS TO OBTAIN FROM EACH OF THE SECURITIES
<PAGE> 53
- 4 -
REGULATORY AUTHORITIES OF THE PROVINCES OF BRITISH COLUMBIA, ONTARIO AND QUEBEC,
AS SOON AS PRACTICABLE, A RECEIPT OR SIMILAR DOCUMENT FOR THE FINAL PROSPECTUS,
THE EXCHANGEABLE SHARES ISSUED UPON THE EXERCISE OR DEEMED EXERCISE OF THE
WARRANTS WILL BE SUBJECT TO RESTRICTIONS ON THE RESALE THEREOF IN ACCORDANCE
WITH APPLICABLE SECURITIES LAWS OF CANADA AND THE UNITED STATES OF AMERICA AND
MAY BEAR A LEGEND TO SUCH EFFECT.
This Warrant certificate represents Warrants of the Corporation issued
or issuable under the provisions of a warrant indenture (which indenture
together with all other instruments supplemental or ancillary thereto is herein
referred to as the "Warrant Indenture") made as of November 6, 1997 between the
Corporation and the Trustee, as trustee, TO WHICH WARRANT INDENTURE REFERENCE IS
HEREBY MADE FOR SPECIFIC PARTICULARS OF THE RIGHTS OF THE HOLDERS OF THE
WARRANTS AND THE CORPORATION AND OF THE TRUSTEE IN RESPECT THEREOF AND THE TERMS
AND CONDITIONS UPON WHICH THE WARRANTS ARE ISSUED AND HELD (WHICH RIGHTS, TERMS
AND CONDITIONS ARE SUMMARIZED ONLY IN THIS WARRANT CERTIFICATE), ALL TO THE SAME
EFFECT AS IF THE PROVISIONS OF THE WARRANT INDENTURE WERE HEREIN SET FORTH, TO
ALL OF WHICH THE HOLDER OF THIS WARRANT CERTIFICATE BY ACCEPTANCE HEREOF
ASSENTS. A copy of the Warrant Indenture will be available for inspection at 393
University Avenue, 5th Floor, Toronto, Ontario M5G 2M7. If any conflict exists
between the provisions contained herein and the provisions of the Warrant
Indenture, the provisions of the Warrant Indenture shall govern.
The Warrant Indenture provides for adjustments to the right of
exercise, including the amount of and class and kind of Exchangeable Shares and
other shares, securities or property issuable upon exercise, upon the happening
of certain stated events including the subdivision or consolidation of the
Exchangeable Shares, certain distributions of Exchangeable Shares or securities
convertible into Exchangeable Shares or of other securities or assets of the
Corporation, certain offerings of rights, warrants or options and certain
capital reorganizations and for payment of an amount to compensate for dividends
paid on Exchangeable Shares.
If, immediately prior to the expiry of the Exercise Period, the
Warrants represented by this Warrant certificate have not been exercised, the
Warrants represented hereby shall be deemed to have been exercised and
surrendered by the holder immediately after that time without any further action
on the part of the holder.
THIS SPECIAL WARRANT, THE EXCHANGEABLE SHARES ISSUABLE UPON EXERCISE
HEREOF AND THE SHARES OF COMMON STOCK, PAR VALUE U.S.$0.01 PER SHARE, OF THE
LEARNING COMPANY, INC. (THE "COMMON STOCK") ISSUABLE UPON EXCHANGE OF THE
EXCHANGEABLE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OF
<PAGE> 54
- 5 -
THE UNITED STATES OF AMERICA (THE "U.S. SECURITIES ACT"); THE SPECIAL WARRANT,
THE EXCHANGEABLE SHARES AND THE COMMON STOCK MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S
PROMULGATED UNDER THE U.S. SECURITIES ACT) UNLESS SUCH OFFER, SALE OR TRANSFER
IS COVERED BY OR MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
U.S. SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE U.S.
SECURITIES ACT, NOR MAY ANY SPECIAL WARRANT OR ANY EXCHANGEABLE SHARE BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR
THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON UNLESS THE ISSUANCE OF THE COMMON
STOCK IS REGISTERED UNDER AN EFFECTIVE REGISTRATION STATEMENT UNDER THE U.S.
SECURITIES ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT
IS AVAILABLE FOR THE EXCHANGE OF THE EXCHANGEABLE SHARES.
Upon presentation at 393 University Avenue, 5th Floor, Toronto, Ontario
M5G 2M7, subject to the provisions of the Warrant Indenture and upon compliance
with the reasonable requirements of the Trustee, Warrants may be exchanged for
Warrants entitling the holder thereof to acquire an equal aggregate number of
Exchangeable Shares (subject to adjustment) or, in the circumstances described
above, Warrants entitling the holder thereof to acquire an aggregate number of
Exchangeable Shares equal to the product of 1.09 and the aggregate number of
Warrants (subject to adjustment) rounded down to the nearest whole number. The
Corporation and the Trustee may treat the registered holder of this Warrant
certificate for all purposes as the absolute owner hereof. The holding of this
Warrant certificate shall not constitute the holder hereof a holder of
Exchangeable Shares nor entitle him to any right or interest in respect thereof
except as herein and in the Warrant Indenture expressly provided.
The transfer of the Warrants evidenced hereby is restricted by
applicable securities laws of Canada and the United States of America. In
addition, no Warrant may be transferred to a person resident in any Province of
Canada other than British Columbia, Ontario or Quebec. Warrants may only be
transferred, upon compliance with the conditions prescribed in the Warrant
Indenture, on the register to be kept at the principal offices of the Trustee in
the City of Toronto by the registered holder thereof or his executors or
administrators or other legal representatives or his or their attorney duly
appointed by an instrument in writing in form and execution satisfactory to the
Trustee with the signature guaranteed by a Canadian chartered bank, a Canadian
trust company or a member firm of The Toronto Stock Exchange and upon compliance
with such reasonable requirements as the Trustee may prescribe (including,
without limitation, the requirement to provide
<PAGE> 55
- 6 -
evidence of satisfactory compliance with applicable securities laws of Canada
and the United States of America).
PRIOR TO THE EARLIER OF THE CLEARANCE DATE AND THE FIRST ANNIVERSARY OF
THE DATE HEREOF, THE TRANSFER OF EXCHANGEABLE SHARES ISSUABLE UPON EXERCISE OF
THE WARRANTS EVIDENCED HEREBY IS RESTRICTED BY APPLICABLE SECURITIES
LEGISLATION.
The Warrant Indenture contains provisions making binding upon all
holders of Warrants outstanding thereunder resolutions passed at meetings of
such holders held in accordance with such provisions and instruments in writing
signed by the Warrantholders holding a specified percentage of outstanding and
unexercised Warrants.
The Warrant Indenture identifies and provides for certain restrictive
legends that will appear on the certificates for the Exchangeable Shares.
The Warrants and the Warrant Indenture shall be governed by and
performed, construed and enforced in accordance with the laws of the Province of
Ontario and shall be treated in all respects as Ontario contracts. Time shall be
of the essence hereof and of the Warrant Indenture.
This Warrant certificate shall not be valid for any purpose until it
has been certified by or on behalf of the Trustee for the time being under the
Warrant Indenture.
IN WITNESS WHEREOF the Corporation has caused this Warrant certificate
to be signed by its duly authorized officers as of the 6th day of November,
1997.
SOFTKEY SOFTWARE PRODUCTS INC.
By ___________________________
Authorized Signing Officer
<PAGE> 56
- 7 -
This Warrant certificate represents Warrants referred
to in the Warrant Indenture within mentioned.
CIBC MELLON TRUST COMPANY
Trustee
By __________________________
Authorized Signing Officer
date of signing _____________
<PAGE> 57
- 8 -
TRANSFER FORM
FOR VALUE RECEIVED, _____________________________________________
hereby sells, assigns and transfers unto
__________________________________________________________________________
PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE
__________________________________________________________________________
__________________________________________________________________________
_____________________ Warrants represented by the within Warrant certificate and
does hereby irrevocably constitute and appoint ___________________________
__________________________________________________________________________
attorney to transfer the said Warrants on the books of the Trustee with full
power of substitution in the premises.
DATED ____________________, 199__.
In the presence of )
) _____________________________
__________________________ ) Signature of Warrantholder
guaranteed by:
__________________________ _____________________________
Name: (Authorized Signature Number)
<PAGE> 58
- 9 -
Upon any due transfer of Warrants, the transferee of a Warrant shall be
a permitted assignee of the transferring holder and shall be entitled to the
benefits of the covenants of the Corporation referred to in section 5 of
Schedule "A" of the Subscription Agreements (as defined in the Warrant
Indenture) and granted by the Corporation, subject to the restrictions and
limitations described therein.
NOTICE: The signature on this assignment must correspond exactly with the name
as written upon the face of this Warrant certificate. If Exchangeable Shares are
to be issued to a person other than the registered holder, the registered holder
must pay to the Trustee all exigible taxes and the signature of the registered
holder must be guaranteed by a Canadian chartered bank, a Canadian trust company
or a member firm of The Toronto Stock Exchange.
<PAGE> 59
- 10 -
EXERCISE FORM
TO: SoftKey Software Products Inc.
c/o CIBC Mellon Trust Company
393 University Avenue
5th Floor
Toronto, Ontario
M5G 2M7
Attention: Stock and Bond Transfer Department
The undersigned holder of the within Warrants hereby irrevocably
exercises the Warrants represented hereby and subscribes for the maximum number
of Exchangeable Shares (or other shares, securities or property issuable in
accordance with the Warrant Indenture) issuable pursuant to the exercise of such
Warrants on the terms specified in the said Warrants and the Warrant Indenture.
The undersigned hereby directs that the said Exchangeable Shares be
issued in the name of the undersigned and delivered as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------
NAME(S) IN FULL | ADDRESS(ES) | NUMBER OF EXCHANGEABLE
| (include Postal Code) | SHARES
- --------------------------------------------------------------------------------
| |
| |
| |
- --------------------------------------------------------------------------------
| |
| |
| |
- --------------------------------------------------------------------------------
</TABLE>
(Please Print)
<PAGE> 60
- 11 -
Please note that if Exchangeable Shares are to be issued to a person
other than the registered holder, the registered holder must pay to the Trustee
all exigible taxes and the signature of the registered holder must be
guaranteed.
DATED this ___ day of _______________________, 199_.
_____________________________ ) _____________________________
Witness ) Signature
)
)
_____________________________
Print full name
_____________________________
Address in full
[ ] Please check box if these certificates are to be delivered to the office
where this Warrant certificate is surrendered, failing which the
certificates will be mailed to the address shown on the register.
(The Trustee may require that the signature above be guaranteed, in which event
the following must be completed.)
Signature of Warrantholder
guaranteed by: _____________________________
(Signature of Warrantholder)
_____________________________ _____________________________
Name: (Authorized Signature Number)
Note: If the signature of the person executing this form is to be guaranteed, it
must be guaranteed by a Canadian chartered bank, a Canadian trust company
or a member firm of The Toronto Stock Exchange.
<PAGE> 61
SCHEDULE B
FORM OF RELEASE CERTIFICATE
TO: CIBC MELLON TRUST COMPANY
________________________________________________________________________________
Reference is made to the special warrant indenture (the "Indenture")
dated November 6, 1997 between SoftKey Software Products Inc. (the
"Corporation") and CIBC Mellon Trust Company (the "Trustee"). Capitalized terms
used herein and not otherwise defined shall have the respective meanings
ascribed thereto in the Indenture.
I, [INSERT NAME], being the [INSERT TITLE] of SoftKey Software Products
Inc., on behalf of the Corporation hereby certify:
(i) that the Corporation has obtained irrevocable proxies executed by holders
of not less than 50.1% of the Exchangeable Shares outstanding on the
record date for, and eligible to vote at, the Shareholder Meeting,
indicating that such holders will vote such shares at the Shareholder
Meeting in favour of, among other things, the issue by the Corporation,
from time to time, of Exchangeable Shares in addition to those shares
outstanding on the record date for the Shareholder Meeting; or
(ii) that the Corporation has obtained approval of the holders of the
Exchangeable Shares to, among other things, the issue by the Corporation,
from time to time, of Exchangeable Shares in addition to those shares
outstanding on the record date for the Shareholder Meeting, such approval
having been given by resolution passed by not less than two-thirds of the
votes cast on such resolution at the Shareholder Meeting, as required by
and in accordance with the rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares; and
(iii) that the Escrowed Funds are required for the purpose of completing the
purchase of Creative Wonders.
Based on the foregoing, the Corporation hereby requests that
all/$ of the Escrowed Funds be released from escrow and paid to the
Corporation.
DATED this ___ day of ____________, 1997.
SOFTKEY SOFTWARE PRODUCTS INC.
By _____________________________
[NAME]
[TITLE]
<PAGE> 62
- 2 -
__________________________
The undersigned, on behalf of the Underwriters, hereby agrees with
and confirms the foregoing and hereby requests that the above-referenced amount
of the Escrowed Funds be released from escrow and paid to the Corporation.
DATED this ___ day of ____________, 1997.
GRIFFITHS McBURNEY & PARTNERS, on
behalf of itself and on behalf of FIRST
MARATHON SECURITIES LIMITED
By ________________________________
[NAME]
[TITLE]
<PAGE> 1
Exhibit 4.10
--------------
REGISTRATION RIGHTS AGREEMENT
by and among
THE LEARNING COMPANY, INC.
and
THE PURCHASERS NAMED HEREIN
--------------
Dated as of August 26, 1997
<PAGE> 2
TABLE OF CONTENTS
SECTION PAGE
1. Introduction................................................. 1
2. Registration under Securities Act, etc....................... 1
2.1 Registration on Request............................. 1
(a) Request.................................... 1
(b) Registration Statement Form................ 2
(c) Expenses................................... 2
(d) Effective Registration Statement........... 2
(e) Selection of Underwriters.................. 3
(f) Priority in Requested Registrations........ 3
(g) Limitation on Registration on Request...... 3
2.2 Incidental Registration............................. 4
(a) Right to Include Registrable Securities.... 4
(b) Priority in Incidental Registrations....... 5
2.3 Registration Procedures............................. 5
2.4 Underwritten Offerings.............................. 11
(a) Requested Underwritten Offerings........... 11
(b) Incidental Underwritten Offerings.......... 12
(c) Holdback Agreements........................ 12
(d) Participation in Underwritten Offerings.... 13
2.5 Preparation; Reasonable Investigation............... 13
2.6 Indemnification..................................... 14
(a) Indemnification by the Company............. 14
(b) Indemnification by the Sellers............. 15
(c) Notices of Claims, etc..................... 15
(d) Other Indemnification...................... 16
<PAGE> 3
(e) Indemnification Payments................... 16
(f) Contribution............................... 16
2.7 Adjustments Affecting Registrable Securities........ 18
3. Definitions.................................................. 18
4. Rule 144..................................................... 21
5. Amendments and Waivers....................................... 21
6. Nominees for Beneficial Owners............................... 21
7. Notices...................................................... 22
8. Assignment................................................... 22
9. Descriptive Headings......................................... 23
10. GOVERNING LAW................................................ 23
11. Counterparts................................................. 23
12. Entire Agreement............................................. 23
14. Severability................................................. 23
ii
<PAGE> 4
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of August 26, 1997, among THE
LEARNING COMPANY, a Delaware corporation (the "Company"), and each of the other
parties listed on the signature pages hereto (each a "Purchaser" and,
collectively, the "Purchasers").
1. INTRODUCTION. The Company is a party to three separate Securities
Purchase Agreements (the "Purchase Agreements"), each dated as of August 26,
1997, with the Purchasers pursuant to which the Purchasers have agreed to
purchase from the Company an aggregate of 750,000 shares of Series A Convertible
Participating Preferred Stock, par value $.01 per share, of the Company (the
"Convertible Preferred Stock"). Certain capitalized terms used in this Agreement
are defined in Section 3 hereof.
2. REGISTRATION UNDER SECURITIES ACT, ETC.
2.1 REGISTRATION ON REQUEST.
(a) REQUEST. At any time or from time to time after the
Applicable Period, upon the written request of one or more holders (the
"Initiating Holders") of Registrable Securities holding (a) in the case of the
first and second registrations effected pursuant to this Section 2.1 and during
the five-year period commencing on the date hereof, a majority of the
Registrable Securities then outstanding on an as-converted basis, and (b) in the
case of the third and fourth registrations effected pursuant to this Section
2.1, or the first and second registrations if such registrations are not
effected within five years hereof, at least 15% of the Registrable Securities
then outstanding on an as-converted basis, requesting that the Company effect
the registration under the Securities Act of all or part of such Initiating
Holders' Registrable Securities and specifying the intended method of
disposition thereof, the Company will promptly give written notice of such
requested registration to all registered holders of Registrable Securities, and
thereupon the Company will, subject to the terms of this Agreement, use its best
efforts to effect the registration under the Securities Act of:
(i) the Registrable Securities which the Company has
been so requested to register by such Initiating Holders for disposition in
1
<PAGE> 5
accordance with the intended method of disposition stated in such request;
and
(ii) all other Registrable Securities the holders of
which shall have made a written request to the Company for registration
thereof within 30 days after the giving of such written notice by the
Company (which request shall specify the intended method of disposition of
such Registrable Securities);
all to the extent requisite to permit the disposition (in accordance with the
intended methods thereof as aforesaid) of the Registrable Securities so to be
registered.
(b) REGISTRATION STATEMENT FORM. Registrations under this
Section 2.1 shall be on such appropriate registration form of the Commission (i)
as shall be selected by the Company and (ii) as shall permit the disposition of
such Registrable Securities in accordance with the intended method or methods of
disposition specified in their request for such registration. If, in connection
with any registration under this Section 2.1 which is proposed by the Company to
be on Form S-3 or any similar short form registration statement which is a
successor to Form S-3, the managing underwriters, if any, shall advise the
Company in writing that in their opinion the use of another permitted form is of
material importance to the success of the offering, then such registration shall
be on such other permitted form.
(c) EXPENSES. The Company will pay all Registration Expenses
in connection with any registration requested pursuant to this Section 2.1.
(d) EFFECTIVE REGISTRATION STATEMENT. A registration re
quested pursuant to this Section 2.1 shall not be deemed to have been effected
(i) unless a registration statement with respect thereto has become effective,
and remained effective in compliance with the provisions of the Securities Act
with respect to the disposition of all Registrable Securities covered by such
registration statement until such time as all of such Registrable Securities
have been disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof set forth in such registration statement,
PROVIDED, that except with respect to any registration statement on Form S-3
filed pursuant to Rule 415 under the Securities Act, such period need not exceed
180 days, and PROVIDED, FURTHER, that a registration requested pursuant to this
Section 2.1 shall be deemed to have been effected if a registration statement
with respect thereto is withdrawn at the request of the Initiating Holders for
any reason other than a material adverse development involving the Company, (ii)
if, after it has become effective, such registration be comes subject to
2
<PAGE> 6
any stop order, injunction or other order or requirement of the Commission or
other governmental agency or court for any reason or (iii) the conditions to
closing specified in the purchase agreement or underwriting agree ment entered
into in connection with such registration are not satisfied, other than by
reason of some act or omission by such Initiating Holders.
(e) SELECTION OF UNDERWRITERS. If a requested registration
pursuant to this Section 2.1 involves an underwritten offering, the managing or
lead underwriter or underwriters thereof shall be selected by the holders of at
least a majority (by number of shares) of the Registrable Securities as to which
registra tion has been requested and shall be acceptable to the Company, which
shall not unreasonably withhold its acceptance of any such underwriters.
(f) PRIORITY IN REQUESTED REGISTRATIONS. If a requested
registration pursuant to this Section 2.1 involves an underwritten offering, and
the managing underwriter shall advise the Company in writing (with a copy to
each holder of Registrable Securities requesting registration) that, in its
opinion, the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering within a price range
acceptable to the holders of a majority of the Registrable Securities requested
to be included in such registration, the Company will include in such
registration, to the extent of the number which the Company is so advised can be
sold in such offering, Registrable Securities requested to be included in such
registration by the holder or holders of Registrable Securities, PRO RATA among
such holders requesting such registration on the basis of the number of such
securities requested to be included by such holders.
(g) LIMITATION ON REGISTRATION ON REQUEST. Subject to Sections
1(d) and 1(f), in no event will the Company be required to effect, in the
aggregate, more than four registrations pursuant to this Section 2.1 PROVIDED,
HOWEVER, that the Company will be required to effect only one registration of
Option Shares and Related Registrable Securities. If, while a registration
request is pending pursuant to this Section 2.1, the Board of Directors of the
Company makes a good faith determination that the filing of the requested
registration would adversely affect either (i) a pending transaction of the
Company or (ii) a securities offering which the Company plans to undertake, the
Company shall not be re quired to effect a registration pursuant to this Section
2.1 until the consummation of such transaction or registration; PROVIDED,
HOWEVER, that the Company may only assert either of such delays once during any
12-month period, and any such asserted delay with respect to the Company's
obligation to effect a registration pursuant to this Section 2.1 shall in no
event exceed 90 days.
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2.2 INCIDENTAL REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If the Company at
any time proposes to register, after the Applicable Period, any of its
securities under the Securities Act (other than by a registration on Form S-4 or
S-8, or any successor or similar forms, and other than pursuant to Section
2.1), whether or not for sale for its own account, it will each such time give
prompt written notice to all holders of Registrable Securities of its intention
to do so and of such holders' rights under this Section 2.2. Upon the written
request of any such holder (a "Requesting Holder") made within 30 days after the
receipt of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such holder and the intended method of
disposition thereof), the Company will, subject to the terms of this Agreement,
use its best efforts to effect the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the holders thereof, to the extent requisite to permit the disposition (in
accordance with the intended methods thereof as aforesaid) of the Registrable
Securities so to be registered, by inclusion of such Registrable Securities in
the registration statement which covers the securities which the Company
proposes to register, PROVIDED that if, at any time after giving written notice
of its intention to register any securities and prior to the effective date of
the registration statement filed in connection with such registration, the
Company shall determine for any reason either not to register or to delay
registration of such securities, the Company may, at its election, give written
notice of such determination to each holder of Registrable Securities and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), without prejudice, however, to the rights of any holder
or holders of Registrable Securities entitled to do so to request that such
registration be effected as a registration under Section 2.1, and (ii) in the
case of a determination to delay registering, shall be permitted to delay
registering any Registrable Securities, for the same period as the delay in
registering such other securities. No registration effected under this Section
2.2 shall relieve the Company of its obligation to effect any registration upon
request under Section 2.1, nor shall any such registration hereunder be deemed
to have been effected pursuant to Section 2.1. The Company will pay all
Registration Expenses in connection with each registration of Registrable
Securities requested pursuant to this Section 2.2.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If (i) a
registration pursuant to this Section 2.2 involves an underwritten offering of
the securities so being registered, whether or not for sale for the account of
the Company, to be
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distributed (on a firm commitment basis) by or through one or more underwriters
of recognized standing under underwriting terms appropriate for such a
transaction, (ii) the Registrable Securities so requested to be registered for
sale for the account of holders of Registrable Securities are not also to be
included in such underwritten offering (either because the Company has not been
requested so to include such Registrable Securities pursuant to Section 2.4(b)
or, if requested to do so, is not obligated to do so under Section 2.4(b), and
(iii) the managing underwriter of such underwritten offering shall inform the
Company and holders of the Registrable Securities requesting such registration
by letter of its belief that the distribution of all or a specified number of
such Registrable Securities concurrently with the securities being distributed
by such underwriters would interfere with the successful marketing of the
securities being distributed by such underwriters (such writing to state the
approximate number of such Registrable Securities which may be distributed
without such effect), then the Company may, upon written notice to all holders
of such Registrable Securities, reduce PRO RATA (if and to the extent stated by
such managing underwriter to be necessary to eliminate such effect) the number
of such Registrable Securities the registration of which shall have been
requested by each holder of Registrable Securities so that the resultant
aggregate number of such Registrable Securities so included in such registration
shall be equal to the number of shares stated in such managing underwriter's
letter.
2.3 REGISTRATION PROCEDURES. If and whenever the Company is required to
use its best efforts to effect the registration of any Registrable Securities
under the Securities Act as provided in Sections 2.1 and 2.2 the Company shall,
as expeditiously as possible:
(i) prepare and as soon as reasonably practicable file with
the Commission the requisite registration statement to effect such
registration (including such audited financial statements as may be
required by the Securities Act or the rules and regulations promulgated
thereunder) and thereafter use its reasonable efforts to cause such
registration statement to become and remain effective, PROVIDED however
that the Company may discontinue any registration of its securities
which are not Registrable Securities (and, under the circumstances
specified in Section 2.2(a), its securities which are Registrable
Securities) at any time prior to the effective date of the registration
statement relating thereto, PROVIDED further that before filing such
registration statement or any amendments thereto, the Company will
furnish to the counsel selected by the holders of Registrable
Securities which are to be included in such registration copies of all
such documents proposed to be filed, which documents will be subject to
the review of such counsel;
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(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such
registration statement until such time as all of such securities have
been disposed of in accordance with the intended methods of disposition
by the seller or sellers thereof set forth in such registration
statement; PROVIDED, that except with respect to any such registration
statement on Form S-3 filed pursuant to Rule 415 under the Securities
Act, such period need not exceed 180 days;
(iii) furnish to each seller of Registrable Securities
covered by such registration statement and each underwriter, if any, of
the securities being sold by such seller such number of conformed
copies of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number
of copies of the prospectus contained in such registration statement
(including each preliminary prospectus and any summary prospectus) and
any other prospectus filed under Rule 424 under the Securities Act, in
conformity with the requirements of the Securities Act, and such other
documents, as such seller and underwriter, if any, may reasonably
request;
(iv) use its best efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities laws or blue sky
laws of such jurisdictions as any seller thereof and any underwriter
of the securities being sold by such seller shall reasonably request,
to keep such registrations or qualifications in effect for so long as
such registration statement remains in effect, and to take any other
action which may be reasonably necessary or advisable to enable such
seller and underwriter to consummate the disposition in such
jurisdictions of the securities owned by such seller, except that the
Company shall not for any such purpose be required to qualify generally
to do business as a foreign corporation in any jurisdiction wherein it
would not but for the requirements of this subdivision (iv) be
obligated to be so qualified or to consent to general service of
process in any such jurisdiction;
(v) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary in the opinion of counsel to the Company and counsel to the
seller or
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<PAGE> 10
sellers of Registrable Securities to enable the seller or
sellers thereof to consummate the disposition of such Registrable
Securities;
(vi) notify each seller of Registrable Securities and the
managing underwriter or underwriters, if any, promptly and confirm
such advice in writing promptly thereafter:
(v) when the registration statement, the prospectus or
any prospectus supplement related thereto or post-effective
amendment to the registration statement has been filed, and, with
respect to the registration statement or any post-effective
amendment thereto, when the same has become effective;
(w) of any request by the Commission for amendments or
supplements to the registration statement or the prospectus or for
additional information;
(x) of the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or the
initiation of any proceedings by any Person for that purpose;
(y) if at any time the representations and warranties
of the Company made as contemplated by Section 2.4 below cease to
be true and correct; and
(z) of the receipt by the Company of any notification
with respect to the suspension of the qualification of any
Registrable Securities for sale under the securities or blue sky
laws of any jurisdiction or the initiation or threat of any
proceeding for such purpose.
(vii) notify each seller of Registrable Securities covered by
such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances then existing, and at the request of any such
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seller promptly prepare and furnish to such seller and each
underwriter, if any, a reasonable number of copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light
of the circumstances then existing;
(viii) use its best efforts to obtain the withdrawal of any
order suspending the effectiveness of the registration statement at the
earliest possible moment;
(ix) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more
than eighteen months, beginning with the first day of the Company's
first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder, and will
furnish to each such seller at least five business days prior to the
filing thereof a copy of any amendment or supplement to such
registration statement or prospectus and shall not file any thereof to
which any such seller shall have reasonably objected on the grounds
that such amendment or supplement does not comply in all material
respects with the requirements of the Securities Act or of the rules or
regulations thereunder;
(x) make available for inspection by a representative or
representatives of the holders of Registrable Securities, any under
writer participating in any disposition pursuant to the registration
statement and any attorney or accountant retained by such selling
holders or underwriter (each, an "Inspector"), all financial and other
records, pertinent corporate documents and properties of the Company
(the "Records"), and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
Inspector in connection with such registration in order to permit a
reasonable investigation within the meaning of Section 11 of the
Securities Act;
(xi) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration
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statement from and after a date not later than the effective date of
such registration statement;
(xii) enter into such agreements and take such other actions
as sellers of such Registrable Securities holding a majority of the
shares so to be sold shall reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities;
(xiii) use its best efforts to list all Registrable Securities
covered by such registration statement on any securities exchange on
which any of the securities of the same class as the Registrable
Securities are then listed and, if no such Registrable Securities are
so listed, on any national securities exchange on which the Common
Stock is then listed; and
(xiv) use its best efforts to provide a CUSIP number for the
Registrable Securities, not later than the effective date of the
registration statement.
The Company may require each seller of Registrable Securities as
to which any registration is being effected to furnish the Company such
information regarding such seller and the distribution of such securities as the
Company may from time to time reasonably request in writing.
The Company will not file any registration statement or amendment
thereto or any prospectus or any supplement thereto (including such documents
incorporated by reference and proposed to be filed after the initial filing of
the registration statement) to which the holders of a majority of the
Registrable Securities covered by such registration statement or the underwriter
or under writers, if any, shall reasonably object, PROVIDED that the Company may
file such document in a form required by law or upon the advice of its counsel.
Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that, upon receipt of any notice from the Company of
the occurrence of any event of the kind described in Section 2.3(viii), such
holder will forthwith discontinue such holder's disposition of Registrable
Securities pursuant to the registration statement relating to such Registrable
Securities until such holder's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 2.3(viii) and, if so directed by the
Company, will deliver to the Company (at the Company's expense) all copies,
other than permanent file copies, then in such holder's possession of the
prospectus relating to such Registrable Securities current at
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the time of receipt of such notice. In the event the Company shall give any such
notice, the period mentioned in Section 2.1(d) and Section 2.3(ii) shall be
extended by the length of the period from and including the date when each
seller of any Registrable Securities covered by such registration statement
shall have received such notice to the date on which each such seller has
received the copies of the supplemented or amended prospectus contemplated by
Section 2.3(viii).
If any such registration statement refers to any holder of
Registrable Securities by name or otherwise as the holder of any securities of
the Company, then such holder shall have the right to require (i) the insertion
therein of language, in form and substance satisfactory to such holder, to the
effect that the holding by such holder of such securities is not to be construed
as a recommendation by such holder of the investment quality of the Company's
securities covered thereby and that such holding does not imply that such holder
will assist in meeting any future financial requirements of the Company, or (ii)
in the event that such reference to such holder by name or otherwise is not
required by the Securities Act or any similar federal statute then in force, the
deletion of the reference to such holder.
2.4 UNDERWRITTEN OFFERINGS.
(a) REQUESTED UNDERWRITTEN OFFERINGS. If requested by the
underwriters for any underwritten offering by holders of Registrable Securities
pursuant to a registration requested under Section 2.1, the Company will enter
into an underwriting agreement with such underwriters for such offering, such
agreement to be satisfactory in substance and form to the Company, each such
holder and the underwriters, and to contain such representations and warranties
by the Company and such other terms as are generally prevailing in agreements of
this type, including, without limitation, indemnities to the effect and to the
extent provided in Section 2.6. The holders of the Registrable Securities will
cooperate with the Company in the negotiation of the underwriting agreement and
will give consideration to the reasonable suggestions of the Company regarding
the form thereof, PROVIDED that nothing herein contained shall diminish the
foregoing obligations of the Company. The holders of Registrable Securities to
be distributed by such underwriters shall be parties to such underwriting
agreement and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such holder of Registrable Securities
shall not be required to make
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any representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding such
holder, such holder's Registrable Securities and such holder's intended method
of distribution and any other representation required by law.
(b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company at any
time proposes to register any of its securities under the Securities Act as
contemplated by Section 2.2 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any
Requesting Holder of Registrable Securities as provided in Section 2.2 and
subject to the provisions of Section 2.2(b), use its reasonable efforts to
arrange for such under writers to include all the Registrable Securities to be
offered and sold by such holder among the securities to be distributed by such
underwriters, PROVIDED that if the managing underwriter of such underwritten
offering shall inform the holders of the Registrable Securities requesting such
registration by letter of its belief that inclusion in such underwritten
distribution of all or a specified number of such Registrable Securities would
interfere with the successful marketing of the securities (other than such
Registrable Securities) by the underwriters (such writing to state the basis of
such belief and the approximate number of such Registrable Securities which may
be included in such underwritten offering without such effect), then the Company
may, upon written notice to all holders of such Registrable Securities, exclude
PRO RATA from such underwritten offering (if and to the extent stated by such
managing underwriter to be necessary to eliminate such effect) the number of
such Registrable Securities so that the resultant aggregate number of such
Registrable Securities shall be equal to the approximate number of shares stated
in such managing underwriter's letter. The holders of Registrable Securities to
be distributed by such underwriters shall be parties to the underwriting
agreement between the Company and such underwriters and may, at their option,
require that any or all of the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such holders of
Registrable Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such holders of Registrable Securities.
(c) HOLDBACK AGREEMENTS.
(i) Each holder of Registrable Securities agrees by
acquisition of such Registrable Securities, if so required by the
managing underwriter, not to sell, make any short sale of, loan, grant
any option for the purchase of, effect any public sale or distribution
of or otherwise dispose of
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any equity securities of the Company, during the 90 days after any
underwritten registration pursuant to Section 2.1 or 2.2 has become
effective, except as part of such underwritten registration, whether or
not such holder participates in such registration. Notwithstanding the
foregoing sentence, each holder of Registrable Securities subject to
the foregoing sentence shall be entitled to sell during the foregoing
period securities in a private sale as long as the purchaser agrees to
be bound by the provisions of this Section 2.4(c)(i) for the balance of
such 90 day period.
(ii) The Company agrees if so requested by the managing
underwriter not to sell, make any short sale of, loan, grant any option
for the purchase of, effect any public sale or distribution of or other
wise dispose of its equity securities or securities convertible into or
exchangeable or exercisable for any of such securities during the
seven days prior to and the 90 days after any underwritten registration
pursuant to Section 2.1 or 2.2 has become effective, except as part of
such underwritten registration and except in connection with a stock
option plan, stock purchase plan, managing directors' plan, or savings
or similar plan, or an acquisition of a business, merger or exchange
of stock for stock or any private placement of stock in which the
purchaser agrees to be bound by the provisions of this Section
2.4(c)(ii) for the balance of such 90 day period.
(d) PARTICIPATION IN UNDERWRITTEN OFFERINGS. No Person may
participate in any underwritten offering hereunder unless such Person (i) agrees
to sell such Person's securities on the basis provided in any underwriting
arrangements approved, subject to the terms and conditions hereof, by the
holders of a majority of Registrable Securities to be included in such
underwritten offering and (ii) completes and executes all questionnaires,
indemnities, underwriting agreements and other documents (other than powers of
attorney) required under the terms of such underwriting arrangements.
2.5 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the holders of Registrable
Securities registered under such registration statement, their underwriters, if
any, each Requesting Holder and their respective counsel and accountants, the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto, and will give each of them such access
to its books and records and such opportunities to discuss the business of the
Company with its officers and the
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independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such holders' and such under writers'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
2.6 INDEMNIFICATION.
(b) INDEMNIFICATION BY THE COMPANY. In the event of any
registration of any securities of the Company under the Securities Act, the
Company will, and hereby does agree to, indemnify and hold harmless in the case
of any registration statement filed pursuant to Section 2.1 or 2.2, the holder
of any Registrable Securities covered by such registration statement, its
directors and officers, each other Person who participates as an underwriter in
the offering or sale of such securities and each other Person, if any, who
controls such holder or any such underwriter within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which such holder or any such director, officer, underwriter or
controlling Person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company will reimburse such holder, director,
officer, under writer and controlling Person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, liability, action or proceeding, PROVIDED that the Company
shall not be liable to any such holder, director, officer, underwriter or
controlling Person, as the case may be, in any such case to the extent that any
such loss, claim, damage, liability (or action or proceeding in respect thereof)
or expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus, final prospectus, summary prospectus, amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company through an instrument duly executed by such holder or
underwriter, as the case may be, specifically stating that it is for use in the
preparation thereof and, PROVIDED further that the Company shall not be liable
to any Person who participates as an under writer in the offering or sale of
Registrable Securities or to any other Person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to the
extent that any such loss,
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claim, damage, liability (or action or proceeding in respect thereof) or expense
arises out of such Person's failure to send or give a copy of the final
prospectus, as the same may be then supplemented or amended, to the Person
asserting the existence of an untrue statement or alleged untrue statement or
omission or alleged omission at or prior to the written confirmation of the
sale of Registrable Securities to such Person if such statement or omission was
corrected in such final prospectus. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of such holder
or any such director, officer, underwriter or controlling Person and shall
survive the transfer of such securities by such holder.
(b) INDEMNIFICATION BY THE SELLERS. The Company may require, as a
condition to including any Registrable Securities in any registration statement
filed pursuant to Section 2.3, that the Company shall have received an
undertaking satisfactory to it from the prospective seller of such Registrable
Securities, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in Section 2.6(a)) the Company, each director of the
Company, each officer of the Company and each other person, if any, who controls
the Company within the meaning of the Securities Act, with respect to any
statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company through an instrument duly executed by such seller specifically stating
that it is for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement, PROVIDED, HOWEVER, that the liability of such indemnifying party
under this Section 2.6(b) shall be limited to the amount of proceeds received by
such indemnifying party in the offering giving rise to such liability. Any such
indemnity shall remain in full force and effect, regard less of any
investigation made by or on behalf of the Company or any such director, officer
or controlling person and shall survive the transfer of such securities by such
seller.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section 2.6,
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action, PROVIDED that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subdivisions of this Section 2.6, except to the extent that
the indemnifying party is
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actually prejudiced by such failure to give notice. In case any such action is
brought against an indemnified party, unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified, to the extent that the
indemnifying party may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the consent of the indemnified party, consent to entry of
any judgment or enter into any settlement of any such action which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect to such
claim or litigation. No indemnified party shall consent to entry of any judgment
or enter into any settlement of any such action the defense of which has been
assumed by an indemnifying party without the consent of such indemnifying party.
(d) OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding subdivisions of this Section 2.6 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities with respect to any required registration or other qualification of
securities under any Federal or state law or regulation of any governmental
authority, other than the Securities Act.
(e) INDEMNIFICATION PAYMENTS. The indemnification required by
this Section 2.6 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
(f) CONTRIBUTION. If the indemnification provided for in this
Section 2.6 is unavailable to an indemnified party in respect of any expense,
loss, claim, damage or liability referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such expense,
loss, claim, damage or liability (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
holder or underwriter, as the case may be, on the other from the distribution of
the Registrable Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as
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is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
holder or underwriter, as the case may be, on the other in connec tion with the
statements or omissions which resulted in such expense, loss, damage or
liability, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the holder or underwriter,
as the case may be, on the other in connection with the distribution of the
Registrable Securities shall be deemed to be in the same proportion as the total
net proceeds received by the Company from the initial sale of the Registrable
Securi ties by the Company to the purchasers pursuant to the Purchase Agreements
bear to the gain, if any, realized by the selling holder or the underwriting
discounts and commissions received by the underwriter, as the case may be. The
relative fault of the Company on the one hand and of the holder or underwriter,
as the case may be, on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or omission to state a material fact relates to information supplied by the
Company, by the holder or by the underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, PROVIDED that the foregoing contribution agreement shall
not inure to the benefit of any indemnified party if indemnification would be
unavailable to such indemnified party by reason of the provisions contained in
the first sentence of Section 2.6(a), and in no event shall the obligation of
any indemnifying party to contribute under this Section 2.6(f) exceed the amount
that such indemnifying party would have been obligated to pay by way of
indemnification if the indemnification provided for under Section 2.6(a) or (b)
had been available under the circumstances.
The Company and the holders of Registrable Securities agree that it
would not be just and equitable if contribution pursuant to this Section 2.6(f)
were determined by PRO RATA allocation (even if the holders, Requesting Holders
and any underwriters were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth in the preceding
sentence and Section 2.6(c), any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim.
Notwithstanding the provisions of this Section 2.6(f), no holder of
Registrable Securities or underwriter shall be required to contribute any amount
in excess of the amount by which (i) in the case of any such holder, the net
proceeds
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<PAGE> 20
received by such holder from the sale of Registrable Securities or (ii) in the
case of an underwriter, the total price at which the Registrable Securities
purchased by it and distributed to the public were offered to the public
exceeds, in any such case, the amount of any damages that such holder or
underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
2.7 ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will not
effect or permit to occur any combination or subdivision of Shares which would
adversely affect the ability of the holders of Registrable Securities to include
such Registrable Securities in any registration of its securities contemplated
by this Section 2 or the marketability of such Registrable Securities under any
such registration.
3. DEFINITIONS. As used herein, unless the context otherwise requires,
the following terms have the following respective meanings:
APPLICABLE PERIOD: In the case of a proposed registration by an
Initiating Holder or Requesting Holder, as the case may be, of (a)
Conversion Shares and any Related Registrable Securities, 18 months
from the Closing Date, (b) Convertible Preferred Stock and any Related
Registrable Securities, 30 months from the Closing Date and (c) Option
Shares and any Related Registrable Securities, the period ending on the
date of first issuance of Option Shares; provided, however, that the
Applicable Period shall immediately cease upon a mandatory conversion
of the Convertible Preferred Stock pursuant to Section 8.10.1 of the
Certificate of Designation for the Convertible Preferred Stock.
CLOSING DATE: The date on which the Convertible Preferred Stock is
first issued.
COMMISSION: The Securities and Exchange Commission or any other Federal
agency at the time administering the Securities Act.
COMMON STOCK: The common stock, par value $.01 per share, of the
Company.
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<PAGE> 21
COMPANY: As defined in the introductory paragraph of this Agreement.
CONVERSION SHARES: The shares of Common Stock issued or issuable upon
conversion of the Convertible Preferred Stock.
CONVERTIBLE PREFERRED STOCK: As defined in Section 1 of this Agreement.
EXCHANGE ACT: The Securities Exchange Act of 1934, or any similar
Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference
to a particular section of the Securities Exchange Act of 1934 shall
include a reference to the comparable section, if any, of any such
similar Federal statute.
INITIATING HOLDERS: As defined in Section 2.1 of the Agreement.
OPTION SHARES: Shares of Common Stock issued pursuant to the Stock
Option Agreements dated as of the date hereof between the Company and
affiliates of the Purchasers.
PERSON: A corporation, an association, a partnership, an organization,
business, an individual, a governmental or political subdivision
thereof or a governmental agency.
PURCHASE AGREEMENTS: As defined in Section 1.
REGISTRABLE SECURITIES: (i) any Conversion Shares and any Related
Registrable Securities, (ii) any Convertible Preferred Stock and any
Related Registrable Securities and (iii) any Option Shares and any
Related Registrable Securities. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable
Securities when (a) a registration statement with respect to the sale
of such securities shall have become effective under the Securities Act
and such securities shall have been disposed of in accordance with such
registration statement, (b) they shall have been sold as permitted by
Rule 144 (or any successor provision) under the Securities Act, (c)
they shall have been otherwise transferred, new certificates for them
not bearing a legend restricting further transfer shall have been
18
<PAGE> 22
delivered by the Company and subsequent public distribution of them
shall not require registration of them under the Securities Act, or (d)
they shall have ceased to be outstanding. In calculating a percentage
of Registrable Securities held, each share of Convertible Preferred
Stock shall be deemed to be equivalent to the number of shares of
Common Stock into which it is then convertible.
REGISTRATION EXPENSES: All expenses incident to the Company's
performance of or compliance with Section 2, including, without
limitation, all registration, filing and NASD fees, all stock exchange
listing fees, all fees and expenses of complying with securities or
blue sky laws, all word processing, duplicating and printing expenses,
messenger and delivery expenses, the fees and disbursements of counsel
for the Company and of its independent public accountants, including
the expenses of any special audits or "cold comfort" letters required
by or incident to such performance and compliance, the reasonable fees
and disbursements of one counsel retained by the holder or holders of a
majority of the Registrable Securities being registered, but excluding
underwriting discounts and commissions and transfer taxes, if any,
PROVIDED, HOWEVER, that in the event that the Company shall, in
accordance with Section 2.2(a), not register any securities with
respect to which it had given written notice of its intention to so
register to holders of Registrable Securities, notwithstanding anything
to the contrary in the foregoing, all of the costs incurred by
Requesting Holders in connection with such registration shall be deemed
Registration Expenses.
RELATED REGISTRABLE SECURITIES: With respect to Conversion Shares,
Convertible Preferred Stock or Option Shares, any securities of the
Company issued or issuable with respect to any Conversion Shares,
Convertible Preferred Stock or Option Shares by way of a dividend
or stock split or in connection with a combination of shares,
recapitalization, merger, consolidated or other reorganization or
otherwise.
REQUESTING HOLDER: As defined in Section 2.2.
SECURITIES ACT: The Securities Act of 1933, or any similar Federal
statute, and the rules and regulations of the Commission thereunder,
all as of the same shall be in effect at the time. References to a
particular section of the Securities Act of 1933 shall include a
19
<PAGE> 23
reference to the comparable section, if any, of any such similar
Federal statute.
4. RULE 144. The Company shall timely file the reports required to be
filed by it under the Securities Act and the Exchange Act (including but not
limited to the reports under Sections 13 and 15(d) of the Exchange Act referred
to in subparagraph (c) of Rule 144 adopted by the Commission under the
Securities Act) (or, if the Company is not required to file such reports, will,
upon the request of any holder of Registrable Securities, make publicly
available other information) and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or (b) any similar rule or regulation hereafter adopted by
the Commission. Upon the request of any holder of Registrable Securities, the
Company will deliver to such holder a written statement as to whether it has
complied with the requirements of this Section 4.
5. AMENDMENTS AND WAIVERS. This Agreement may be amended and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the holder or
holders of a majority of the shares of Registrable Securities. Each holder of
any Registrable Securities at the time or thereafter outstanding shall be bound
by any consent authorized by this Section 5, whether or not such Registrable
Securities shall have been marked to indicate such consent.
6. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election, be treated as the holder of such
Registrable Securities for purposes of any request or other action by any holder
or holders of Registrable Securities pursuant to this Agreement or any
determination of any number or percentage of shares of Registrable Securities
held by any holder or holders of Registrable Securities contemplated by this
Agreement. If the beneficial owner of any Registrable Securities so elects, the
Company may require assurances reasonably satisfactory to it of such owner's
beneficial ownership of such Registrable Securities.
7. NOTICES. Except as otherwise provided in this Agreement, all
notices, requests and other communications to any Person provided for hereunder
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<PAGE> 24
shall be in writing and shall be given to such Person (a) in the case of a party
hereto other than the Company, addressed to such party in the manner set forth
in the applicable Purchase Agreement or at such other address as such party
shall have furnished to the Company in writing, or (b) in the case of any other
holder of Registrable Securities, at the address that such holder shall have
furnished to the Company in writing, or, until any such other holder so
furnishes to the Company an address, then to and at the address of the last
holder of such Registrable Securities who has furnished an address to the
Company, or (c) in the case of the Company, at One Athenaeum Street, Cambridge,
Massachusetts 02142 to the attention of its President, or at such other address,
or to the attention of such other officer, as the Company shall have furnished
to each holder of Registrable Securities at the time outstanding. Each such
notice, request or other communication shall be effective (i) if given by mail,
72 hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (ii) if given by any other means
(including, without limitation, by air courier), when delivered at the address
specified above, PROVIDED that any such notice, request or communication to any
holder of Registrable Securities shall not be effective until received.
8. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express assignment
shall have been made, the provisions of this Agreement which are for the benefit
of the parties hereto other than the Company shall also be for the benefit of
and enforceable by any subsequent holder of any Registrable Securities, subject
to the provisions respecting the minimum numbers or percentages of shares of
Registrable Securities required in order to be entitled to certain rights, or
take certain actions, contained herein and provided that the rights of the
Purchasers hereunder may only be assigned to holders of at least 75,000 shares
of Convertible Preferred Stock or underlying Conversion Shares. Any assignee
must agree in writing to be bound by the provisions of this Agreement.
9. DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF
THE COMMONWEALTH OF MASSACHUSETTS WITHOUT REFERENCE TO THE PRINCIPLES OF
CONFLICTS OF LAWS.
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<PAGE> 25
11. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
12. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the Company and each other party hereto relating to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
13. SEVERABILITY. If any provision of this Agreement, or the
application of such provisions to any Person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to Persons or circumstances other than those to which it is held invalid, shall
not be affected thereby.
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<PAGE> 26
IN WITNESS WHEREOF, each of the undersigned has caused the foregoing
Agreement to be executed under seal by one of its duly authorized officers as of
the date first above written.
THE LEARNING COMPANY, INC.
By: /s/ R. Scott Murray
---------------------------------
Name: R. Scott Murray
Title: Executive Vice President
and Chief Financial Officer
23
<PAGE> 27
PURCHASERS:
THOMAS H. LEE EQUITY FUND III, L.P.
By: THL Equity Advisors III Limited
Partnership, as General Partner
By: THL Equity Trust III,
as General Partner
By: /s/ Anthony J. DiNovi
--------------------------------------
Name: Anthony J. DiNovi
Title: Vice President
THOMAS H. LEE FOREIGN FUND III, L.P.
By: THL Equity Advisors III Limited
Partnership, as General Partner
By: THL Equity Trust III,
as General Partner
By: /s/ Anthony J. DiNovi
--------------------------------------
Name: Anthony J. DiNovi
Title: Vice President
THOMAS H. LEE COMPANY
By: /s/ Anthony J. DiNovi
--------------------------------------
Name: Anthony J. DiNovi
Title: Managing Director
24
<PAGE> 28
BAIN CAPITAL FUND V, L.P.
By: Bain Capital Partners V, L.P.,
as General Partner
By: Bain Capital Investors V, Inc.,
as General Partner
By: /s/ Mark E. Nunnelly
--------------------------------------
Name: Mark E. Nunnelly
Title: Managing Director
BAIN CAPITAL FUND V-B, L.P.
By: Bain Capital Partners V, L.P.,
as General Partner
By: Bain Capital Investors V, Inc.,
as General Partner
By: /s/ Mark E. Nunnelly
--------------------------------------
Name: Mark E. Nunnelly
Title: Managing Director
BCIP ASSOCIATES, L.P.
By: /s/ Mark E. Nunnelly
--------------------------------------
Name: Mark E. Nunnelly
Title: General Partner
BCIP TRUST ASSOCIATES, L.P.
By: /s/ Mark E. Nunnelly
--------------------------------------
Name: Mark E. Nunnelly
Title: Managing Director
25
<PAGE> 29
CENTRE CAPITAL INVESTORS II, L.P.
CENTRE CAPITAL TAX-EXEMPT INVESTORS II, L.P.
CENTRE CAPITAL OFFSHORE INVESTORS II, L.P.
By: Centre Partners II, L.P.,
as General Partner
By: Centre Partners Management LLC,
as Attorney-in-fact
By: /s/ [illegible]
----------------------------------------
Managing Director
STATE BOARD OF ADMINISTRATION OF FLORIDA
By: Centre Parallel Management Partners, L.P.,
as Manager
By: Centre Partners Management LLC,
as Attorney-in-fact
By: /s/ [illegible]
----------------------------------------
Managing Director
CENTRE PARALLEL MANAGEMENT PARTNERS, L.P.
CENTRE PARTNERS COINVESTMENT, L.P.
By: Centre Partners II LLC,
as General Partner
By: /s/ [illegible]
----------------------------------------
Managing Director
26
<PAGE> 1
Exhibit 10.6
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made effective as of this 6th day of February, 1997 by
and between THE LEARNING COMPANY, INC., a Delaware corporation (the
"Corporation"), and Neal S. Winneg (the "Executive").
WHEREAS the Corporation desires to employ the Executive in the position of
Vice President and General Counsel or a position with similar responsibilities,
and the Executive wishes to be so employed by the Corporation.
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
ARTICLE I
EMPLOYMENT
1.1 EMPLOYMENT AND POSITION. Effective as of the date hereof and for the Term
(as defined in Section 3.1 herein), the Corporation hereby employs the Executive
in the capacity of Vice President and General Counsel, and the Executive hereby
accepts such employment, all on and pursuant to the terms and conditions set out
herein.
1.2 DUTIES AND RESPONSIBILITIES. The Executive shall have such powers and
duties as are customarily associated with the office or offices of the
Corporation held by the Executive and as may from time to time be prescribed by
the Board of Directors of the Corporation (the "Board") or the Chief Executive
Officer or such other officer to whom the Executive may then report.
Notwithstanding the foregoing, it is expressly understood and agreed that the
Board may at any time give any other person authority equivalent or superior to
that of the Executive if, in the reasonable judgment of the Board such a change
is advisable under the circumstances.
1.3 FULL TIME AND ATTENTION. The Executive shall well and faithfully serve the
Corporation and its subsidiaries and shall devote his or her full working time
and attention to the business and affairs of the Corporation and its
subsidiaries and the performance of his or her duties and responsibilities
hereunder; PROVIDED, HOWEVER, that the Executive may participate in other
business ventures and activities from time to time which do not interfere with
his or her duties hereunder.
1.4 PROHIBITED INTERESTS. Neither the Executive nor any member of his or her
immediate family shall purchase or hold an interest in any company doing
business with the Corporation (other than as a customer of the Corporation) or
competing with the Corporation other than a two percent or lesser interest in
publicly traded stock or such other interests to which the Corporation has given
its prior written consent.
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<PAGE> 2
ARTICLE II
REMUNERATION AND BENEFITS
2.1 ANNUAL BASE SALARY. Effective as of the date hereof and for each year of
employment during the Term (an "Employment Year"), the Corporation shall pay to
the Executive an annual base salary (the "Annual Base Salary") of not less than
$200,000. The Annual Base Salary shall be payable twice monthly in equal
installments or in such other regular installments as the Corporation may pay
its employees from time to time.
2.2 BENEFITS. The Corporation shall provide to the Executive benefits
consistent with benefits provided under the existing benefit plans, practices,
programs and policies of the Corporation in effect for executive officers from
time to time during the Term.
2.3 VACATION. The Executive shall be entitled to paid vacation in accordance
with the Corporation's vacation policy, as the same may be in effect from time
to time; provided, however that the Executive shall be entitled to at least four
weeks of paid vacation per year.
2.4 BONUS. In addition to the Annual Base Salary, the Executive shall be
eligible to receive a targeted annual cash bonus of not less than $100,000 (the
"Bonus"), payable in quarterly installments, based upon the same financial
performance objectives approved by the Corporation's Compensation Committee (the
"Compensation Committee") for each Employment Year for determination of the
bonus of the Chief Executive Officer of the Corporation. If the Chief Executive
Officer of the Corporation ceases to be compensated in part by means of a bonus
based on financial performance objectives approved by the Corporation's
Compensation Committee, then the Bonus will be based on quantifiable performance
objectives mutually agreed to by the Executive and the Chief Executive Officer.
2.5 EXPENSES. During the Term the Corporation will reimburse the Executive for
all normal and customary expenses incurred by the Executive in carrying out his
or her duties under this Agreement, provided that the Executive complies with
the policies, practices and procedures of the Corporation for submission of
expense reports, receipts or other similar documentation of such expenses.
ARTICLE III
TERM AND TERMINATION
3.1 TERM. Unless otherwise terminated in accordance with the provisions hereof,
this Agreement shall have a term of two years from the effective date hereof, as
the same is first set forth above (the "Term"). On the expiration of the Term
and on each anniversary of the expiration of the Term this Agreement shall
automatically renew for an additional one year period (each of which renewal
periods shall form part of the Term) unless the Corporation notifies the
Executive in writing three months in advance of the expiration of the Term, or
any subsequent anniversary thereof, that the Corporation does not wish to
further extend this Agreement.
2
<PAGE> 3
3.2 TERMINATION FOR JUST CAUSE.
(a) The Corporation may terminate the employment of the Executive hereunder
at any time for Just Cause, such termination to be communicated by the
Corporation to the Executive by written notice. For the purposes hereof, "Just
Cause" means a determination by the Board, in the exercise of its reasonable
judgment and after permitting the Executive a reasonable opportunity to be
heard, that any of the following has occurred:
(i) the willful and continued failure by the Executive to perform his
or her duties and responsibilities with the Corporation under this Agreement
(other than any such failure resulting from incapacity due to physical or mental
illness or disability) which is not cured within 30 days of receiving written
notice from the Corporation specifying in reasonable detail the duties and
responsibilities which the Corporation believes are not being adequately
performed;
(ii) the willful engaging by the Executive in any act which is
demonstrably and materially injurious to the Corporation;
(iii) the conviction of the Executive of a criminal offense involving
fraud, dishonesty or other moral turpitude;
(iv) any material breach by the Executive of the terms of this
Agreement or any other written agreement between the Executive and the
Corporation relating to proprietary information, confidentiality,
non-competition or non-solicitation which is not cured within 30 days of
receiving written notice from the Corporation specifying in reasonable detail
such breach; or
(v) the engaging by the Executive in any intentional act of dishonesty
resulting or intended to result, directly or indirectly, in personal gain to the
Executive at the Corporation's expense.
(b) Upon the termination of the Executive's employment for Just Cause, the
Executive shall not be entitled to any severance, termination or other
compensation payment other than unpaid base salary earned by the Executive up to
the date of termination, together with any amount to which the Executive may be
entitled under the provisions of applicable employment legislation in force at
the date of termination of the Executive's employment (less any deductions
required by law).
3.3 TERMINATION WITHOUT JUST CAUSE OR FOR GOOD REASON.
(a) The Corporation may terminate the employment of the Executive hereunder
at any time without Just Cause, such termination to be communicated by the
Corporation to the Executive by at least 30 days prior written notice. In
addition, the Executive may terminate his or her employment for Good Reason,
such termination to be communicated by the Executive to the Corporation by at
least 30 days prior written notice. For purposes of this Agreement, "Good
Reason" shall mean (i) a substantial diminution in the Executive's
3
<PAGE> 4
position, duties, responsibilities or authority with the Corporation, (ii) any
purported termination of the Executive's employment which is not effected in
accordance with this Agreement (which purported termination shall not be
effective), (iii) the failure of the Corporation to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
contemplated in Section 4.8 hereof, (iv) any requirement by the Corporation that
the Executive move or maintain his principal business office more than 30 miles
from Boston, Massachusetts or (v) any material breach by the Corporation of this
Agreement which is not cured within 30 days of receiving written notice from the
Executive specifying in reasonable detail such breach. The Executive's right to
terminate his or her employment for Good Reason shall not be affected by his or
her incapacity due to physical or mental illness or disability. The Executive's
continued employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason hereunder.
(b) Upon the termination of the Executive's employment without Just Cause
or for Good Reason, the Corporation shall have the following obligations:
(i) if not theretofore paid, the Corporation shall pay to or to the
order of the Executive within 10 days after the date of termination of the
Executive's employment hereunder any unpaid base salary earned by the
Executive up to the date of termination (less any deductions required by
law);
(ii) the Corporation shall pay to or to the order of the Executive, in
equal installments in accordance with its normal payroll practices over an
eighteen month period, as compensation for the Executive's loss of
employment, an amount equal to one and one-half times the Annual Base
Salary then in effect plus one and one-half times the maximum Bonus then in
effect payable pursuant to Section 2.4 hereof (less any deductions required
by law); and
(iii) the Corporation shall take all action necessary, consistent with
applicable stock option and incentive plans, to permit immediate vesting of
the Executive's then outstanding options for the purchase of capital stock
of the Corporation.
3.4 TERMINATION UPON DEATH OR DISABILITY OR BY EXECUTIVE FOR OTHER THAN GOOD
REASON.
(a) The Corporation may terminate the employment of the Executive hereunder
at any time forthwith upon the death or permanent disability of the
Executive, such termination to be communicated by written notice given by
the Corporation to the Executive or, in the event of the death of the
Executive, to his or her personal representative or his or her estate. The
Executive shall be considered to have become permanently disabled if in any
period of 12 consecutive months during the Term, because of ill health,
physical or mental disability, or for other causes beyond the control of
the Executive, the Executive has been or is reasonably likely to be
continuously unable or unwilling or has failed to perform his or her duties
and responsibilities hereunder for 120 consecutive days,
4
<PAGE> 5
or if, during any period of 12 consecutive months during the Term, the Executive
has been unable or unwilling or has failed to perform his or her duties and
responsibilities hereunder for a total of 180 days, consecutive or not.
(b) The Executive may, upon three months' prior written notice to the
Corporation, voluntarily terminate his or her employment hereunder for other
than Good Reason.
(c) On termination of the Executive's employment as a result of the
Executive's death or as a result of the Executive having become permanently
disabled, or upon the termination by the Executive of his or her or her
employment for other than Good Reason, the Corporation shall pay to the
Executive or his or her personal representative on behalf of the estate of the
Executive, within 10 days after date of termination of the Executive's
employment, any unpaid base salary earned by the Executive up to the date of
termination, together with any amount to which the Executive may be entitled
under the provisions of applicable employment legislation in force at the date
of termination of the Executive's employment (less any deductions required by
law).
(d) The several payments and other obligations of the Corporation described
in this Section 3.4 are the only severance, compensation or termination payments
or benefits that the Executive will receive in the event of any termination of
employment set forth in this Section 3.4.
3.5 RETURN OF PROPERTY. Upon the termination of the employment of the Executive
hereunder, regardless of the reason therefor, the Executive will immediately
deliver or cause to be delivered to the Corporation all books, documents,
effects, money, securities, equipment or other property (including manuals,
computer disks and software products) belonging to the Corporation, or for which
the Corporation is liable to others, which are in the possession, charge or
custody of the Executive. The Executive agrees not to make for personal or
business use or for the use of any other party any reproductions or copies of
any such books, documents, effects or other property belonging to the
Corporation or for which the Corporation is liable to others.
ARTICLE IV
GENERAL
4.1 CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity
for the benefit of the Corporation all secret or confidential information,
knowledge or data relating to the Corporation and its subsidiaries and their
respective businesses which shall have been obtained by the Executive during the
Executive's employment by the Corporation and which shall not be or become
public knowledge (other than by acts of the Executive or representatives of the
Executive in violation of this Agreement). If the employment of the Executive
hereunder is terminated for any reason, the Executive shall not, without the
prior written consent of the Corporation or as may otherwise be required by law
or legal process, communicate or divulge any such information, knowledge or data
to any person other than the Corporation and those persons designated by it.
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<PAGE> 6
4.2 NON-INTERFERENCE WITH PERSONNEL RELATIONS. During the Executive's
employment with the Corporation and for a period of twelve months thereafter,
the Executive will not, directly or indirectly, solicit, entice or persuade any
employee of the Corporation or any of its subsidiaries to leave the services of
the Corporation for any reason.
4.3 EQUITABLE RELIEF. The Executive acknowledges that a breach of the
restrictions contained in Sections 4.1 and 4.2 hereof will cause irreparable
damage to the Corporation, the exact amount of which will be difficult to
ascertain, and that the remedies at law for any such breach will be inadequate.
Accordingly, the Executive and the Corporation agree that if the Executive
breaches or attempts to breach any of the restrictions contained in Sections 4.1
and 4.2 hereof, then the Corporation shall be entitled to temporary or permanent
injunctive relief with respect to any such breach or attempted breach (in
addition to any other remedies, at law or in equity, as may be available to the
Corporation), without posting bond or other security.
4.4 RESIGNATIONS. If the employment of the Executive hereunder is terminated in
accordance with the terms of this Agreement, the Executive shall tender his or
her resignation from all positions he may hold as an officer or director of the
Corporation or any of its subsidiaries.
4.5 MITIGATION. The Executive shall have no duty to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Agreement be reduced by
any compensation earned by the Executive as the result of employment by another
employer after the date of termination of the Employee's employment with the
Corporation, or otherwise.
4.6 NOTICES. Any notice required or permitted to be given under this Agreement
shall be in writing and shall be properly given if delivered personally or
mailed by prepaid registered mail addressed as follows:
(a) in the case of the Corporation, to:
The Learning Company, Inc.
One Athenaeum Street
Cambridge, Massachusetts 02142
Attention: Chief Executive Officer
(b) in the case of the Executive, to:
Neal S. Winneg
11 Highfields
Wayland, MA 01778
or to such other address as the parties may from time to time specify by notice
given in accordance herewith. Any notice so given shall be conclusively deemed
to have been given or made on the day of delivery, if delivered, or, if mailed
by registered mail, upon the date shown on the postal return receipt as the date
upon which the envelope containing such
6
<PAGE> 7
notice was actually received by the addressee.
4.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties with respect to the employment relationship contemplated hereby and
cancels and supersedes all prior understandings and agreements between the
parties with respect thereto, and no agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
4.8 SUCCESSORS AND ASSIGNS. Neither the Executive nor the Corporation may
assign its rights hereunder to another person without the consent of the other;
provided, however, that the Corporation may assign its rights hereunder to a
successor corporation which acquires (whether directly or indirectly, by
purchase, arrangement, merger, consolidation, dissolution or otherwise) all or
substantially all of the business or assets of the Corporation and expressly
assumes and agrees to perform this Agreement in the same manner and to the same
extent that the Corporation would be required to perform it if no such
succession had taken place and provided that such successor shall reasonably be
able to perform all of its obligations under this Agreement. As used in this
Agreement, the term "Corporation" shall mean the Corporation (as herein defined)
and any successor to its business or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law or otherwise.
4.9 ENUREMENT. This Agreement shall enure to the benefit of and be binding upon
the Executive and his or her personal representatives and upon the Corporation
and its successors and permitted assigns.
4.10 FURTHER ASSURANCES. Each of the Corporation and the Executive agrees to
execute all such documents and to do all such acts and things as the other party
may reasonably request and as may be lawful and within its power to do or to
cause to be done in order to carry out or implement in full the provisions and
intent of this Agreement.
4.11 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the federal
laws of the United States of America applicable therein. Each of the parties
assents to the jurisdiction of the courts of the Commonwealth of Massachusetts
to hear any action, suit or proceeding arising in connection with this
Agreement.
4.12 WAIVER OF RIGHTS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
by the party against whom the same is sought to be enforced and no failure by
any party to enforce any of its rights hereunder shall, except as aforesaid, be
deemed to be a waiver of such right. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
provision of this Agreement to be performed by such other party shall be deemed
to be a waiver of a similar or dissimilar provision hereof at the same or at any
prior or subsequent time.
4.13 MANDATORY ARBITRATION. Except as expressly stated below, any dispute,
controversy or claim arising out of or relating to my employment by the
Corporation or its
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<PAGE> 8
termination, including but not limited to claims of unlawful discrimination or
harassment (collectively, the "Arbitrable Claims"), will be settled by binding
arbitration in (a) Boston or Cambridge, Massachusetts (if the Executive's
primary place of work is in Massachusetts), or (b) Fremont or San Francisco,
California (if the Executive's primary place of work is in California) or (c) in
such city as is located the office of the Corporation in which constitutes the
Executive's primary place of work (if the Executive's primary place of work is
not in Massachusetts or California), in accordance with the then current rules
of the American Arbitration Association (the "AAA"), before an experienced
employment arbitrator licensed to practice law in the state in which the
arbitration is conducted (the "Arbitration Site") and selected in accordance
with the Model Employment Arbitration Procedures of the AAA. Notwithstanding the
foregoing, and for purposes of clarity, each of the Corporation and the
Executive acknowledges and agrees that any Arbitrable Claim shall be governed by
the internal laws of the Commonwealth of Massachusetts (regardless of the
Arbitration Site) without regard to the laws that might otherwise apply under
applicable principles of conflicts of laws. The Corporation and the Executive
each knowingly waive the right to a jury trial in a court of law with respect to
the Arbitrable Claims. For purposes of any arbitration under this Section 4.13,
the Corporation and the Executive hereby incorporate by reference, and adopt all
of the discovery rights and procedures referenced in, the Massachusetts Code of
Civil Procedure, and agree that each of the Corporation and the Executive shall
pay the fees of its, his or her own attorneys, the expenses of its, his or her
own witnesses and any other expenses connected with presenting its, his or her
own claims. The fees of the arbitrator will be paid half by the Executive and
half by the Corporation, provided that the Corporation will pay 100% of any
portion of the arbitrator's fee that exceeds $1000. The Arbitrator shall have
the power to summarily adjudicate claims and/or enter summary judgment in
appropriate cases. Notwithstanding any of the foregoing, any claim or
counterclaim brought for infringement or misappropriation of any patent,
copyright, trade secret, trademark or other proprietary right shall not be
subject to arbitration, and neither the Executive nor the Corporation waive any
right to submit any such claim, or any factual or legal issues relating to such
a claim, to a court of competent jurisdiction.
IN WITNESS WHEREOF the parties hereto have executed this Agreement on the
date and year first above written.
/s/ Neal S. Winneg
---------------------------------------
NEAL S. WINNEG
THE LEARNING COMPANY, INC.
By: /s/ Michael J. Perik
-----------------------------------
Michael J. Perik
Chief Executive Officer
8
<PAGE> 1
Exhibit 10.13
SIXTH AMENDMENT TO LOAN DOCUMENTS
AMENDMENT dated as of December 31, 1997 (the "AMENDMENT") by and among TLC
MULTIMEDIA INC., a Minnesota corporation f/k/a/ "SoftKey Inc." (hereinafter,
"MULTIMEDIA"), MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC), a Minnesota
corporation ("MECC"), and TLC PROPERTIES INC., a Massachusetts corporation
f/k/a "SoftKey Multimedia Inc." (hereinafter "PROPERTIES"), each referred to
hereinafter as a "BORROWER" and, collectively, as the "BORROWERS", and FLEET
NATIONAL BANK, as successor in interest to Fleet Bank of Massachusetts, N.A.
(together with its successors, the "BANK").
PRELIMINARY STATEMENT
1. Multimedia and its corporate affiliates MECC and Properties, each a
wholly-owned subsidiary of The Learning Company, Inc., a Delaware Corporation
f/k/a "SoftKey International Inc." (hereinafter, the "GUARANTOR"), are parties
with the Bank to a Credit Agreement dated as of September 30, 1994, as
previously amended by a letter amendment dated as of December 5, 1994, a Second
Amendment to Loan Documents dated as of May 17, 1995, a Third Amendment to Loan
Documents dated as of December 22, 1995, a Fourth Amendment to Loan Documents
dated as of February 28, 1996 and a Fifth Amendment to Loan Documents dated as
of October 4, 1996 (as so amended and as the same may be amended, supplemented
or otherwise modified from time to time, the "CREDIT AGREEMENT"). Unless
otherwise defined herein, capitalized terms used herein shall have the same
respective meanings as set forth in the Credit Agreement.
2. The Bank and the Borrowers wish to amend the Credit Agreement to
extend the Commitment Expiration Date from June 30, 1998 to June 30, 1999 and
to extend the Maturity Date from July 1, 1998 to July 1, 1999.
3. The Bank and the Borrowers wish to make provision for a future
amendment of the Credit Agreement and the other Loan Documents to include
Creative Wonders Inc., a Delaware corporation and wholly-owned subsidiary of
Guarantor ("CREATIVE WONDERS"), as a party to the Credit Agreement and as a
Co-Borrower with the other Borrowers.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. AMENDMENTS TO CREDIT AGREEMENT.
1.1 Section 1.1 is hereby amended by deleting the date "June 30,
1998" appearing in the fourth line thereof (defined therein as the "Commitment
Expiration Date") and substituting in lieu thereof the date "June 30, 1999".
1.2 Section 1.5 is hereby amended by deleting the date "July 1,
1998" appearing in the third line thereof (defined therein as the "Maturity
Date") and substituting in lieu thereof the date "July 1, 1999".
<PAGE> 2
-2-
Section 2. SPECIAL COVENANTS WITH REGARD TO THE ADDITION OF CREATIVE WONDERS AS
A CO-BORROWER.
The Borrowers agree to enter into, on or before January 31, 1998,
agreements with the Bank and Creative Wonders, in form and substance
satisfactory to the Bank, whereby the Credit Agreement will be amended to
include Creative Wonders as a party thereto and Creative Wonders will become
jointly and severally liable with the Borrowers under the Credit Agreement and
the other Loan Documents and shall become, for all purposes thereof, a
"Borrower" thereunder. The Borrowers further agree (a) to provide the Bank, on
or before January 31, 1998, with an updated list of the Borrower's intellectual
property referred to in Section 6.12 of the Credit Agreement and (b) to cause
Creative Wonders and the Borrowers to enter, on or before January 31, 1998,
into other such agreements with the Bank (including, without limitation,
security agreements covering some or all of their assets and properties) as the
Bank shall deem appropriate.
Section 3. CONDITIONS OF EFFECTIVENESS.
This Amendment shall be deemed effective as of December 30, 1997 (the
"EFFECTIVE DATE"), provided that the Bank shall have received on or before such
date two (2) copies of this Amendment executed by each Borrower and consented
to by the Guarantor.
Section 4. CONFIRMATION OF REPRESENTATIONS, ABSENCE OF DEFAULT.
Each Borrower hereby confirms that the representations set forth in the
Loan Documents are true and correct as of the date hereof, subject to the
exceptions and further disclosures set forth in SCHEDULE A hereto. Each
Borrower hereby confirms that, except as set forth in Section 4 hereof or in
SCHEDULE A hereto, no Event of Default has occurred and is continuing under the
Credit Agreement.
Section 5. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
5.1 Upon the Effective Date, each occurrence in the Credit Agreement
of "this Credit Agreement", "hereunder", "hereof", "herein", or words of like
import referring to the Credit Agreement, and each occurrence in each of the
other Loan Documents to "the Credit Agreement", "thereunder", "thereof",
"therein", or words of like import referring to the Credit Agreement, shall
mean to be a reference to the Credit Agreement as amended hereby.
5.2 Except as specifically amended above, the Credit Agreement each
of the other Loan Documents shall remain in full force and effect and is hereby
ratified and confirmed. Each Borrower (and the Guarantor by its consent to
this Agreement) agrees that, as of the date hereof, it has no defenses against
the obligations represented by the Credit Agreement and the other Loan
Documents.
5.3 The amendments set forth herein (i) do not constitute a waiver
or modification of any term, condition or covenant of the Credit Agreement or
any other Loan Documents or any of the instruments or documents referred to by
the foregoing documents, other than as expressly set forth herein, and (ii)
shall not prejudice any rights which the Bank may now or hereafter have under
or in connection with the Credit Agreement, the other Loan Documents or any of
the instruments or documents referred to therein.
Section 6. COST AND EXPENSES.
Each Borrower agrees, jointly and severally, to pay on demand all costs
and expenses of the Bank in connection with the preparation, reproduction,
execution and delivery of this Amendment and any other instruments and
documents to be delivered hereunder, including the reasonable fees and
out-of-pocket expenses of Sullivan & Worcester LLP, special counsel for the
Bank with respect thereto.
<PAGE> 3
-3-
Section 7. GOVERNING LAW.
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
Section 8. COUNTERPARTS.
This Amendment may be signed in one or more counterparts each of which
shall constitute an original and all of which, when taken together, shall
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be
executed under seal by their respective officers thereunto duly authorized as of
the date first above written.
TLC MULTIMEDIA INC.
By: /s/ R. Scott Murray
--------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
MINNESOTA EDUCATIONAL
COMPUTING CORPORATION (MECC)
By: /s/ R. Scott Murray
--------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
TLC PROPERTIES INC.
By: /s/ R. Scott Murray
--------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
<PAGE> 4
-4-
FLEET NATIONAL BANK, as successor in
interest to Fleet Bank of
Massachusetts, N.A.
By: /s/ William E. Rurode
------------------------------
Name: William E. Rurode, Jr.
Title: Senior Vice President
<PAGE> 5
SCHEDULE A
EXCEPTIONS AND QUALIFICATIONS TO REPRESENTATIONS
(Section 6 of this Amendment)
[If none, please initial: /s/RSM]
--------
<PAGE> 6
CONSENT
The undersigned, as Guarantor under the Guaranty dated as of September 30,
1994, as amended (the "Guaranty"), in favor of Fleet National Bank (successor
to Fleet Bank of Massachusetts, N.A.), hereby consents to the foregoing
amendment to the Credit Agreement dated as of September 30, 1994, as amended
(the "Credit Agreement"), and hereby confirms and agrees that the Guaranty is,
and shall continue to be, in full force and effect and is hereby ratified and
confirmed in all respects, except that, upon the effectiveness of, and on and
after the date of, said amendment, each occurrence in the Guaranty and in each
other Loan Document (as defined in the Credit Agreement) to which the
undersigned is a party, of "the Credit Agreement", "thereunder", "thereof",
"therein", or words of like import referring to the Credit Agreement shall
mean and be a reference to the Credit Agreement, as amended thereby.
THE LEARNING COMPANY, INC.
By: /s/ R. Scott Murray
----------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
<PAGE> 1
Exhibit 10.18
THE LEARNING COMPANY, INC.
LONG TERM EQUITY INCENTIVE PLAN
RESTATED AS OF DECEMBER 4, 1997
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
<PAGE> 2
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.
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.
<PAGE> 3
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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<PAGE> 4
33. "TERMINATION" means, for purposes of the Plan, with
respect to a participant, that the participant has ceased to be, for any reason,
with or without cause, an employee of, or a consultant to, the Company, or a
Subsidiary or Affiliate of the Company, such that such participant is neither an
employee of, or a consultant to, the Company, a Subsidiary, or any Affiliate.
2. ADMINISTRATION.
A. COMMITTEE. The Plan shall be administered by the Board or,
upon delegation by the Board, by a committee of the Board comprised of not less
than two members (i) each member of which shall be, to the extent required to
comply with Rule 16b-3 and unless the Committee determines that Rule 16b-3 is
not applicable to the Plan, a Non-Employee Director, and (ii) each member of
which shall be, to the extent required to comply with Section 162(m) and unless
the Committee determines that Rule 162(m) is not applicable to the Plan, an
Outside Director. In connection with the administration of the Plan, the
Committee shall have the powers possessed by the Board. The Committee may act
only by a majority of its members, except that the Committee (i) may authorize
any one or more of its members or any officer of the Company to execute and
deliver documents on behalf of the Committee and (ii) so long as not otherwise
required for the Plan to comply with Rule 16b-3 (unless the Committee determines
that Rule 16b-3 is not applicable to the Plan) and so long as not otherwise
required for the Plan to comply with Section 162(m) (unless the Committee
determines that Section 162(m) is not applicable to the Plan), may delegate to
one or more officers or directors of the Company authority to grant Awards to
persons who are not subject to Section 16 of the Exchange Act with respect to
Stock and who are not Covered Employees. The Board at any time may abolish the
Committee and revest in the Board the administration of the Plan.
B. AUTHORITY. The Committee shall grant Awards to eligible
employees and consultants. In particular and without limitation, the Committee,
subject to the terms of the Plan, shall:
1. Select the officers, other employees and consultants to
whom Awards may be granted;
2. Determine whether and to what extent Awards are to be
granted under the Plan;
3. Determine the number of shares to be covered by each Award
granted under the Plan;
(a) determine the terms and conditions of any Award
granted under the Plan and any related loans to be made by the Company, based
upon factors determined by the Committee;
(b) determine to what extent and under what circumstances
any
4
<PAGE> 5
Award payments may be deferred by a Plan participant; and
4. Make adjustments in the Performance Goals (as hereinafter
defined) in recognition of unusual or non-recurring events affecting the Company
or the financial statements of the Company, or in response to changes in
applicable laws, regulations, or accounting principles.
C. COMMITTEE DETERMINATIONS BINDING. The Committee may adopt,
alter and repeal administrative rules, guidelines and practices governing the
Plan as it from time to time shall deem advisable, interpret the terms and
provisions of the Plan, any Award, any Award Agreement and otherwise supervise
the administration of the Plan. Any determination made by the Committee pursuant
to the provisions of the Plan with respect to any Award shall be made in its
sole discretion at the time of the grant of the Award or, unless in
contravention of any express term of the Plan or Award, at any later time. All
decisions made by the Committee under the Plan shall be binding on all persons,
including the Company and Plan participants.
3. STOCK SUBJECT TO PLAN.
A. NUMBER OF SHARES. The total number of shares of Stock reserved
and available for issuance pursuant to Awards under the Plan shall be 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.
5
<PAGE> 6
C. ADJUSTMENTS. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split, spin-off, sale of
substantial assets or other change in corporate structure affecting the Stock,
such substitution or adjustments shall be made in the aggregate number and kind
of shares of Stock reserved for issuance under the Plan, in the number, kind and
exercise price of shares subject to outstanding Options, in the number, kind and
purchase price of shares subject to outstanding Stock Purchase Rights and in the
number and kind of shares subject to other outstanding Awards, as may be
determined to be appropriate by the Committee in its sole discretion; provided
that the number and kind of shares subject to any Award shall always be rounded
down to the nearest whole number; and provided further that with respect to
Incentive Stock Options, such adjustment shall be made in accordance with
Section 424 of the Code. Such adjusted exercise price shall also be used to
determine the amount payable by the Company upon the exercise of any Stock
Appreciation Right associated with any Option.
4. ELIGIBILITY.
Awards may be granted to officers and other employees of, and
consultants to, the Company, its Subsidiaries and its Affiliates (excluding any
person who serves only as a director).
5. STOCK OPTIONS.
A. TYPES. Any Option granted under the Plan shall be in such form
as the Committee may from time to time approve. The Committee shall have the
authority to grant to any Plan participant Incentive Stock Options,
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:
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
6
<PAGE> 7
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
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Stock Option, the Stock Appreciation Right may be granted either simultaneously
with the grant of the related Non-Qualified Stock Option or at any time during
the term of such related Non-Qualified Stock Option. No consideration shall be
paid by a participant with respect to a Stock Appreciation Right.
B. WHEN EXERCISABLE. A Stock Appreciation Right shall be
exercisable at such times and in whole or in part, each as determined by the
Committee, subject, with respect to Plan participants subject to Section 16(b)
of the Exchange Act, to Rule 16b-3. Any exercise by the participant of a Stock
Appreciation Right for cash shall be made only during the window period
specified in Rule 16b-3(e)(3)(iii) and any successor rule (the "Window Period"),
unless the Committee determines that Rule 16b-3 is not applicable to the Plan.
If a Stock Appreciation Right is granted with respect to an Option, unless the
Award Agreement otherwise provides, the Stock Appreciation Right may be
exercised only to the extent to which shares covered by the Option are not at
the time of exercise subject to repurchase by the Company.
C. EFFECT ON RELATED RIGHT; TERMINATION OF STOCK APPRECIATION
RIGHT. If a Stock Appreciation Right granted with respect to
an Option is exercised, the Option shall cease to be exercisable and shall be
canceled to the extent of the number of shares with respect to which the Stock
Appreciation Right was exercised. Upon the exercise or termination of an Option,
related Stock Appreciation Rights shall terminate to the extent of the number of
shares as to which the Option was exercised or terminated, except that, unless
otherwise determined by the Committee at the time of grant, a Stock Appreciation
Right granted with respect to less than the full number of shares covered by a
related Option shall not be reduced until the number of shares covered by
exercise or termination of the related Option exceeds the number of shares not
covered by the Stock Appreciation Right. A Stock Appreciation Right granted
independently from an Option shall terminate and shall be no longer exercisable
at the time determined by the Committee at the time of grant, but not later than
10 years from the date of grant. Upon the Termination of the participant, a
Stock Appreciation Right granted with respect to an Option shall be exercisable
only to the extent to which the Option is then exercisable.
D. FORM OF PAYMENT UPON EXERCISE. Despite any attempt by a Plan
participant to elect payment in a particular form upon exercise of a Stock
Appreciation Right, the Committee, in its discretion, may elect to cause the
Company to pay cash, Stock, or a combination of cash and Stock upon exercise of
the Stock Appreciation Right.
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
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the Stock Appreciation Right may only be exercised during the Window Period, the
highest Fair Market Value on any day during the Window Period, and otherwise,
the Fair Market Value on the date the Stock Appreciation Right is exercised,
over (2) the exercise price per share of Stock of the related Option, or in the
case of a Stock Appreciation Right granted without reference to an Option, such
other price as the Committee establishes at the time the Stock Appreciation
Right is granted, by (y) the number of shares of Stock with respect to which a
Stock Appreciation Right is being exercised by (B) (1) if the Stock Appreciation
Right may only be exercised during the Window Period, the highest Fair Market
Value during the Window Period in which the Stock Appreciation Right was
exercised, and (2) otherwise, the Fair Market Value on the date the Stock
Appreciation Right is exercised; plus, if the foregoing calculation yields a
fractional share, an amount of cash equal to the applicable Fair Market Value
multiplied by such fraction (such payment to be the difference of the fractional
share); or
2. CASH. An amount in cash equal to the Stock Appreciation
Right Spread; or
3. CASH AND STOCK. A combination of cash and Stock, the
combined value of which shall equal the Stock Appreciation Right
Spread.
7. RESTRICTED STOCK.
Shares of Restricted Stock shall be subject to the following terms
and conditions:
A. PRICE. Plan participants awarded Restricted Stock, within 45
days of receipt of the applicable Award Agreement, which in no event shall be
later than ten (10) days after the Award grant date, shall pay to the Company,
if required by applicable law, an amount equal to the par value of the Stock
subject to the Award. If such payment is not made and received by the Company by
such date, the Award of Restricted Stock shall lapse.
B. RESTRICTIONS. Subject to the provisions of the Plan and the
Award Agreement, during a period set by the Committee, commencing with, and not
exceeding 10 years from, the date of such award (the "Restriction Period"), the
Plan participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock. Within these limits, the
Committee may in its discretion provide for the lapse of such restrictions in
installments and may accelerate or waive such restrictions, in whole or in part,
based on 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
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for any reason during the Restriction Period, all shares still subject to
restriction shall be forfeited by the participant.
E. SPECIAL PROVISIONS REGARDING AWARDS. Notwithstanding anything
to the contrary contained in this Section 7, (i) all awards of Restricted Stock
granted pursuant to this Section 7 to participants who are employees whom the
Committee determines are likely to be Covered Employees at the end of the year
shall have restrictions which will lapse contingent on the attainment of
performance goals based on the attainment of an amount of Pre-tax Profit of the
Company during a tax year and (ii) in no event shall the grant of Restricted
Stock in any fiscal year be made to an employee whom the Committee determines is
likely to be a Covered Employee at the end of the year with a Fair Market Value
as of the date of grant which exceeds the lesser of (i) 100% of such
Participant's Annual Base Salary and (ii) $500,000.
F. TIME AND FORM OF PAYMENT. In the case of Plan participants who
are Covered Employees as of the end of the year, unless otherwise determined by
the Committee, shares of Restricted Stock shall be released from restrictions
only after achievement of the applicable performance goals has been certified by
the Committee.
8. STOCK PURCHASE RIGHTS.
A. PRICE. The Committee may grant Stock Purchase Rights which
shall enable the recipients to purchase Stock at a price equal to not less than
50%, and not more than 100%, of Fair Market Value on the date of grant.
B. EXERCISABILITY. Stock Purchase Rights shall be exercisable for
a period determined by the Committee not exceeding 30 days from the date of
grant. The Committee, however, may provide that, if required under Rule 16b-3,
Stock Purchase Rights granted to persons subject to Section 16(b) of the
Exchange Act shall not become exercisable until six months and one day after the
grant date and shall then be exercisable for 10 trading days at the purchase
price specified by the Committee in accordance with Section 8A.
C. SPECIAL PROVISIONS REGARDING AWARDS. In no event shall any
awards be granted under this Section 8 to an employee who the Committee
determines is likely to be a Covered Employee at the end of the year.
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
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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
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the time of their first election to the Board, candidates proposed by a majority
of the Board in office prior to the time of such first election; or
3. The dissolution of the Company or liquidation of more than
50% in value of the Company or a sale of assets involving 50% or more in value
of the assets of the Company, (x) any merger or reorganization of the Company
whether or not another entity is the survivor, (y) a transaction pursuant to
which the holders, as a group, of all of the shares of the Company outstanding
prior to the transaction hold, as a group, less than 50% of the combined voting
power of the Company or any successor company outstanding after the transaction,
or (z) any other event which the Board determines, in its discretion, would
materially alter the structure of the Company or its ownership.
B. IMPACT OF EVENT. Except as expressly provided in any Award
agreement, in the event of a "Change in Control" as defined in Section 10A, the
following provisions shall apply:
1. Any Stock Appreciation Rights and Options outstanding as
of the date such Change in Control is determined to have occurred and not then
exercisable and vested shall become fully exercisable and vested; provided, that
in the case of the holder of Stock Appreciation Rights who is actually subject
to Section 16(b) of the Exchange Act, such Stock Appreciation Rights shall have
been outstanding for at least six months at the date such Change in Control is
determined to have occurred;
2. The restrictions and limitations applicable to any
Restricted Stock and Stock Purchase Rights shall lapse and such Restricted Stock
shall become fully vested;
3. The value (net of any exercise price and required tax
withholdings) of all outstanding Options, Stock Appreciation Rights, Restricted
Stock, and Stock Purchase Rights, unless otherwise determined by the Committee
at or after grant and subject to Rule 16b-3, shall be cashed out on the basis of
the "Change in Control Price," as defined in Section 11C., as of the date such
Change in Control is determined to have occurred or such other date as the Board
may determine prior to the Change in Control;
4. Any outstanding Performance Share Awards shall be vested
and paid in full as if all performance criteria had been met; provided, however,
that the foregoing provision shall only apply, with respect to the events
described in Section 10A.1, 10A.3(x), 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
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Company at any time during the preceding 60-day period as determined by the
Committee, except that in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, such price shall be
based only on transactions reported for the date on which the Board decides to
cash out such Options.
11. GENERAL PROVISIONS.
A. AWARD GRANTS. Any Award may be granted either alone or in
addition to other Awards granted under the Plan. Subject to the terms and
restrictions set forth elsewhere in the Plan, the Committee shall determine the
consideration, if any, payable by the participant for any Award and, in addition
to those set forth in the Plan, any other terms and conditions of the Awards.
The Committee may condition the grant or payment of any Award upon the
attainment of Performance Goals or such other factors or criteria, including
vesting based on continued employment or consulting, as the Committee shall
determine. Performance Goals may vary from Plan participant to Plan participant
and among groups of Plan participants and shall be based upon such Company,
subsidiary, group or division factors or criteria as the Committee may deem
appropriate, including, but not limited to, earnings per share or return on
equity (except as otherwise required for Plan participants who are Covered
Employees as of the end of the year in order to comply with Section 162(m)). The
other provisions of Awards also need not be the same with respect to each
recipient. Unless otherwise specified in the Plan or by the Committee, the date
of grant of an Award shall be the date of action by the Committee to grant the
Award. The Committee may also substitute new Options for previously granted
Options, including previously granted Options having higher exercise prices.
B. TYPES OF SHARES. The Committee, in its discretion, may
determine at the time of an Award that in lieu of Stock there shall be issuable
under, or applicable to the measurement of, any Award any of the following: (i)
Restricted Stock; (ii) shares of any series of common stock of the Company other
than Stock and shares of any series of common stock of any Subsidiary or
Affiliate 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.
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D. CERTIFICATES. All certificates for shares of Stock or other
securities delivered under the Plan shall be subject to such stock transfer
orders, legends and other restrictions as the Committee may deem advisable under
the rules, regulations and other requirements of the Commission, any stock
exchange upon which the Stock is then listed, any national market system over
which the Stock is then quoted and any applicable federal, state or foreign
securities law.
E. TERMINATION. With respect to Awards (other than Options), in
the event of Termination for any reason other than death or Disability, Awards
held at the date of Termination (and only to the extent then exercisable or
payable, as the case may be) may be exercised in whole or in part at any time
within 90 days after the date of Termination, or such lesser period specified in
the Award Agreement (but in no event after the expiration date of the Award),
but not thereafter. With respect to Options, in the event of Termination for any
reason other than death or Disability, Options held at the date of Termination
(to the extent then exercisable) may be exercised in whole or in part within 90
days after the date of Termination, or such other period (which may be longer or
shorter than 90 days) which shall be specified in the Award Agreement (but in no
event shall any Option remain exercisable after the expiration date of such
Option). If Termination is due to death or Disability, or a participant dies or
becomes disabled within the period that the Award remains exercisable or
payable, as the case may be, after Termination, only Awards (including Options)
held at the date of death or Disability (and only to the extent then exercisable
or payable, as the case may be) may be exercised in whole or in part by the
participant in the case of Disability, by the participant's personal
representative or by the person to whom the Award is transferred by will or the
laws of descent and distribution, at any time within 18 months after the death
or one year after the Disability, as the case may be, of the participant (or
such other period which shall be specified in the Award Agreement, but in no
event shall any Award remain exercisable after the expiration of such Award). In
the event of Termination by reason of the participant's retirement (as
determined in the exercise of the Committee's sole discretion), Awards
(including Options) may be exercised in whole or in part at any time within two
years after the date of Termination (or such other period which shall be
specified in the Award Agreement, but in no event shall any Award remain
exercisable after the expiration date of such Award).
F. DELIVERY OF PURCHASE PRICE. Plan participants shall make all
or any portion of any payment due to the Company with respect to the
consideration payable for, upon exercise of, or for federal, state, local or
foreign tax payable in connection with, an Award by 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
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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
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the laws of descent and distribution, and, during the life of the participant,
an Award shall be exercisable, and any elections with respect to an Award shall
be made, only by the Plan participant or such participant's guardian or legal
representative.
I. RIGHTS OF FIRST REFUSAL. At the time of grant, the Committee
may provide in connection with any Award that the shares of Stock received as a
result of such Award shall be subject to a right of first refusal pursuant to
which the participant shall be required to offer to the Company any shares that
the participant wishes to sell at the then Fair Market Value subject to such
other terms and conditions as the Committee may specify at the time of grant
J. ADJUSTMENT OF AWARDS; WAIVERS. The Committee may adjust the
Performance Goals and measurements applicable to Awards (i) to take into account
changes in law and accounting and tax rules, (ii) to make such adjustments as
the Committee deems necessary or appropriate to reflect the inclusion or
exclusion of the impact of extraordinary or unusual items, events, or
circumstances in order to avoid windfalls or hardships, (iii) to make such
adjustments as the Committee deems necessary or appropriate to reflect any
material changes in business conditions and (iv) in any other manner determined
in its discretion. In the event of hardship or other special circumstances of a
participant and otherwise in its discretion, the Committee may waive in whole or
in part any or all restrictions, conditions, vesting, or forfeiture with respect
to any Award granted to such Plan participant.
K. ELECTION TO DEFER PAYMENT. To the extent, if any, permitted by
the Committee, a Plan participant may elect, at such time as the Committee may
in its discretion specify, to defer payment of all or a portion of an Award.
L. NON-COMPETITION. The Committee may condition the Committee's
discretionary waiver of a forfeiture or vesting acceleration at the time of
Termination of a Plan participant holding any unexercised or unearned Award or
the waiver of restrictions upon any Award upon a requirement that such
participant agree to and actually (i) not engage in any business or activity
competitive with any business or activity conducted by the Company and (ii) be
available, unless such participant shall have died, for consultations at the
request of the Company's management, all on such terms and conditions (including
conditions in addition to (i) and (ii)) as the Committee may determine.
M. DIVIDENDS. The reinvestment of dividends in additional Stock
or Restricted Stock at the time of any dividend payment shall only be
permissible if sufficient shares of 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,
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qualification, consent, approval, agreement or representations shall have been
effected or obtained free of any conditions not acceptable to the Committee.
O. RIGHTS AS STOCKHOLDER. Unless the Plan or the Committee
expressly specifies otherwise, a Plan participant shall have no rights as a
stockholder with respect to any shares covered by an Award until the participant
is entitled, under the terms of the Award, to receive such shares. Subject to
Sections 3B. and 7C., no adjustment shall be made for dividends or other rights
for which the record date is prior to the date the certificates are delivered.
P. BENEFICIARY DESIGNATION. The Committee, in its discretion, may
establish procedures for a participant to designate a beneficiary to whom any
amounts payable in the event of the participant's death are to be paid.
Q. ADDITIONAL PLANS. Nothing contained in the Plan shall prevent
the Company or a Subsidiary or Affiliate of the Company from adopting other or
additional compensation arrangements for its employees.
R. NO EMPLOYMENT RIGHTS. The adoption of the Plan shall not
confer upon any employee any right to continued employment nor shall it
interfere in any way with the right of the Company or a Subsidiary or Affiliate
of the Company to terminate the employment of any employee at any time.
S. INTERPRETATION. Notwithstanding any provision of the Plan, the
Plan shall always be administered, and Awards shall always be granted and
exercised, in such a manner as to conform to the provisions of Rule 16b-3 and
Section 162(m), unless the Committee determines that Rule 16b-3 or Section
162(m) are not applicable to the Plan. The Plan is designed and intended to
comply with Rule 16b-3 and, to the extent applicable, with Section 162(m), and
all provisions hereof shall be construed in a manner to so comply.
T. GOVERNING LAW. The Plan and all Awards shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts.
U. USE OF PROCEEDS. All cash proceeds to the Company under the
Plan shall constitute general funds of the Company.
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".
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X. PLAN DESIGNATION AND STATUS. Notwithstanding the designation
of this document as a plan for convenience of reference and to standardize
certain provisions applicable to all types of Awards, each type of Award shall
be deemed to be a separate "plan" for purposes of Section 16 of the Exchange Act
and any applicable state securities laws.
12. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuance shall be made which would impair the rights of a
participant under an outstanding Award without the Plan participant's consent.
In addition, to the extent required for the Plan to comply with Rule 16b-3 or
Section 162(m) or, with respect to provisions solely as they relate to Incentive
Stock Options, to the extent required for the Plan to comply with Section 422A
of the Code, the Board may not amend or alter the Plan without the approval of a
majority of the votes cast at a duly held stockholders' meeting at which a
quorum of the voting power of the Company is represented in person or by proxy,
where such amendment or alteration would:
A. Except as expressly provided in the Plan, increase the total
number of shares reserved for issuance pursuant to Awards under the Plan;
B. Except as expressly provided in the Plan, change the minimum
price terms of Section 5B.3 or Section 8A;
C. Change the class of employees and consultants eligible to
participate in the Plan;
D. Extend the maximum Option term under Section 5B. or the
maximum exercise period under Section 8B.; or
E. Materially increase the benefits accruing to participants
under the Plan.
The Board of Directors may, at any time without stockholder approval,
amend the Plan and the terms of any Award outstanding under the Plan, provided
that such amendment is designed to maximize federal income tax benefits accorded
to Awards or, if the Committee determines that Rule 16b-3 is applicable to the
Plan, to comply with Rule 16b-3 and provided 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
18
<PAGE> 19
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.
19
<PAGE> 1
Exhibit 10.23
THE LEARNING COMPANY, INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
STOCK OPTION AGREEMENT
The Learning Company, Inc. (the "Company") has granted to you an
option (the "Option") to purchase the number of shares (the "Shares") of common
stock, par value $.01 per share, of the Company ("Common Stock") listed on
Exhibit A hereto at the exercise price set forth on Exhibit A. The Option is
granted subject in all respects to the terms of the Company's 1996 Non-Employee
Director Stock Option Plan (the "Plan"). The Option does not constitute an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. Capitalized terms used and not defined in this
Agreement shall have the meanings assigned to such terms in the Plan.
The terms of the Option are as follows:
1. TERM. The term of the Option commences on the Grant Date
set forth in Exhibit A and, except as provided in Section 4 hereof, ends on the
Expiration Date set forth on Exhibit A.
2. EXERCISABILITY. The Option shall be exercisable at the
times, and with respect to the number of Shares, set forth on Exhibit A.
Exercisability of the Option may also be accelerated or adjusted as
provided in the Plan.
3. EXERCISE AND PAYMENT.
(a) EXERCISE. You, or the person or persons having the
right to exercise the Option upon Disability, may exercise the Option to
purchase all or any part of the Shares for which it is then exercisable by
delivering in person or by mail to the Secretary of the Company a completed
Notice of Exercise Form attached hereto as Exhibit B (the "Exercise Form"),
together with payment of the exercise price. The date the Company receives full
payment of the exercise price and any required documents from you will be
considered the date that the Option was exercised. You shall not have privileges
as a stockholder until the date of issuance of a stock certificate representing
Shares.
(b) PAYMENT OF EXERCISE PRICE. Payment of the exercise
price must be made in full at the time of exercise in cash, by certified or
cashier's check or, in the sole discretion of the Committee, pursuant to such
other methods as may be permitted under the Plan. In lieu of full payment of the
exercise price in cash, upon request, the Committee may, in its sole discretion,
allow you (or the person or persons having the right to exercise the Option upon
your death or Disability), to exercise the Option or a portion thereof by
tendering shares of Common Stock (including Shares received upon exercise of the
Option), valued at Fair Market Value on the date
<PAGE> 2
immediately preceding the day of exercise, equal to the exercise price for the
Shares being acquired, as permitted by the Plan.
(c) WITHHOLDING TAX. You may be subject to withholding
taxes which, in the Company's judgment, result from the purchase of shares upon
exercise of the Option. At the time of any exercise of the Option (or at any
such later time as such obligation arises or as the amount of such obligation
becomes determinable), you shall pay to the Company in cash all applicable
federal, state, local and foreign withholding and employment taxes required to
be withheld resulting from exercise of the Option, from the lapse of any
restriction imposed on the Shares, from a transfer or other disposition of the
Shares, or otherwise related to the Shares. The Company may withhold from your
wages, or require you to pay to the Company, such amount. The Committee may in
its discretion permit you to pay some or all of such amount as provided in
Section 15 of the Plan, with all decisions of the Committee to be made at any
time at or prior to each exercise of the Option.
4. TERMINATION OF EMPLOYMENT.
(a) GENERAL. In the event of your Termination for any
reason other than death or Disability before exercise in full of your Option,
you may (only to the extent then exercisable on the date of such Termination)
exercise your Option in whole or in part any time within 90 days after the date
of Termination (unless otherwise indicated on Exhibit A hereto).
(b) DEATH OR DISABILITY. In the event of your Termination
by reason of death or Disability prior to the exercise in full of your option,
you, your personal representative or the person to whom the Option is
transferred by will or the laws of descent and distribution may (only to the
extent exercisable on the date of such Termination) exercise the Option in whole
or in part at any time within one year after the date of death or Disability, as
the case may be.
(c) CAUSE. In the event of your Termination by reason of
Cause (as defined in the Plan), you may have a period of time to be determined
by the Committee not to exceed ten days from the date of cessation of service
(but in no event after the expiration date of the Option) to exercise the Option
(to the extent exercisable at the time of the optionee's cessation of service),
and the Option shall thereafter terminate.
(d) FINAL CUT-OFF. In no event may this Option be exercised
by anyone after the Expiration Date.
5. TAX CONSEQUENCES. The tax consequences associated with this
Option are complex and can depend upon your particular circumstances. The
Company is not making any warranties or representations to you with respect to
the income tax consequences of the transactions contemplated by the option
agreement, and you should consult a tax advisor before exercising this Option.
2
<PAGE> 3
6. THE PLAN.
(a) PLAN PROVISIONS APPLICABLE. The Option is subject to
all provisions of the Plan, a copy of which is being delivered to you with this
Agreement. The Plan is described in the Prospectus which is also being delivered
to you with this Agreement.
(b) OPTION AND PLAN PROVISIONS CONTROL. THE OPTIONS
DESCRIBED IN THE PROSPECTUS MAY VARY SUBSTANTIALLY FROM THIS OPTION. YOUR RIGHTS
ARE AS SET FORTH IN THIS AGREEMENT AND THE PLAN, WHICH CONTROL IN THE EVENT OF
ANY INCONSISTENCY WITH THE DESCRIPTION IN THE PROSPECTUS.
7. TRANSFER OF OPTIONS.
(a) The Option represented by this Agreement may be
received by the Optionee in exchange for an option granted under the Company's
1996 Stock Option Plan. In the event of any conflict between the terms of this
Option and the option granted under the 1996 Stock Option Plan, the terms of the
Plan and this Agreement shall govern.
(b) This Option may be transferred to your spouse, child or
grandchild or trust or limited partnership for your or their benefit.
8. ADJUSTMENTS. The Company may adjust the number and kind of
stock issuable upon exercise of the Option and the exercise price thereof in
certain circumstances in accordance with the provisions of Section 8 and Section
9 of the Plan.
9. LEGALITY OF ISSUANCE. The Company shall not be obligated to
sell or issue any Shares pursuant to this Agreement if such sale or issuance, in
the opinion of the Company or the Company's counsel, might constitute a
violation by the Company of any provision of law, including without limitation
the provisions of the Securities Act of 1933, as amended.
10. INVESTMENT REPRESENTATIONS. The Company may, as a
condition of issuance Shares, require you to make such investment
representations as the Company and the Company's counsel deem necessary or
desirable in order to assure compliance with applicable federal or state
securities law.
11. LEGENDS. The Company may impose restrictions upon the
sale, pledge or other transfer of Shares acquired upon exercise of this option
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company or the Company's counsel, such restrictions are
necessary or desirable in order to achieve compliance with any federal or state
securities or other laws.
12. MISCELLANEOUS.
3
<PAGE> 4
12.1 ASSIGNMENT; BINDING EFFECT; NO TRANSFER. Subject to the
limitations set forth in this Agreement, this Agreement shall be binding upon
and insure to the benefit of the executors, administrators, heirs, legal
representatives, successors and assigns of the parties hereto; PROVIDED,
HOWEVER, that you may not assign any of your rights under this Agreement. The
Option is not transferable except at death by will or the laws of descent and
distribution, and is exercisable during your lifetime only by you.
12.2 DAMAGES. You shall be liable to the Company for all costs
and damages, including incidental and consequential damages and attorneys' fees
and expenses, resulting from a disposition of shares which is not in conformity
with the provisions of this Agreement.
12.3 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware.
12.4 NOTICES. All notices and other communications under this
agreement shall be in writing. Unless you are notified in writing to the
contrary, all notices, communications and documents directed to the Company and
related to the Agreement, if not delivered by hand, shall be mailed, addressed
as follows:
The Learning Company, Inc.
One Athenaeum Street
Cambridge, MA 02142
Attention: Secretary
Unless and until the Company is notified in writing to the contrary, all
notices, communications and documents intended for you and related to this
Agreement, if not delivered by hand, shall be mailed to your last known address
as shown on the Company's books. Notices and communications shall be mailed by
first class mail, postage prepaid; documents shall be mailed by U.S. registered
mail, return receipt requested, postage prepaid. All mailing and deliveries
related to the Agreement shall be deemed delivered, if mailed, on the second day
after they are deposited in the U.S. mail.
12.5 EXHIBITS. The exhibits attached to, or delivered to you
with, this Agreement (including without limitation the Plan) are incorporated
herein and form a part of this Agreement.
12.6 ENTIRE AGREEMENT. This Agreement, including the Plan,
contains all of the terms and conditions agreed upon by the parties relating to
its subject matter and supersedes any and all prior and contemporaneous
agreements, negotiations, correspondence, understandings and communications of
the parties whether oral or written, respecting that subject matter.
4
<PAGE> 5
12.7 ATTORNEYS' FEES. If any party to this Agreement seeks to
enforce this Agreement by legal proceedings or otherwise, the nonprevailing
party shall pay the prevailing party's costs and expenses, including, without
limitation reasonable attorneys' fees.
12.8 VALIDITY OF PROVISIONS; SEVERABILITY. If any provision of
this Agreement is held invalid, illegal or unenforceable, the provision shall be
adjusted if possible rather than voided to carryout its intent to the maximum
extent possible and in all events the remainder of this Agreement will remain in
full force and effect.
12.9 COUNTERPARTS. This Agreement may be signed in
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same agreement.
THE LEARNING COMPANY, INC.
By:
--------------------------------
R. Scott Murray
Chief Financial Officer
OPTIONEE
-----------------------------------
CONSENT OF SPOUSE
If the Optionee resides in California, or another community property
jurisdiction, I, as the Optionee's spouse, also accept and agree to be bound by
the terms and conditions of this option and the Plan.
------------------------------------
Optionee's Spouse
5
<PAGE> 1
EXHIBIT 21.1
THE LEARNING COMPANY, INC.
SUBSIDIARIES
SoftKey Software Products Inc. (Ontario)
SoftKey Holdings Corporation (Ontario)
TLC Multimedia Inc. (Minnesota)
Learning Company Properties Inc. (Delaware)
The Learning Company Funding, Inc. (Delaware)
The Learning Company (Ireland) Limited (Ireland)
Minnesota Educational Computing Corporation (Minnesota)
Compton's NewMedia, Inc. (California)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
The Learning Company, Inc. (formerly known as Softkey International, Inc.) on
Form S-3 (File Nos. 33-73422, 33-63073, 333-00145, 333-02385, 333-03271,
333-10009, 333-40543, 333-40549) and Form S-8 (File Nos. 33-75134, 33-92920,
33-92922, 33-61931, 333-00107, 333-02337, 333-04619, 333-40539, 333-42449,
333-43653, 333-45113, 333-45115) our report dated February 9, 1998 (except as to
note 12, which is as of March 6, 1998) on our audits of the consolidated
financial statements and financial statement schedule of The Learning Company,
Inc. as of January 3, 1998 and January 4, 1997, and for each of the three fiscal
years in the period ended January 3, 1998, which report is included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
March 13, 1998
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