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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): March 27, 1998
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THE LEARNING COMPANY, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
1-12375 94-2562108
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(Commission File Number) (IRS Employer Identification No.)
One Athenaeum Street, Cambridge, Massachusetts 02142
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(Address of principal executive offices) (Zip Code)
(617) 494-1200
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Registrant's Telephone Number, Including Area Code
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 27, 1998 (the "Effective Date"), The Learning Company, Inc., a
Delaware corporation (the "Company"), completed the acquisition of Mindscape,
Inc., a Delaware corporation, and certain affiliated companies (collectively
"Mindscape Group"), pursuant to a Stock Purchase Agreement, dated as of March 5,
1998 (as amended, the "Stock Purchase Agreement"), by and between the Company
and Mindscape Holding Company, Pearson Overseas Holdings Ltd. and Pearson
Netherlands, BV (collectively, the "Sellers").
Pursuant to the Stock Purchase Agreement, the Company paid $120 million
in cash and issued 1,366,743 shares of its Common Stock, $.01 par value per
share (the "Common Stock"), in consideration for all of the outstanding capital
stock of Mindscape Group. The shares issued in the acquisition were authorized
but previously unissued shares. The purchase price for the transaction was
approximately $150 million.
In connection with the Stock Purchase Agreement, the Company and
Mindscape Holding Company entered into a Registration Rights Agreement, dated as
of March 27, 1998, pursuant to which the Company has agreed to file a
Registration Statement on Form S-3, within 30 days following the Effective Date,
for the purpose of registering under the Securities Act of 1933, as amended, the
shares of Common Stock of the Company issued to the Sellers pursuant to the
Stock Purchase Agreement.
Mindscape Group is a leading developer and publisher of education,
productivity, reference and entertainment software.
The foregoing descriptions of the Stock Purchase Agreement and the
Registration Rights Agreement do not purport to be complete and are qualified in
their entirety by reference to the full text of such agreements which are filed
as Exhibits 2.1 and 10.1, respectively, to this Current Report on Form 8-K and
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
The audited financial statements of Mindscape Group for the
year ended December 31, 1997 are filed herewith as Exhibit 99.3.
(b) Pro Forma Financial Information
The Unaudited Pro Forma Combined Condensed Consolidated
Financial Statements of the Company for the year ended December 31,
1997 are filed herewith as Exhibit 99.4.
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(c) Exhibits.
See Index to Exhibits attached hereto.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: April 13, 1998 THE LEARNING COMPANY, INC.
(Registrant)
By: /s/ Neal S. Winneg
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Neal S. Winneg
Sr. Vice President and General Counsel
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EXHIBIT INDEX
Exhibit
Number Description
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2.1 Stock Purchase Agreement, dated as of March 5, 1998, by and
between The Learning Company, Inc. and Mindscape Holding
Company, Pearson Overseas Holdings Ltd. and Pearson
Netherlands, BV, as amended
10.1 Registration Rights Agreement, dated as of March 27, 1998, by
and between The Learning Company, Inc. and Mindscape Holding
Company
99.1 Press Release issued by The Learning Company, Inc. on March 6,
1998
99.2 Press Release issued by The Learning Company, Inc. on
March 27, 1998
99.3 Audited Financial Statements of Mindscape Group for the year
ended December 31, 1997
99.4 The Unaudited Pro Forma Combined Condensed Consolidated
Financial Statements of the Company for the year ended
December 31, 1997.
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Exhibit 2.1
STOCK PURCHASE AGREEMENT
DATED AS OF
MARCH 5, 1998,
BY AND BETWEEN
MINDSCAPE HOLDING COMPANY
PEARSON OVERSEAS HOLDINGS, LTD. AND
PEARSON NETHERLANDS, BV,
ON THE ONE HAND,
AND
THE LEARNING COMPANY, INC.
ON THE OTHER HAND
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TABLE OF CONTENTS
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ARTICLE I - PURCHASE & SALE/CLOSING......................................................................... 1
1.1 Transfer of Stock by Sellers........................................................... 1
1.2 Purchase of the Stock by Buyer/Purchase Price.......................................... 1
1.3 The Closing............................................................................ 3
1.4 Other Closing Deliveries............................................................... 3
1.5 Adjustments............................................................................ 3
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLERS...................................................... 4
2.1 Subsidiaries: Organization and Related Matters......................................... 4
2.2 Stock.................................................................................. 5
2.3 Financial Statements; Changes; Contingencies........................................... 6
2.4 Tax and Other Returns and Reports...................................................... 6
2.5 Material Contracts..................................................................... 7
2.6 Real Property.......................................................................... 8
2.7 Condition of Property.................................................................. 8
2.8 Accounts Receivable.................................................................... 8
2.9 Intellectual Property.................................................................. 9
2.10 Environmental Matters.................................................................. 9
2.11 Authorization; No Conflicts; Approvals................................................. 10
2.12 Legal Proceedings...................................................................... 11
2.13 Dividends and Other Distributions...................................................... 11
2.14 Insurance.............................................................................. 11
2.15 Compliance with Law: Permits........................................................... 11
2.16 Employee Benefits...................................................................... 12
2.17 Certain Interests...................................................................... 15
2.18 Bank Accounts, Powers, etc............................................................. 15
2.19 Minute Books........................................................................... 15
2.20 Investment............................................................................. 15
2.21 No Brokers or Finders.................................................................. 15
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF BUYER....................................................... 16
3.1 SEC Reports............................................................................ 16
3.2 Organization and Related Matters....................................................... 16
3.3 Investment............................................................................. 17
3.4 Stock.................................................................................. 17
3.5 Registration and Qualification......................................................... 18
3.6 Accountants............................................................................ 18
3.7 Financial Statements................................................................... 18
3.8 Tax and Other Returns and Reports...................................................... 19
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3.9 Environmental Matters................................................................. 19
3.10 Authorization; No Conflicts; Approvals................................................ 19
3.11 Legal Proceedings..................................................................... 20
3.12 Insurance............................................................................. 20
3.13 Compliance with Law; Permits.......................................................... 20
3.14 Investigation......................................................................... 21
3.15 Delaware General Corporation Law Section 203.......................................... 21
3.16 No Brokers or Finders................................................................. 21
ARTICLE IV - COVENANTS WITH RESPECT TO ACTS PRIOR TO CLOSING............................................... 21
4.1 Access................................................................................ 21
4.2 Conduct of Business................................................................... 22
4.3 Permits and Approvals................................................................. 24
4.4 Preservation of Business Prior to Closing Date........................................ 24
4.5 Elimination of Intercompany and Affiliate Liabilities................................. 25
4.6 Confidentiality....................................................................... 25
4.7 Certain Payments...................................................................... 25
4.8 Pre-Closing Transactions.............................................................. 25
ARTICLE V - ADDITIONAL CONTINUING COVENANTS................................................................ 26
5.1 Filing of Tax Returns and Payment of Taxes............................................ 26
5.2 Apportionment......................................................................... 27
5.3 Tax Cooperation....................................................................... 27
5.4 Maintain Records...................................................................... 28
5.5 Plan Transfers........................................................................ 28
5.6 Buyer's Additional Employee Related Obligations....................................... 29
5.7 Directors' and Officers' Indemnification.............................................. 30
5.8 Letter of Credit Reimbursement........................................................ 31
ARTICLE VI - CONDITIONS OF PURCHASE........................................................................ 31
6.1 General Conditions.................................................................... 31
6.2 Conditions to Obligations of Buyer.................................................... 32
6.3 Conditions to Obligations of Seller................................................... 32
ARTICLE VII - TERMINATION OF OBLIGATIONS; SURVIVAL......................................................... 33
7.1 Termination of Agreement.............................................................. 33
7.2 Effect of Termination................................................................. 34
ARTICLE VIII - INDEMNIFICATION............................................................................. 34
8.1 Obligations of Sellers................................................................ 34
8.2 Obligations of Buyer.................................................................. 35
8.3 Certain Tax Matters................................................................... 35
8.4 Indemnification Procedure............................................................. 37
8.5 Limitation on Indemnity............................................................... 38
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8.6 Absolute Indemnity.................................................................... 38
8.7 Survival.............................................................................. 39
ARTICLE IX - GENERAL....................................................................................... 39
9.1 Amendments; Waivers................................................................... 39
9.2 Schedules; Exhibits; Integration...................................................... 39
9.3 Reasonable Best Efforts; Further Assurances........................................... 40
9.4 Governing Law......................................................................... 40
9.5 No Assignment......................................................................... 41
9.6 Headings.............................................................................. 41
9.7 Counterparts.......................................................................... 41
9.8 Publicity and Reports................................................................. 41
9.9 Parties in Interest................................................................... 41
9.10 Notices............................................................................... 42
9.11 Expenses and Attorneys Fees........................................................... 43
9.12 Specific Performance.................................................................. 43
9.13 Damages............................................................................... 43
9.14 Representation By Counsel; Interpretation............................................. 43
ARTICLE X - DEFINITIONS.................................................................................... 44
10.1 Definitions........................................................................... 44
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STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is entered into as of March 5, 1998, between
The Learning Company, Inc., a Delaware corporation ("BUYER"), on the one hand,
and Mindscape Molding Company, a Delaware corporation, Pearson Overseas Moldings
Ltd., a company incorporated with limited liability under the laws of England,
and Pearson Netherlands, BV, a Netherlands corporation (each a "SELLER" and
collectively, the "SELLERS"), on the other hand.
R E C I T A L S
WHEREAS, Sellers own all the outstanding capital stock of the Companies;
and
WHEREAS, each Seller desires to sell, and Buyer desires to buy, all
outstanding capital stock of each of the Companies (the "STOCK") for the
consideration described herein.
AGREEMENT
In consideration of the mutual promises contained herein and intending to
be legally bound the parties agree as follows:
ARTICLE I
PURCHASE & SALE/CLOSING
1.1 TRANSFER OF STOCK BY SELLERS.
Subject to the terms and conditions of this Agreement, each Seller agrees
to sell the Stock owned by such Seller and deliver the certificates evidencing
the Stock to Buyer at the Closing. Such certificates will be properly endorsed
for transfer to or accompanied by a duly executed stock power (or equivalent
instrument in any non-US jurisdiction) in favor of Buyer or its nominee as Buyer
may have directed prior to the Closing Date.
1.2 PURCHASE OF THE STOCK BY BUYER/PURCHASE PRICE.
(a) Subject to the terms and conditions of this Agreement, Buyer
agrees to acquire the Stock from Sellers and to (i) pay (x) $97,300,000 in cash
plus (y) an amount equal to all bank cash balances held by any Company or
Company Subsidiary as at the Closing, in cash (collectively, the "CASH") and
(ii) issue to Sellers a number of shares of Common Stock ("Shares") equal to the
quotient obtained by dividing (i) $32,300,000 by (ii) the average closing price
of the Common Stock on the New York Stock Exchange during the five trading days
ended two days prior to the Closing.
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(b) Both the Cash and the Shares shall be allocated among each Seller
as set forth on Schedule 1.2 (the Cash and the Shares, collectively, the
"Purchase Price"). Any amounts paid to Sellers or Buyer pursuant to this Section
1.2(b) shall be deemed an increase or decrease in the cash portion of the
Purchase Price. Additionally, if the net proceeds received by the Sellers from
an underwritten sale of the Shares pursuant to the Registration Rights Agreement
referred to in Section 6.3(c), after taking into account any discounts,
commissions and other registration expenses and stock transfer taxes (but not
including income taxes) (the "Net Proceeds"), is less than the Base Amount, the
Buyer shall, within 10 days after the closing of such sale of the Shares, pay to
Sellers an amount equal to the amount by which the Base Amount exceeds the Net
Proceeds; and if the Net Proceeds are more than the Base Amount, the Sellers
shall, within 10 days after the closing of such sale, pay to Buyer the amount by
which the Net Proceeds exceeds the Base Amount. At any time prior to the
execution and delivery by Sellers of an underwriting agreement for the sale of
the Shares by Sellers pursuant to the Registration Rights Agreement, Buyer shall
have the right, upon written notice to Sellers, to repurchase all or a portion
of such Shares from Sellers for a pro rata portion of the Base Amount (based
upon the number of Shares repurchased in relation to the total number of Shares)
in cash plus an amount equal to all out- of-pocket expenses incurred by Sellers
in connection with the registration and proposed sale of the Shares; if such
notice is given, the closing of the purchase and sale shall take place within
five days after such notice is provided to the Sellers. For the purpose hereof,
the "Base Amount" shall initially be $52,300,000; provided, however, if either
(i) Buyer fails for any reason to file a registration statement with respect to
the Shares within 30 days of the Closing Date or (ii) a registration statement
in respect of the Shares is not declared effective by the SEC within 120 days of
the Closing Date, the Base Amount shall increase to the greater of (i)
$52,500,000, plus interest on $52,300,000, calculated at the rate of 9% per
annum from the Closing Date to the date of the sale of the Shares and (ii) the
actual Net Proceeds from the Offering (if the offering has been completed at the
time the Base Amount is being calculated).
(c) If for any reason Sellers have not sold all of the Shares by
September 15, 1998 (other than by reason of Seller's breach of its obligations
under the Registration Rights Agreement; provided, that it is understood and
agreed that Sellers shall have no obligations under the Registration Rights
Agreement or otherwise to provide any financial statements with respect to the
Companies or the Company Subsidiaries), Sellers may by written notice to the
Buyer "put" the Shares to Buyer for a purchase price equal to the Base Amount
plus actual out-of-pocket expenses of Sellers incurred in seeking registration
or sale of the Shares less any Net Proceeds actually received by Sellers from
any sale of the Shares. The closing of such put if exercised shall occur on or
prior to September 30, 1998.
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1.3 THE CLOSING.
The Closing will take place at the offices of O'Melveny & Myers LLP,
Embarcadero Center West, 275 Battery Street, San Francisco, California. The
Closing shall take place at 8:00 A.M. pacific coast time on the third business
day after the satisfaction or waiver of the conditions set forth in Article VI
or on such other date as Sellers and Buyer may agree. The parties acknowledge
that time is of the essence and shall use their respective reasonable best
efforts to effectuate the Closing by March 31, 1998. The payment of the Cash
amount of the Purchase Price shall be paid to Sellers by wire transfer in
immediately available funds to accounts designated by Sellers.
1.4 OTHER CLOSING DELIVERIES. At the Closing, Buyer and Pearson
Netherlands, B.V. shall enter into a purchase and sale agreement as required by
the laws of France with respect to the shares of Mindscape France SARL.
1.5 ADJUSTMENTS.
(a) Buyer shall pay to Sellers the amounts described in clause (y) of
Section 1.2(a) within ten (10) Business Days of the Closing Date accompanied by
bank statements reflecting such amounts certified by Buyer's Chief Financial
Officer.
(b) As soon as possible after the Closing, but not later than
thirty (30) days after the Closing, Buyer shall prepare and deliver to Sellers
the Closing Working Capital Statement. The Closing Working Capital Statement
shall be prepared by Buyer as provided in Schedule 1.5.
(c) Subject to the provisions of Section 1.3(d) below, the Purchase
Price shall be adjusted as follows:
(1) If the Working Capital set forth on the Closing Working
Capital Statement is more than $26,000,000, then the Purchase Price shall
be increased by an amount equal to the difference between $26,000,000 and
the Working Capital set forth in the Closing Working Capital Statement;
(2) If the Working Capital set forth on the Closing Working
Capital Statement is less than $20,000,000, then the Purchase Price shall
be decreased by an amount equal to the difference between $20,000,000 and
the Working Capital set forth in the Closing Working Capital Statement.
(3) Any increase or decrease in the Purchase Price shall be paid
by Buyer or Sellers in cash, as applicable, within five (3) Business Days
after determination of the amount of adjustment as provided in Section
1.3(d).
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(d) DISPUTES. The Closing Working Capital Statement shall be final
and binding on the parties with respect to the Working Capital of the Companies
on the Closing Date, provided, however, that Sellers may dispute the calculation
of the Closing Working Capital Statement in writing by Sellers within 10 days of
receiving the Closing Working Capital Statement. In such case Price Waterhouse
shall be entitled to audit the Closing Working Capital Statement. Such audit
shall be completed within thirty (30) days of Sellers' notice of dispute and
Sellers shall provide to Buyer a notice by the end of such thirty (30) day
period as to amounts in dispute. If such disputes cannot be resolved within ten
(10) days of such notice, such disputes shall be resolved by a "big 5"
accounting firm (the "Accountant"), other than Price Waterhouse or Coopers &
Lybrand as soon as reasonably practicable and such decision shall be final and
binding on the parties.
(e) MISCELLANEOUS.
(1) Sellers and Buyer shall each be responsible for 50% of all
fees and expenses of Accountant, if any, in connection with resolving any
disputes related to the Closing Working Capital Statement.
(2) Any payment required to be made pursuant to this Section 1.5
shall bear interest at the rate of 9% per annum calculated from the date of
delivery of the Closing Working Capital Statement by Buyer through the date
of payment.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers have invited Buyer to perform and Buyer has performed certain due
diligence and business investigations with respect to the Companies, with the
intention that Buyer form its own conclusions regarding the condition and value
of the Business pursuant to the parties' express intention that the sale of the
Stock and related Business be without representation or warranty by Sellers,
express or implied, except as set forth in this Article II and the Seller
Disclosure Schedule. Except as otherwise indicated on the Sellers Disclosure
Schedule dated as of the date hereof and delivered to Buyer, Sellers represent,
warrant and agree as follows:
2.1 SUBSIDIARIES: ORGANIZATION AND RELATED MATTERS.
Section 2.1 of the Seller Disclosure Schedule lists all Subsidiaries of the
Companies and correctly sets forth the capitalization or share capital, as the
case may be, of each Subsidiary and each Company's ownership interest therein,
the jurisdiction in which each Company and each subsidiary was organized and
each, in the case of Companies organized under US law, jurisdiction in which
each Company and each subsidiary is qualified or licensed to do business as a
foreign person, to the
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extent applicable. Such subsidiaries are herein referred to as "COMPANY
SUBSIDIARIES". Each Seller, each Company, and each Company Subsidiary is a
corporation duly incorporated, validly existing and, in the case of Companies
organized under the laws of a state of the United States, in good standing under
the respective laws of the jurisdiction of their incorporation. Each Seller,
each Company, and each Company Subsidiary is authorized to do business, duly
qualified and, in the case of Companies organized under the Laws of a state of
the United States, in good standing in each of the jurisdictions in which the
nature of their respective businesses requires such authorization or
qualification, except where the failure to be so qualified or authorized would
not have a Material Adverse Effect. Each Seller has all necessary corporate
power and authority to execute, deliver and perform this Agreement and any
related agreements to which it is a party. Each Company and each Company
Subsidiary has all necessary corporate power and authority to own their
respective properties and assets and to carry on their respective businesses as
now conducted. Section 2.1 of the Seller Disclosure Schedule correctly lists the
current directors and executive officers or, managing directors and
"Prokuriste", as applicable, of each Company and of each Company Subsidiary.
True, correct and complete copies of the respective charter documents (or
equivalent constitutional documents) of the Companies and each Company
Subsidiary as in effect on the date hereof have been made available to Buyer.
2.2 STOCK.
Each Seller owns all of the outstanding shares of capital stock and other
Equity Securities of the Companies as set forth on Section 2.2 of the Seller
Disclosure Schedule. Except as described in Section 2.2 of the Seller Disclosure
Schedule, each Company owns all of the outstanding shares of capital stock and
Equity Securities of each of its Subsidiaries, beneficially and, to the extent
applicable, of record. All of such Equity Securities of the Companies and the
Company Subsidiaries are owned free and clear of any Encumbrance. At the
Closing, Buyer will acquire good and marketable title to and complete ownership
of the Stock, free of any Encumbrance. The authorized capital stock of each
Company is as set forth on Section 2.2 of the Seller Disclosure Schedule. There
are no outstanding Contracts or other rights to subscribe for or purchase, or
Contracts or other obligations to issue or grant any rights to acquire, any
Equity Securities of any Company or any Company Subsidiary, or to restructure or
recapitalize any Company or any Company Subsidiary. There are no outstanding
Contracts of any Seller, any Company, or any Company Subsidiary to repurchase,
redeem or otherwise acquire any Equity Securities of any of such entities. All
Equity Securities of each Company and each Company Subsidiary are duly
authorized, validly issued and outstanding, fully paid, and in the case of
Companies organized under the Laws of a state of the United States, are
nonassessable. Except as set forth in Section 2.3 of the Seller Disclosure
Schedule, there are no preemptive rights in respect of any Equity Securities of
any Company or any Company Subsidiary other than any set out in the respective
foreign statutes or Laws applicable
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to a non-US company. Any Equity Securities of any Company or any Company
Subsidiary which were issued and reacquired by any of such entities were so
reacquired (and, if reissued, so reissued) in compliance with all applicable
Laws, and neither any Company nor any Company Subsidiary has any outstanding
obligation or liability with respect thereto.
2.3 FINANCIAL STATEMENTS; CHANGES; CONTINGENCIES.
(a) FINANCIAL STATEMENTS. Section 2.3 of Seller Disclosure Schedule
sets forth the audited consolidated statements of income and cash flow and
balance sheet of the Companies and Company Subsidiaries as at and for the year
ended December 31, 1997 (the foregoing statements are referred to herein
collectively as the "Financial Statements" and the related balance sheet
included therein is referred to herein as the "Balance Sheet"). Except as set
forth in Section 2.3 of Seller Disclosure Schedule, the Financial Statements
were prepared from the books and records of the Companies in accordance with US
generally accepted accounting principles, and fairly present in all material
respects, the operating results and financial condition of the Business as of
and for the year ended on December 31, 1997.
(b) NO MATERIAL ADVERSE CHANGES. Since the Balance Sheet Date whether
or not in the ordinary course of business, there has not been, occurred or
arisen:
(1) any change in or event affecting the Companies, the Business
or the Stock that has had or would reasonably be expected to have a
Material Adverse Effect, or
(2) any agreement, condition, action or omission which would be
proscribed by (or require consent under) Section 4.2 had it existed,
occurred or arisen after the date of this Agreement other than as set forth
in the Seller Disclosure Schedule or in the ordinary course of business.
2.4 TAX AND OTHER RETURNS AND REPORTS.
Each Company and each Company Subsidiary has timely filed all material Tax
Returns required to be filed by them and have paid all Taxes shown as due on
such returns. Neither any Company nor any Company Subsidiary has elected to be
treated as a consenting corporation under Section 341(f) of the Code. All such
Tax Returns, including amendments to date, have been prepared in good faith
without willful misrepresentation and to Sellers' knowledge and belief are
complete and accurate in all material respects. Except as set forth in Section
2.4 of the Seller Disclosure Schedule, no Governmental Entity has, during the
past three years, examined or is in the process of examining any Tax Returns of
any Company or any Company Subsidiary. Except as set forth in the Seller
Disclosure Schedule, no
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Governmental Entity has proposed against any Company or any Company Subsidiary
any deficiency, assessment, or claim for Taxes. The unpaid Taxes of each of the
Companies and the Company Subsidiaries or the Taxes for which they could be
liable to any Person with respect to all Pre-Closing Periods will not exceed the
reserve for Taxes (excluding any reserves for deferred Taxes) set forth or.
included on the Balance Sheet. The Sellers are eligible to make an election
under Section 338(h)(10) of the Code (and any comparable election under state,
local or foreign Tax law) with respect to the Companies and the Company
Subsidiaries. No Person has made an election under Treasury Reg. Section
1.1502.20(g) with respect to the Companies or any Company Subsidiary. Mindscape
and its US Company Subsidiaries have a federal net operating loss in the
aggregate of at least $ 100,000,000
2.5 MATERIAL CONTRACTS.
(a) Section 2.5 of the Seller Disclosure Schedule lists each Contract
to which any Company or any Company Subsidiary is a party or to which any
Company, any Company Subsidiary or any of their respective properties is subject
or by which any thereof is bound that is deemed a Material Contract under this
Agreement. The following Contracts shall be deemed to be "Material Contracts":
any Contract that (a) after the Balance Sheet Date obligates any Company to pay
an amount of $500,000 or more, or (b)provides for an extension of credit, or (c)
limits or restricts the ability of any Company or any Company Subsidiary to
compete or otherwise to conduct its business in any manner or place, or (d)
provides for a guaranty by any Company or any Company Subsidiary, or (e) grants,
other than in the ordinary course of business, a power of attorney, agency or
similar authority to another person or entity, or (f) grants to a third party a
right of first refusal, or (g) grants a right to, or obligation of, any Seller
or Affiliate, officer, director or any Associate of any Seller, any Company or
any Company Subsidiary, or (i) was not made in the ordinary course of business,
or (j) any agreement establishing a partnership or joint venture, or (k) any
license agreement pursuant to which any Company or any Company Subsidiary has
licensed Intellectual Property Rights from third parties covering or related to
the leading 25 software products (by revenue) of the Companies for the year
ended December 31, 1997 (other than license agreements for Intellectual Property
Rights which are generally available at minimal cost), or (I) any agreements
granting to any Company or any Company Subsidiary the right to distribute
products of third parties under the brand names of such third parties (other
than agreements for products which accounted for less than $250,000 of revenue
to the Company in the year ended December 31, 1997), or (m) any agreement
pursuant to which any Company or any Company Subsidiary has licensed to any
third party any of its Intellectual Property Rights other than licenses granted
in the ordinary course of business and other than licenses terminable by such
Company or Company Subsidiary at any time upon not more than 60 days' notice.
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(b) Subject to such exceptions as are not, individually or in the
aggregate, material to the Business, each Material Contract is valid and
subsisting; the applicable Company or Company Subsidiary has duly performed all
its material obligations thereunder to the extent that such obligations to
perform have accrued; and no breach or default, alleged breach or default, or
event which would (with the passage of time, notice or both) constitute a breach
or default thereunder by such Company or such Company Subsidiary, as the case
may be, or, to Sellers' knowledge, any other party or obligor with respect
thereto, has occurred or as a result of this Agreement or performance will
occur. True copies of the agreements appearing in Section 2.3 of the Seller
Disclosure Schedule, including all amendments and supplements, have been made
available to Buyer.
2.6 REAL PROPERTY.
Each Company and each Company Subsidiary has the right to use, free of
Encumbrances, all items of real property, including leaseholds and all other
interests in real property, and such other assets and properties that are
material to the Business, except for Permitted Encumbrances. Except as disclosed
in Section 2.6 of the Seller Disclosure Schedule, all material leasehold
properties held by any Company or any Company Subsidiary as lessee are held
under valid, binding and enforceable leases, and each such Company and Company
Subsidiary is in compliance, in all material respects, with the terms of all
such leases to which it is a party.
2.7 CONDITION OF PROPERTY.
The Companies and the Company Subsidiaries have good and marketable title
to all of their respective assets, free of Encumbrances, except for Permitted
Encumbrances. All of the assets of the Companies are in good operating condition
and repair as required for their use in the Business, except (i) for ordinary
wear and tear and (ii) as is consistent with reasonable business practices.
Except as set forth in Section 2.7 of the Seller Disclosure Schedule, the assets
of the Companies include all assets necessary to conduct the Business as
currently conducted.
2.8 ACCOUNTS RECEIVABLE.
Except as set forth in Section 2.8 of the Seller Disclosure Schedule or as
specifically provided for in the Balance Sheet, the accounts receivable
reflected on the Balance Sheet and all accounts receivable of the Business
arising between the Balance Sheet Date and the date hereof, arose from
transactions in the ordinary course of business, have been collected or are less
than six months past due as of the date hereof (other than individual
receivables in amount of less than $100,000) and no further goods or services
are required to be provided in order to entitle the Companies or the Company
Subsidiaries or their respective assignees to collect the
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accounts receivable in full. No such receivable has been pledged or assigned to
any other Person and no defense or set off to any such receivable has been
asserted in writing by the receivable obligor, or, to the knowledge of Seller,
exists.
2.9 INTELLECTUAL PROPERTY.
The Companies and/or the Company Subsidiaries own, or have validly licensed
or otherwise have the right to use, all patents, patent rights, trademarks,
trademark rights, trade names, trade name rights, service marks, service mark
rights, copyrights and other proprietary intellectual property rights and
computer programs, software and data (collectively, "Intellectual Property
Rights") which are used (and the Companies and/or the Company Subsidiaries own,
or have validly licensed or otherwise have the right to license, all
Intellectual Property Rights which are licensed) in the conduct of the Business
in the manner in which each such Intellectual Property Right is currently being
used or licensed or which is being held for use or license by the Companies
and/or the Company Subsidiaries, except for Intellectual Property Rights, the
loss of which is not reasonably likely to have a Material Adverse Effect;
PROVIDED that no representations and warranties are made as to noninfringement
of the patents and patent rights of third parties. Section 2.9 of the Seller
Disclosure Schedule sets forth a description of all patents and applications
therefor, registration of trademarks and service marks and applications
therefor, and registrations of copyrights and applications therefor that are
material to the conduct of the business of the Companies and the Company
Subsidiaries taken as a whole. Except as set forth in Section 2.9 of the Seller
Disclosure Schedule, there are no claims pending or, to the best of Sellers'
knowledge, threatened against any Company or any Company Subsidiary, or any
product or services thereof, or any advertisement or publicity in connection
therewith, with respect to the violation or infringement of any copyright,
trademark, trade name, patent, of any rights of privacy or publicity or any
other proprietary right of any person anywhere in the world except for claims
which are not reasonably likely to have a Material Adverse Effect. Except as set
forth in Section 2.9 of the Seller Disclosure Schedule, to Sellers' knowledge,
neither any Company nor any Company Subsidiary is infringing any Intellectual
Property Rights of any third party.
Any Intellectual Property Rights of the Companies or Company Subsidiaries
transferred to Headland Digital Media, Inc. have been transferred back to either
a Company or a Company Subsidiary.
2.10 ENVIRONMENTAL MATTERS.
(i) Neither Company nor any Company Subsidiaries has generated, used,
transported, treated, stored, released or disposed of, or has suffered or
permitted anyone else to generate, use, transport, treat, store, release or
dispose of any Hazardous Substance in violation of any laws; (ii) there has not
been any generation,
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use, transportation, treatment, storage, release or disposal of any Hazardous
Substance in connection with the conduct of the Business of any Company or any
Company Subsidiary or the use of any property or facility of any Company of any
Company Subsidiary or, to Sellers' knowledge, any nearby or adjacent properties
or facilities, which has created or might reasonably be expected to create, any
liability under any laws or which would require reporting to or notification of
any Governmental Entity; (iii) any Hazardous Substance handled or dealt with in
any way in connection with the Business, has been and is being handled or dealt
with in all material respects in compliance with applicable laws; and (iv) since
January 1, 1995, neither any Company nor any Company Subsidiary has received any
written notice (A) from a Governmental Entity that any Company or any Company
Subsidiary is in violation of any statute, law, ordinance, regulation, rule,
judgment, decree or order of any Governmental Entity relating to any matter of
pollution, protection of the environment, environmental regulation or control or
regarding Hazardous Substances on or under any of the properties of any Company
or any Company Subsidiary, or (B) requiring the response to or remediation of a
release or threatened release of Hazardous Substances.
2.11 AUTHORIZATION; NO CONFLICTS; APPROVALS.
The execution, delivery and performance of this Agreement by each Seller
has been duly and validly authorized by all necessary corporate action on the
part of such Seller. This Agreement constitutes the legally valid and binding
obligation of each Seller, enforceable against such Seller in accordance with
its terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws and equitable
principles relating to or limiting creditors rights generally. Except as set
forth on Section 2.11 of the Seller Disclosure Schedule, the execution, delivery
and performance of this Agreement by each Seller will not violate, constitute a
breach or default (whether upon lapse of time and/or the occurrence of any act
or event or otherwise) under, the charter documents or by-laws (or equivalent
constitutional documents) of any of such entities, or give rise to any right of
termination, cancellation or acceleration of any obligation or to a loss of
benefit under any Material Contract or result in the imposition of any material
Encumbrance against any material asset or properties of any Company or any
Company Subsidiary, which in any case, could reasonably be expected to have a
Material Adverse Effect. Except as set forth on Section 2.11 of the Seller
Disclosure Schedule, the execution and delivery of this Agreement by each Seller
and the performance of this Agreement and any related or contemplated
transactions by any Seller, any Company, or any Company Subsidiary will not
violate any law, except violations which would not, individually or in the
aggregate, be reasonably expected to have a Material Adverse Effect or impair
the ability of the Sellers to perform their obligations under this Agreement.
Except as set forth in Schedule 2.11 of the Seller Disclosure Schedule, no
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity is required by any Seller,
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Company or any Company Subsidiary in connection with the execution and delivery
of this Agreement or the consummation by any such entity of the transactions
contemplated by this Agreement.
2.12 LEGAL PROCEEDINGS.
Except as set forth in Section 2.12 of the Seller Disclosure Schedule,
there is no Order or Action pending, or, to Sellers' knowledge, threatened,
against or affecting any Company or any Company Subsidiary or any of their
respective properties or assets that individually or when aggregated with one or
more other Orders or Actions has or, if determined adversely to the Companies
would reasonably be expected to have, a Material Adverse Effect, or materially
and adversely affects any Seller's ability to perform this Agreement. Section
2.12 of the Seller Disclosure Schedule lists each Order and each Action that
involves a claim or reasonably potential claim of aggregate liability in excess
of $250,000 against, or that enjoins or seeks to enjoin any activity by, any
Company or any Company Subsidiary.
2.13 DIVIDENDS AND OTHER DISTRIBUTIONS.
Except as set forth in Section 2.13 of the Seller Disclosure Schedule,
since the Balance Sheet Date, there has been no dividend or other distribution
of assets or securities whether consisting of money, property or any other thing
of value, declared, issued or paid to or for the benefit of any Seller, by any
Company or any Company Subsidiary.
2.14 INSURANCE.
Section 2.14 of the Seller Disclosure Schedule lists all insurance policies
and bonds of, or which insure, the Companies or the Company Subsidiaries that
are material to the Business. All such policies are in full force and effect and
are in reasonable amounts given all the facts and circumstances of the Business.
No Seller, Company, nor Company Subsidiary is in default under any such policy
or bond.
2.15 COMPLIANCE WITH LAW: PERMITS.
Except in so far as Mindscape International Limited is required to equalize
male and female Guaranteed Minimum Pension benefits relating to contracting-out
of the UK State Earnings related Pension Scheme in respect of UK Employees
participating in the Pearson Group Pension Plan, each Company and each Company
Subsidiary has conducted their respective businesses in accordance with
applicable Laws (including, without limitation, the receipt of all Permits that
are required to conduct the Business), the violation of which would, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. The forms, procedures and practices of each Company and each
Company Subsidiary are in
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compliance with all such Laws, to the extent applicable, the violation of which
might reasonably be expected to have a Material Adverse Effect. To Sellers'
knowledge, no suspension, cancellation or termination of any Permits required by
any Governmental Entity to permit the Business to be conducted is threatened or
imminent, that would, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect.
2.16 EMPLOYEE BENEFITS.
(a) EMPLOYEE BENEFIT PLANS, COLLECTIVE BARGAINING AND EMPLOYEE
AGREEMENTS, AND SIMILAR ARRANGEMENTS.
(1) Section 2.16(a) of the Seller Disclosure Schedule lists all
United States employee benefit, compensation and fringe benefit plans and
arrangements, including without limitation, any United States "employee
benefit plan" (within the meaning of Section 3(3) of ERISA) to which
Mindscape or any US Company Subsidiary is a party or by which any of them
is bound, legally or otherwise and all other employment, consulting or
indemnification agreements, in each case having executory payment
obligations of any Company or Company Subsidiary in excess of $50,000, and
any pension benefit, profit sharing, retirement, deferred compensation,
welfare, insurance disability, bonus, vacation pay, severance or other
similar plan providing for benefits or compensation to any current or
former employees to which any Company or Company Subsidiary is a party or
is otherwise bound. To Sellers' knowledge, except under the Pearson Group
Pension Plan, the UK state scheme and as disclosed in Section 2. 16(a)'of
the Seller Disclosure Schedule, Mindscape International Limited and its UK
Subsidiaries have no legal obligation to provide or contribute to the
provision of pension or lump sum benefits for or in respect of any of the
UK Employees payable on their retirement or death nor have they announced
any proposal to establish or continue any arrangement providing such
benefits.
(2) Sellers have made available to Buyer true and complete
copies of all documents and summary plan descriptions with respect to such
US plans, agreements and arrangements, or summary descriptions of any such
plans, agreements or arrangements not otherwise in writing. With regard to
the Pearson Group Pension Plan, Sellers have made available to Buyer true
and complete copies of the trust deed and the documents described on
Schedule 2.16(a) governing the plan together with the rules of the Sections
of that plan in which certain UK. Employees participate together with a
summary of the benefits provided to those UK Employees. Section 2.16(a) of
the Seller Disclosure Schedule also contains a list of all of the UK
Employees who are contributing members of the Pearson Group Pension Plan as
at January 1, 1998.
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(3) Mindscape International Limited has materially complied with
its obligations under the Pearson Group Pension Plan (except, so far as is
required by law, in respect of equalization of male and female Guaranteed
Minimum Pension benefits relating to contracting-out of the UK State
Earnings related Pension Scheme). Mindscape and its Subsidiaries and each
trade or business (whether or not incorporated) that is a member of a group
of which Mindscape, Inc. is a member and which is under common control
within the meaning of Section 414(b) and (c) of the Code ("ERISA
Affiliate") are in compliance with the applicable provisions of ERISA and
other laws applicable with respect to such plans, agreements and
arrangements and to all group health plans of any ERISA Affiliate. Company
and its Subsidiaries and ERISA Affiliates have performed their obligations
under such plans, agreements and arrangements. With respect to employees
and former employees, of Mindscape there are no Actions (other than routine
claims for benefits) pending or to Seller's knowledge threatened against
such plans or their assets, or arising out of such plans, agreements or
arrangements, and, no facts exist which could give rise to any such
Actions. The Company and any Company Subsidiaries have paid or accrued on
their Balance Sheet all liabilities, including without limitation,
contributions, premiums or other payments, with respect to any plans,
agreements or arrangements for any US Employee or former employee, or with
respect to any benefits for UK Employees or former employees or with
respect to benefits for any other employee or former employee, for the
period ending with the Balance Sheet Date.
(4) The Pearson Group Pension Plan is approved as an exempt
approved Plan (within the meaning of Chapter 1 of Part XIV ICTA 1988) and
nothing has been done or omitted to be done, so far as the Seller is aware,
which will result in that plan ceasing to be an exempt approved plan.
(5) All plans, agreements or arrangements which are now or
previously have been maintained to provide benefits to employees or former
employees of the Company or any Subsidiary outside the US have been
maintained in compliance with applicable law in all material respects
except in respect of, so far as required, Guaranteed Minimum Pension
benefits in the Pearson Group Pension Plan. The UK Employees who are active
members of the Pearson Group Pension Plan are contracted out of the UK
State Earnings Related Pension Scheme and Mindscape International Limited
has been or is named in a contracting-out certificate (within the meaning
of Pension Schemes Act (1993).
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(b) US QUALIFIED STOCK, PENSION AND PROFIT-SHARING PLANS.
(1) Section 2.16(a) of the Seller Disclosure Schedule indicates
all US "employee pension benefit plans" (within the meaning of Section 3(2)
of ERISA) in Section 2.16(a) of the Seller Disclosure Schedule which are
also stock bonus, pension or profit-sharing plans within the meaning of
Section 401(a) of the Code to which Mindscape or any US Company Subsidiary
is a party.
(2) Each such US plan is qualified in form and operation under
Section 401(a) of the Code and each trust under each such plan is exempt
from tax under Section 501(a) of the Code. To Sellers' knowledge, no event
has occurred that could subject any such plans to tax under Section 511 of
the Code. No prohibited transaction (within the meaning of Section 4975 of
the Code) or party-in-interest transaction (within the meaning of Section
406 of ERISA) has occurred with respect to such plans.
(3) Sellers have made available to Buyer for each such US plan
copies of the following documents: (i) the form 5500 with all attachments
filed in each of the most recent two plan years, (ii) the most recent
determination letter from the IRS, and (iii) the consolidated statement of
assets and liabilities of such plan as of its most recent valuation date.
(4) The Company and the Company Subsidiaries have not, within
the last five years, maintained or contributed to any plan which is subject
to (i) Section 412 of the Code or Part 3 of Title 1 of ERISA or (ii) Title
IV of ERISA, or a multiemployer plan as defined in ERISA.
(c) RETIREE AND OTHER BENEFITS.
(1) Except as set forth in Schedule 2.16(c), no US Employee or
US former employee of Mindscape or any US Subsidiary of Mindscape is
entitled to retiree benefits other than those provided under any plan
described in Section 2.16(b) or in connection with the requirements of
Section 4980B of the Code.
(2) Except as required by ERISA, no US employee benefit plan
contains any provisions, and no commitments or agreements exist, which in
any way would limit or prohibit the Buyer from amending or terminating any
such plans, agreements or arrangements, including, without limitation,
amending any such plan, agreement or arrangement to reduce or eliminate
retiree benefits.
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(3) No Employee or former employee of the Company or any Company
Subsidiary of Mindscape is entitled to any benefit which will be subject to
Section 280G of the Code.
2.17 CERTAIN INTERESTS.
Except as set forth in Section 2.17 of the Seller Disclosure Schedule,
neither any Seller nor any Affiliate of any Seller, any Company, or any Company
Subsidiary (other than the Companies and the Company Subsidiaries) nor any
officer or director of any thereof, nor Associate of any such individual, has
any material interest in any property used in or pertaining to the Business nor
is any such Person doing business with any Company or any Company Subsidiary.
2.18 BANK ACCOUNTS, POWERS, ETC.
Section 2.18 of the Seller Disclosure Schedule lists each bank, trust
company, savings institution, brokerage firm, mutual fund or other financial
institution with which any Company or any Company Subsidiary has an account or
safe deposit box and the names and identification of all Persons authorized to
draw thereon or to have access thereto.
2.19 MINUTE BOOKS.
Except as set forth in Section 2.19 of the Seller Disclosure Schedule, the
minute books of each Company and each Company Subsidiary accurately reflect all
material actions and proceedings taken to date by the respective Stockholders,
boards of directors, and committees of such Company and such Company Subsidiary,
such minute books contain true and complete copies of the charter documents (or
equivalent constitutional documents for any non-US entity) of each Company and
each Company Subsidiary and all related amendments, and, to the extent
applicable, the stock record books of Company and each Company Subsidiary
reflect accurately all transactions in their respective capital stock of all
classes.
2.20 INVESTMENT.
Each Seller is acquiring the Shares from Buyer for such Seller's own
account, for investment purposes only and not with a view to or for sale in
connection with the distribution thereof, except as contemplated by the
Registration Rights Agreement.
2.21 NO BROKERS OR FINDERS.
No agent, broker, finder, or investment or commercial banker, or other
Person or firm engaged by or acting on behalf of Sellers, the Companies or the
Company
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Subsidiaries or any of their respective Affiliates in connection with the
negotiation, execution or performance of this Agreement or the transactions
contemplated by this Agreement, is or will be entitled to any brokerage or
finder's or similar fee or other commission as a result of this Agreement or
such transactions except BT Alex Brown, as to which Sellers shall have full
responsibility and liability and neither Buyer, the Companies or the Company
Subsidiaries shall have any responsibility nor liability.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as otherwise indicated on Buyer's Disclosure Schedule dated the date
hereof and delivered to Sellers (the "BUYER DISCLOSURE SCHEDULE"), Buyer
represents, warrants and agrees as follows:
3.1 SEC REPORTS.
Buyer has filed all documents required to be filed since January 1, 1995
with the Securities and Exchange Commission (the "COMMISSION") (the "SEC
REPORTS"). As of their respective dates, the SEC Reports complied in all
material respects with the requirements of the Securities Act of 1933, as
amended (including the rules and regulations promulgated thereunder, the
"SECURITIES ACT"), and the Securities Exchange Act of 1934, as amended
(including the rules and regulations promulgated thereunder, the "EXCHANGE
ACT"), as the case may be, and none of the SEC Reports contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein, in order to make the statements contained therein, in light of
the circumstances under which they were made, not misleading.
3.2 ORGANIZATION AND RELATED MATTERS.
Section 3.2 of Buyer Disclosure Schedule lists all Significant Subsidiaries
(as defined in Rule- 1.02 of Regulation S-X of the SEC) of Buyer. Such
Subsidiaries are herein referred to as "BUYER SUBSIDIARIES". Buyer and each
Buyer Subsidiary is a corporation duly incorporated, validly existing and in
good standing under the respective laws of the jurisdiction of their
incorporation. Buyer and each Buyer Subsidiary is authorized to do business,
duly qualified and in good standing in each of the jurisdictions in which the
nature of its respective businesses requires such authorization or
qualification, except where the failure to be so qualified or authorized would
not have a Buyer Material Adverse Effect. Buyer has all necessary corporate
power and authority to execute, deliver and perform this Agreement and any
related agreements to which it is a party. Buyer and each Buyer Subsidiary has
all necessary corporate power and authority to own their respective properties
and assets and to carry on their respective businesses as now conducted.
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3.3 INVESTMENT.
Buyer is acquiring the Stock from Sellers for Buyer's own account, for
investment purposes only and not with a view to or for sale in connection with
the distribution thereof.
3.4 STOCK.
(a) All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, and were not issued and
are not now in violation of or subject to any preemptive rights. All issued and
outstanding shares of capital stock of each Subsidiary have been duly authorized
and validly issued and are fully paid and nonassessable. Buyer had, as of
October 4, 1997, an authorized and outstanding capitalization as set forth in
the Third Quarter 10-Q. Except as described in Section 3.4 of the Buyer
Disclosure Schedule, Buyer owns all of the outstanding shares of capital stock
and Equity Securities of each Buyer Subsidiary, beneficially and of record. All
of such Equity Securities of each Buyer Subsidiary are owned free and clear of
any Encumbrance. Except as described in Section 3.4 of the Buyer Disclosure
Schedule, there are no outstanding Contracts of Buyer or any Buyer Subsidiary to
repurchase, redeem or otherwise acquire any Equity Securities of any of such
entities. All Equity Securities of each Buyer Subsidiary are duly authorized,
validly issued and outstanding and are fully paid and nonassessable. Except as
described in Section 3.4 of the Buyer Disclosure Schedule, there are no
preemptive rights in respect of any Equity Securities of Buyer or any of its
Subsidiaries. Any Equity Securities of Buyer or any Buyer Subsidiary which were
issued and reacquired by any of such entities were so reacquired (and, if
reissued, so reissued) in compliance with all applicable Laws, and neither any
Buyer nor any Buyer Subsidiary has any outstanding obligation or liability with
respect thereto.
(b) (i) The Shares have been duly and validly authorized by Buyer
and the Shares, when issued, and delivered in accordance with this Agreement,
will be duly and validly issued, fully paid and nonassessable. No preemptive
rights or other rights to subscribe for or purchase securities exist with
respect to the issuance of the Shares by Buyer pursuant to this Agreement.
(ii) No security holder of Buyer has any right to participate in
the offering contemplated by the Registration Rights Agreement.
(iii) Approval of Buyer's stockholders is not required in
connection with the issuance of the Shares to Sellers.
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3.5 REGISTRATION AND QUALIFICATION.
Assuming the accuracy of the representations and warranties made by each of
the Sellers as set forth in Article 11 hereof, it is not necessary in connection
with the offer, sale and delivery of the Shares to the Sellers in the manner
contemplated by this Agreement to register the Shares under the Securities Act.
3.6 ACCOUNTANTS.
Coopers & Lybrand L.L.P., who have expressed their respective opinions with
respect to the financial statements and schedules included in the SEC Reports,
are independent accountants as required by the Securities Act.
3.7 FINANCIAL STATEMENTS.
(a) The annual audited financial statements of Buyer included in the
relevant Report on Form 10-K for the period ended January 4, 1997 (the "10-K")
present fairly in all material respects the financial position of Buyer and the
Buyer Subsidiaries, as of the date of such financial statements, and the results
of operations and changes in cash flows of Buyer and the Buyer Subsidiaries for
the periods covered thereby. Such statements and related notes have been
prepared in accordance with US generally accepted accounting principles applied
on a consistent basis, in each case, as certified by the independent
accountants.
(b) The unaudited interim financial statements of Buyer included in
Buyer's Quarterly Report on Form 10-Q for the period ended October 4, 1997 (the
"THIRD QUARTER 1O.Q") present fairly in all material respects the financial
position of Buyer and the Buyer Subsidiaries, as of the date of such financial
statements, and the results of operations and changes in cash flows of Buyer and
the Buyer Subsidiaries for the periods covered thereby. Such statements and
related notes have been prepared in accordance with US generally accepted
accounting principles applied on a consistent basis except for normal year-end
adjustments and the omission of certain footnote disclosure.
(c) Since the date of the balance sheet presented except as set forth
in Section 3.7 of the Buyer Disclosure Schedule, in the Third Quarter 10-Q
whether or not in the ordinary course of business, there has not been, occurred
or arisen:
(1) any change in or event affecting Buyer, the business of
Buyer and the Buyer Subsidiaries or the Shares that has had or would
reasonably be expected to have a Buyer Material Adverse Effect, or
(2) any incurrence or undertaking of any liability or
obligation, direct or contingent, except for (i) liabilities or obligations
which are reflected
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in the Third Quarter 10-Q, (ii) the transactions contemplated by this
Agreement, (iii) liabilities incurred in the ordinary course of business,
(iv) other liabilities that would not have a Buyer Material Adverse Effect
and (v) liabilities or obligations relating to transactions publicly
disclosed by Buyer since October 4, 1997 in the SEC Reports.
3.8 TAX AND OTHER RETURNS AND REPORTS.
Buyer and each Buyer Subsidiary have timely filed all material Tax Returns
required to be filed by them and have paid all Taxes shown as due on such
returns. Neither Buyer nor any Buyer Subsidiary has elected to be treated as a
consenting corporation under Section 341(f) of the Code. All such Tax Returns,
including amendments to date, have been prepared in good faith without willful
misrepresentation and to Buyer's knowledge are complete and accurate in all
material respects. Except as set forth in Section 3.8 of the Buyer Disclosure
Schedule, no Governmental Entity has, during the past three years, examined or
is in the process of examining any Tax Returns of Buyer or any Buyer Subsidiary.
Except as set forth in the Buyer Disclosure Schedule, no Governmental Entity has
proposed against Buyer or any Buyer Subsidiary any material deficiency,
assessment, or claim for Taxes.
3.9 ENVIRONMENTAL MATTERS.
(i) Neither Buyer nor any Buyer Subsidiary has generated, used,
transported, treated, stored, released or disposed of, or has suffered or
permitted anyone else to generate, use, transport, treat, store, release or
dispose of any Hazardous Substance in violation of any Laws; (ii) there has not
been any generation, use, transportation, treatment, storage, release or
disposal of any Hazardous Substance in connection with the conduct of the
business of Buyer or any Buyer Subsidiary or the use of any property or facility
of Buyer or any Buyer Subsidiary or, to Buyer's knowledge, any nearby or
adjacent properties or facilities, which has created or might reasonably be
expected to create, any liability under any Laws or which would require
reporting to or notification of any Governmental Entity; and (iii) any Hazardous
Substance handled or dealt with in any way in connection with the business of
Buyer and the Buyer Subsidiaries, has been and is being handled or dealt with in
all material respects in compliance with applicable Laws.
3.10 AUTHORIZATION; NO CONFLICTS; APPROVALS.
The execution, delivery and performance of this Agreement and any related
agreements by Buyer has been duly and validly authorized by all necessary
corporate action on the part of Buyer. This Agreement and any related agreements
constitutes the legally valid and binding obligation of Buyer, enforceable
against Buyer in accordance with its terms except as such enforceability may be
limited by
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bankruptcy, insolvency, reorganization, moratorium and other similar laws and
equitable principles relating to or limiting creditors rights generally. The
execution, delivery and performance of this Agreement by Buyer and the
execution, delivery and performance of any related agreements or contemplated
transactions by Buyer will not violate, or constitute a breach or default
(whether upon lapse of time and/or the occurrence of any act or event or
otherwise) under, the charter documents or by-laws of Buyer or any Contract to
which Buyer or any Buyer Subsidiary is a party that is material to the financial
condition, results of operations or conduct of the business of Buyer and its
Subsidiaries taken as a whole or result in the imposition of any material
Encumbrance against any material asset or properties of Buyer or any of its
Subsidiaries, which in any case, could reasonably be expected to have a Buyer
Material Adverse Effect. The execution and delivery of this Agreement by Buyer
and the perforce of this Agreement and any related or contemplated transactions
by Buyer will not violate any Law, except violations which would not,
individually or in the aggregate, be reasonably expected to have a Buyer
Material Adverse Effect.
3.11 LEGAL PROCEEDINGS.
Except as set forth in Section 3.11 of the Buyer Disclosure Schedule, there
is no Order or Action pending, or, to Buyer's knowledge, threatened, against or
affecting Buyer or any Buyer Subsidiary or any of their respective properties or
assets that individually or when aggregated with one or more other Orders or
Actions has or, if determined adversely to Buyer or such Buyer Subsidiary would
reasonably be expected to have, a Buyer Material Adverse Effect, or materially
adversely affect Buyer's ability to perform this Agreement.
3.12 INSURANCE.
Buyer and the Buyer Subsidiaries maintain insurance of the types and in the
amounts generally deemed adequate for their respective businesses against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect.
3.13 COMPLIANCE WITH LAW; PERMITS.
Buyer and each Buyer Subsidiary has conducted its respective businesses in
accordance with applicable Laws (including, without limitation, the receipt of
all Permits that are required to conduct their respective Businesses), the
violation of which would, either individually or in the aggregate, reasonably be
expected to have a Buyer Material Adverse Effect. The forms, procedures and
practices of Buyer and each Buyer Subsidiary are in compliance with all such
Laws, to the extent applicable, the violation of which might reasonably be
expected to have a Buyer Material Adverse Effect. To Buyer's knowledge, no
suspension, cancellation or termination OF any Permits required by any
Governmental Entity to permit the Business to be
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conducted is threatened or imminent, that would, individually or in the
aggregate, reasonably be expected to have a Buyer Material Adverse Effect.
3.14 INVESTIGATION.
Buyer acknowledges and agrees that it has made its own inquiry and
investigation into, and based thereon has formed an independent judgment
concerning, the Stock, the Companies, the Company Subsidiaries, and the
Business. Buyer agrees that it has not relied on the accuracy of, and shall have
no claim against, Sellers, the Companies, or any of their officers, employees,
agents, stockholders, Affiliates, consultants, investment bankers, legal
advisers, or representatives arising out of any inaccuracy in or omission from
(except insofar as such inaccuracy or omission constitutes a breach of any
express representation or warranty of Sellers contained in Article II hereof)
information which has been furnished by the Companies concerning the Companies,
the Company Subsidiaries, and the Business. In connection with Buyer's
investigation of the Business, Buyer has received from the Companies and Sellers
certain projections and other forecasts for the Business. Buyer has not relied
on the accuracy of, and Sellers make no representation or warranty with respect
to, any projections or forecasts.
3.15 DELAWARE GENERAL CORPORATION LAW SECTION 203.
Section 203 of the Delaware General Corporation Law will not, prior to the
termination of this Agreement, apply to this Agreement or the transactions
contemplated hereby.
3.16 NO BROKERS OR FINDERS.
No agent, broker, finder or investment or commercial banker, or other
Person or firms engaged by or acting on behalf of Buyer or its Affiliates in
connection with the negotiation, execution or performance of this Agreement or
the transactions contemplated by this Agreement, is or will be entitled to any
broker's or finder's or similar fees or other commissions as a result of this
Agreement or such transactions, except for the fees and expenses of Piper
Jaffrey as to which Sellers shall have no responsibility or liability and Buyer
shall have full responsibility and liability.
ARTICLE IV
COVENANTS WITH RESPECT TO ACTS PRIOR TO CLOSING
4.1 ACCESS.
Subject to applicable Laws and fiduciary and privacy obligations, each
party will give the other party and their respective counsel, financial
advisors, auditors and other authorized representatives reasonable access during
normal business hours and
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on reasonable notice to the officers, properties, books and records of and
relating to the Companies and the Company Subsidiaries or Buyer and Buyer
Subsidiaries, as the case may be, will furnish to the other party and their
respective counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information with
respect to the Companies and the Company Subsidiaries or Buyer and the Buyer
Subsidiaries, as the case may be, as such Persons may reasonably request and
will instruct its employees, counsel and financial advisors to cooperate with
the other party in its investigation of the Company or Buyer and the Buyer
Subsidiaries, as the case may be. Any information provided, or caused to be
provided, by the parties pursuant to this Section 4.1 shall be subject to the
terms of the Confidentiality Agreement dated as of January 22, 1998 among
Pearson Inc., Mindscape, Inc. and Buyer (the "Confidentiality Agreement").
4.2 CONDUCT OF BUSINESS.
Between the date of this Agreement and the Closing Date, except with
respect to the items described in Section 4.8, Sellers covenant that no Company
and no Company Subsidiary shall, without the prior Consent in writing of Buyer,
which may not be Unreasonably withheld:
(a) Conduct the Business in any manner except in the ordinary Course
substantially as now Conducted; or
(b) Except as required by their terms, amend, terminate or enter into
any Material Contract; or
(c) terminate, amend or fail to renew any existing insurance
Coverage; or
(d) terminate or fail to renew or preserve any Permits; or
(e) incur or agree to incur any obligation or liability (absolute or
Contingent) that individually calls for payment by Company or any Company
Subsidiary of more than $250,000; or
(f) make any loan, guaranty or other extension of credit, or enter
into any Commitment to make any loan, guaranty or other extension of credit, to
or for the benefit of any director, officer, employee, Stockholder or any of
their respective Associates; or
(g) sell, transfer, mortgage, encumber or otherwise dispose of any
assets or any liabilities, except (i) for dispositions of property not material
in amount, or (ii) for dispositions contemplated by this Agreement; or
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(h) issue, sell, redeem or acquire for value, or agree to do so, any
debt obligations or Equity Securities of any Company or any Company Subsidiary;
or
(i) declare, issue, make or pay any dividend or other distribution of
assets, whether consisting of money, other personal property, real property or
other thing of value, to its shareholders, or split, Combine, dividend,
distribute or reclassify any shares of its Equity Securities; provided, however,
that the Companies and the Company Subsidiaries may pay as dividends on other
distributions to Sellers or Seller's Affiliates any and all cash on hand at the
Companies and the Company Subsidiaries prior to the Closing; or
(j) change or amend its charter documents or bylaws (or equivalent
documents); or
(k) make special or extraordinary payments to any person; or
(l) make any material investment, by purchase, Contributions to
capital, property transfers, or otherwise, in any other Person; or
(m) Compromise or otherwise settle any claims in excess of $250,000;
or
(n) enter into or adopt any employee benefit plan or any employment,
severance or bonus agreement or arrangement, or, except for normal increases in
the ordinary Course of business, increase in any manner the Compensation or
fringe benefits of, or materially modify the employment terms of, the directors,
officers or employees of the Company and Company Subsidiaries, or pay any
employee benefits not required by the terms in effect on the date hereof of any
existing employee benefit plan; or
(o) sell, assign, transfer or license any Intellectual Property
Rights, other than in the ordinary course of business; or
(p) make or commit to make any Capital expenditure in excess of
$250,000 per item; or
(q) purchase any inventory in excess of $500,000; or
(r) enter into any sales contract or other arrangement to deliver
products or licenses or an amount in excess of $500,000; or
(s) terminate any vendor relationships with 12 month purchases
greater than $250,000; or
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(t) terminate any employee earning over $100,000 per year, other than
for cause; or
(u) enter into any cooperative, advertising or marketing programs
costing more than $500,000; or
(v) make any payment or transfer of assets to any Seller or Affiliate
thereof; or
(w) make or terminate any material tax election; or
(x) accelerate the payment of any accounts receivable outside the
ordinary course or defer the payment of any accounts payable outside the
ordinary course; or
(y) agree to or make any commitment to take any actions prohibited by
this Section 4.2.
4.3 PERMITS AND APPROVALS.
Sellers and Buyer each agree to cooperate and use their reasonable best
efforts to obtain, and will immediately prepare all registrations, filings
(including but not limited to all filings required by the Hart-Scott-Rodino Act
and post closing notification to the German Bundeskartellant and applications,
requests and notices preliminary to, all Approvals and Permits that may be
necessary or which may be reasonably requested by Buyer to consummate, the
transactions contemplated by this Agreement, including requesting early
termination of any applicable waiting periods. To that end, Sellers and Buyer
agree to file notification as required by the Hart-Scott-Rodino Act within three
business days of the date of this Agreement. To the extent that the Approval of
a third party with respect to any Material Contract is required in Connection
with the transactions contemplated by this Agreement, each Seller shall use its
reasonable efforts to obtain such Approval prior to the Closing Date to the
extent requested by Buyer.
4.4 PRESERVATION OF BUSINESS PRIOR TO CLOSING DATE.
During the period beginning on the date hereof and ending on the Closing
Date, (a) Sellers will use their reasonable best efforts to preserve the
businesses of the Companies as Company Subsidiaries and to preserve the goodwill
of customers, suppliers and others having business relations with the Companies
and the Company Subsidiaries, and (b) Sellers and Buyer will consult with each
other concerning, and Sellers will cooperate in all reasonable respects to keep
available to Buyer, the services of the officers and employees of the Companies
and the Company Subsidiaries that Buyer may wish to have the Companies and the
Company
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Subsidiaries retain, and Sellers will provide reasonable access of Buyer to such
employees.
4.5 ELIMINATION OF INTERCOMPANY AND AFFILIATE LIABILITIES.
Except as set forth in Section 4.5 of the Disclosure Schedule, prior to the
Closing Date, Sellers shall cause to be eliminated through dividends, capital
contributions, or otherwise, to the extent they relate to the Business: (a) any
and all loans made or guaranteed by any Seller or any Affiliate of any Seller
(other than the Companies or their respective Subsidiaries) to or for the
benefit of any Company or any Company Subsidiary of any Company; (b) any and all
loans or guarantees made to or for the benefit of any Seller any Affiliate of
any Seller (other than the Companies or their respective Subsidiaries) by any
Company or any Company Subsidiary of any Company; and (c) other intercompany
accounts between the Sellers and any Company or Company Subsidiary.
4.6 CONFIDENTIALITY.
Subject to Section 9.8, all non-public information disclosed by any party
(or its representatives), whether before or after the date hereof, in connection
with the transactions contemplated by or the discussions and negotiations
preceding this Agreement shall be covered by the Confidentiality Agreement.
4.7 CERTAIN PAYMENTS.
Prior to the Closing, Sellers shall pay, or cause the Companies to pay, all
1997 employee bonuses and earn out obligations with respect to Micrologic.
4.8 PRE-CLOSING TRANSACTIONS.
Notwithstanding any other provision of this Agreement (including without
limitation the Seller Disclosure Schedule):
(a) Prior to the Closing, Mindscape shall be entitled to sell to any
Seller or Affiliate of any Seller all of the capital stock of Headland Digital
Media, Inc. for a purchase price of approximately $270,000.
(b) Prior to the Closing, Sellers or Affiliates of Sellers will
charge $7,500,000 to Mindscape for the Red Storm distribution contract described
on Section 2.5 of the Seller Disclosure Schedule. For the avoidance of doubt,
this will not be included in Working Capital on the Closing Working Capital
Statement. Sellers shall be responsible for any adverse tax consequences to
Mindscape on account of the $7,500,000 charge described above (without regard to
any limitation contained in Section 8.5).
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(c) Prior to the Closing, it is agreed that the relevant Companies
and the relevant Company Subsidiaries may transfer and assign to any Seller or
any Affiliate of any Seller in perpetuity all its or their rights in "Peter
Rabbit's Math Garden," "The Adventures of Peter Rabbit and Benjamin Bunny" and
"The Tale of Tom Kitten and Jemima Puddleduck") (collectively the "Potter
Programs") (including but not limited to the copyright in the program, program
engine, user interface, all source and object code, and associated program
documentation as well as any additional content and collateral materials
contained in the Potter Programs and any foreign language versions thereof), and
deliver any materials relating thereto, to such Seller or Affiliate, provided
always that (i) Mindscape shall retain the exclusive right (subject to approval
of packaging and any special sales including without limitation OEM deals) to
distribute the Potter Programs in the US and Canada for a period not exceeding
one year from the date of this Agreement on the basis that Mindscape shall not
be obliged to pay any royalty or other fee on such sales, (ii) Mindscape shall
continue to administer and support (but not vary, extend or renew) the Potter
Programs sub-licenses existing at the date hereof, (iii) the Seller and/or any
Affiliate of the Seller shall not be obliged to make any payments whatsoever to
Mindscape in respect of the Potter Programs or any future exploitation thereof,
and (iv) this assignment and the terms of this paragraph shall supersede and
replace all current arrangements and agreements regarding Potter Programs
between Mindscape and any Seller or any Affiliate of a Seller which shall no
longer have any force or effect.
ARTICLE V
ADDITIONAL CONTINUING COVENANTS
5.1 FILING OF TAX RETURNS AND PAYMENT OF TAXES.
(a) Sellers shall cause to be prepared and filed (or provide the
Companies for execution and filing, as appropriate) all Tax Returns of or
including any Company that pertain to or include any Pre-Closing Period, except
for any Tax Returns which include any Pre-Closing Straddle Period; and Sellers
shall pay or cause to be paid all Tax reported, or required to be reported, on
such Returns. Buyer shall provide Sellers with any assistance reasonably
requested by Sellers in connection with the filing of any Tax Returns described
above.
(b) Buyer shall prepare and file, or shall cause the Companies and
the Company Subsidiaries to prepare and file, all Tax Returns of or including
any Company other than those described in Section 5.1(a) above and Buyer or the
Companies shall pay all taxes shown thereon. Sellers will pay to Buyer an amount
equal to any Tax, or portion thereof, payable by Buyer that Buyer reasonably
determines is attributable to any Pre-Closing Straddle Period, at least fifteen
(15) business days prior to the due date of any such payment. Sellers will have
the right to review and comment on any Tax Return relating to the Pre-Closing
Straddle Period.
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(c) All transfer, documentary, sales, use, registration and other
such Taxes (including, but not limited to, all applicable real estate transfer
or gains taxes and stock transfer Taxes), any penalties, interest and additions
to Tax and fees incurred in Connection with this Agreement and the transactions,
contemplated hereby shall be paid by Buyer. Each party to this Agreement shall
cooperate in the timely making of all filings, returns, reports and forms as may
be required in connection therewith.
(d) Without Sellers' written consent, Buyer shall not file or permit
to be filed, any Tax Return or amended Tax Return related to any Company or
Company Subsidiary with respect to any Pre-Closing Period.
(e) The parties shall comply with their respective obligations in
relation to UK Tax matters as set out in Schedule 5.1 (UK Tax Covenant). To the
extent the provisions of this Agreement, including, but not limited to, this
Section 5.1 and Section 8.3 are inconsistent with the provisions of Schedule 5.1
with respect to any UK Company or Company Subsidiary, the provisions of Schedule
5.1 shall govern.
(f) No Person will make an election under Treasury Reg. Section 1.
5.2 APPORTIONMENT.
Sellers and Buyer agree to treat the Companies and the Company Subsidiaries
as if they ceased to be a part of each consolidated or combined group for
federal, state, local or foreign Tax purposes in which the Seller is also
currently a member as of 11:59 p.m. on the Closing Date and to treat the Closing
Date as the last day of any Taxable Period where such treatment is required or
permitted. For purposes of apportioning a Tax relating to a Straddle Period for
which such treatment is not required or permitted between the Pre-Closing
Straddle Period and the Post-Closing Straddle Period, the parties hereto shall
treat the Closing Date as the last day of the Pre-Closing Straddle Period (I.E.,
the parties shall "close the books" on such date).
5.3 TAX COOPERATION.
After the Closing, the parties shall, and shall cause their respective
Affiliates to, reasonably cooperate with Sellers, Buyer and the Companies in the
preparation of all Tax Returns and shall provide, or cause to be provided to
Sellers, Buyer and the Companies, any records and other information requested by
such parties in connection therewith as well as access to, and the cooperation
of, the accountants and auditors of Sellers, the Companies and their Affiliates.
Each party shall, and shall cause its Affiliates to, cooperate fully with
Sellers, Buyer, the Companies and the Company Subsidiaries, as the case may be,
in connection with any Tax investigation, audit or other proceeding. Any
information obtained pursuant to this Section 5.3 or
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pursuant to any other Section hereof providing for the sharing of information or
the review of any Tax Return or other Schedule relating to Taxes shall be
subject to Section 4.6.
5.4 MAINTAIN RECORDS.
For a period of five years after the Closing (or until the running of the
applicable statute of limitations for the return in question), the Companies,
Buyer and Sellers shall maintain all tax records, working papers, and other
supporting financial records and documents relating to the Tax Returns filed by,
on behalf of, or relating to the Companies or any Company Subsidiary or to any
Taxes for the last closed year and for all open years and for their taxable
years in which the Closing Date occurs. All such documents that relate primarily
to the Companies and the Company Subsidiaries will be delivered to and
maintained by Buyer during the period set forth above, and Buyer will make the
same available to Sellers or their agents at reasonable times for inspection and
copying. All such remaining documents shall be retained by Sellers during the
period set forth above, and Sellers will make the same available to Buyer or its
agents at reasonable times for inspection and copying. At the end of the period
set forth above, Sellers or Buyer, as the case may be, may dispose of such
documents, provided that notice of such disposition must be given to the other
parties at least 60 days in advance of such disposition. Upon receipt of such
notice, any Seller or Buyer, as the case may be, may request (at the requesting
party's expense) that such documents be delivered to them in lieu of disposing
of such documents.
5.5 PLAN TRANSFERS.
Buyer and Sellers agree to cooperate in making all appropriate filings and
taking all appropriate actions required to implement the provisions of this
Section.
(a) Following the Closing, Buyer shall sponsor, or cause one or more
of its Affiliates to sponsor, a plan or plans (the "SUCCESSOR PLAN") that is
qualified under Section 401 of the Code, under which there is established a
trust (the "SUCCESSOR TRUST") that is exempt under Section 501 of the Code, to
which the following transfers shall be made. As promptly as practicable after
the Closing Date, the Sellers shall cause Pearson Inc. to take all actions
necessary to vest the US Employees of the Companies in their account balances
held in the Pearson Inc. Savings and Investment Plan as of the Closing Date and
to transfer such account balances (including any loans and qualified domestic
relations orders pertaining thereto) to the Successor Trust in cash (and
promissory notes for the participant loans). The transfer of the account
balances referred to above shall take place upon receipt by such Seller of
either (x) a copy of a favorable determination letter or letters from the IRS
that the Successor Plan is qualified under Section 401 of the Code and the
Successor Trust is exempt from taxation under Section 501 of the Code, or (y) an
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opinion of counsel to Buyer, reasonably satisfactory to such Seller, that the
Successor Plan is qualified under Section 401 of the Code and the Successor
Trust is exempt from taxation under Section 501 of the Code.
(b) The parties shall comply with their respective obligations in
relation to UK pensions as set out in Schedule 5.5 (UK Pensions) and with
pension arrangements provided or contributed by any Company or Company
Subsidiary in respect of their employees governed by any jurisdiction other than
the US or the UK so far as is required by law in such other jurisdiction.
5.6 BUYER'S ADDITIONAL EMPLOYEE RELATED OBLIGATIONS.
(a) Buyer agrees that, after the Closing and until December 31, 1999,
employees of each Company and the Company Subsidiaries will, to the extent
permitted by law, be provided with benefits (including welfare, compensation,
bonus and incentive benefits) which in the aggregate are no less favorable than
those currently provided by such Company or Company Subsidiary, or the existing
benefit plans, programs and arrangements of the Companies and the Company
Subsidiaries will be continued, unless otherwise provided in this Agreement.
Buyer further agrees that the employees of the Companies shall be credited for
eligibility and vesting after the Closing Date under any applicable benefit
plan, program or arrangement of Buyer with their Service with any Company before
the Closing Date to the same extent such service was credited under the
comparable plan of such Company. After December 31, 1999, Buyer agrees to
provide all employees of the Companies and the Company Subsidiaries as of the
Closing Date with benefits to the same extent and on the same terms and
conditions as employees of Buyer or its Affiliates, as in effect from time to
time. Buyer further agrees (i) for a period of not less than two years after the
Closing, to maintain for the benefit of all employees of the Companies and the
Company Subsidiaries as of the Closing Date a severance pay plan no less
favorable than that provided by the Companies, the Company Subsidiaries and
their Affiliates immediately before the Closing; (ii) to use reasonable efforts
to waive any limitations regarding preexisting conditions under any welfare or
other employee benefit plan maintained by Buyer (and/or any of its Affiliates)
for the benefit of continuing employees or in which continuing employees
participate after the Closing; and (iii) for all purposes under all
compensation, life insurance, disability insurance, medical and severance pay
plans and policies applicable to employees of Buyer and its Affiliates,
including those referred to in this Section, to treat all service by continuing
employees with the Companies, the Company Subsidiaries or of their Affiliates
before the Closing as service with Buyer and its Affiliates.
(b) Buyer agrees that after the Closing, all severance agreements and
other arrangements of the Companies and the Company Subsidiaries for the benefit
of employees or former employees that are described in Section 5.6 of the Seller
Disclosure Schedule and that are in effect on the date hereof, will be paid by
Buyer
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or, if such amounts have previously been paid by Sellers, will be paid to
Sellers; provided, however, that Sellers, and not Buyer, will be responsible for
all payments to employees who, at the Closing, are entitled to a payment based
upon the "change in control" under the Companies' long Term Incentive Plan as in
effect on the date hereof. Buyer agrees that (i) the purchase of the Stock shall
Constitute a "change in control" for purposes of said severance agreements and
other agreements, (ii) each Company and each Company Subsidiary shall, and Buyer
shall cause the Companies and the Company Subsidiaries to, honor and comply with
the terms and conditions of all such severance agreements and other arrangements
and (iii) the Companies and the Company Subsidiaries will not amend any of the
terms of said severance agreements and other arrangements.
(c) Buyer shall indemnify and shall hold Sellers and their Affiliates
harmless from and against all liabilities with respect to all employees and
employee benefit plans, including, but not limited to, 401(k) Plans, relating to
causes of action arising after the Closing Date.
5.7 DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) The Certificates of Incorporation and Bylaws (or equivalent
documents) of the Companies and the company Subsidiaries shall contain
provisions no less favorable with respect to indemnification of directors and
officers of the Company and the Company Subsidiaries than are set forth in the
current certificates of incorporation and bylaws (or equivalent documents) of
the Company and the Company Subsidiaries and such provisions shall not be
amended, repealed or otherwise modified for a period of seven years after the
Closing in any manner that would adversely affect the rights thereunder of
individuals who prior to the Closing were directors or officers of any Company
or any Company Subsidiary, unless such modification is required by law.
(b) After the Closing, Buyer shall, to the fullest extent permitted
under applicable Law, indemnify and hold harmless, each present and former
director or officer of each Company or any Company Subsidiary (collectively, the
"Indemnitees") against any costs or expenses (including attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid in
settlement in connection with any claim, action, suit proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of, relating to or in connection with any action or omission occurring prior
to the Closing (including acts or omissions in connection with such persons'
serving as an officer, director or other fiduciary in any entity if such service
was at the request or for the benefit of Company or any Company Subsidiary) or
arising out of or pertaining to the transactions contemplated by this Agreement
for a period of seven years after the date hereof. In the event of any such
claim, action, suit, proceeding or investigation (whether arising before or
after the Closing), (i) Buyer shall pay the reasonable fees and expenses of a
single
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counsel selected by the Indemnitees, which counsel shall be reasonably
satisfactory to Buyer, within a reasonable time after statements therefor are
received, (ii) Buyer will have the right to control and, in any event, will
cooperate in, the defense and settlement of any such matter, and (iii) any
determination required to be made with respect to whether an Indemnitee's
conduct complies with the standards set forth under applicable law or the
applicable charter documents shall be made by independent counsel mutually
acceptable to Buyer and the Indemnitee; provided, however, that Buyer shall not
be liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld); and provided further that, in the event
that any proceeding indemnification is asserted or made within such seven-year
period, all rights to indemnification in respect of any such proceeding shall
continue until the disposition of all such proceedings.
(c) In the event Buyer, any Company or any Company Subsidiary or any
of their successors or assigns (i) consolidates with or merges into any other
Person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then and in each such case, proper
provisions shall be made so that the successors and assigns of Buyer, any
Company or any Company Subsidiary, as the case may be, shall assume the
obligations set forth in this Section 5.7(c).
(d) Buyer shall maintain or cause to be maintained in effect for
seven years after the Closing the current policies of the directors' and
officers' liability insurance maintained by each Company and each Company
Subsidiary (provided that Buyer may substitute or cause to be substituted
therefor policies of at least the same coverage containing terms and conditions
which are no less advantageous to the beneficiaries thereof) with respect to
matters occurring prior to the Closing.
5.8 LETTER OF CREDIT REIMBURSEMENT.
To the extent any letters of credit listed on Section 2.5 of Seller
Disclosure Schedule issued or guaranteed by any Seller or any Affiliate of
Seller is drawn down upon, Buyer will reimburse Sellers for any amounts so drawn
within five (5) Business Days of notification thereof.
ARTICLE VI
CONDITIONS OF PURCHASE
6.1 GENERAL CONDITIONS.
The obligations of the parties to effect the Closing shall be subject to
the following conditions unless waived by all parties:
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(a) NO ORDERS; LEGAL PROCEEDINGS. No law or Order which prohibits,
enjoins or otherwise restrains the consummation of the transactions contemplated
hereby shall have been enacted, entered, issued, promulgated or enforced by any
Governmental Entity; provided, that the parties shall use commercially
reasonable efforts to cause any such Law or Order to be vacated or lifted.
(b) HART-SCOTT-RODINO ACT. Any applicable waiting period under the
Hart-Scott-Rodino Act shall have expired or been terminated.
(c) OTHER APPROVALS. Any other required regulatory approvals shall
have been obtained.
6.2 CONDITIONS TO OBLIGATIONS OF BUYER.
The obligations of Buyer to effect the Closing shall be subject to the
following conditions except to the extent waived in writing by Buyer:
(a) REPRESENTATIONS AND WARRANTIES AND COVENANTS OF SELLERS. The
representations and warranties of Sellers herein contained that are qualified by
materiality shall be true and correct, and the representations and warranties of
Sellers herein contained that are not so qualified shall be true in all material
respects, at the Closing Date with the same effect as though made at such time,
other than those that speak as of a specific date, which in the case of those
qualified by materiality shall be true and correct and in the case of those not
so qualified, shall be true and correct in all material respects as of such
date, and except (i) as affected by any transactions contemplated by this
Agreement which are inconsistent with such representations or warranties or (ii)
as contemplated or permitted by this Agreement; each Seller shall have in all
material respects performed all obligations and complied with all covenants and
conditions required by this Agreement to be performed or complied with by it at
or prior to the Closing Date, and each Seller shall have delivered to Buyer a
certificate of each Seller in form and substance satisfactory to Buyer, dated
the Closing Date and signed by its chief executive officer and chief financial
officer (or equivalent officers) to such effect.
(b) NO MATERIAL ADVERSE CHANGE. There shall not have been any
Material Adverse Effect subsequent to the date of this Agreement.
6.3 CONDITIONS TO OBLIGATIONS OF SELLER.
The obligations of Sellers to effect the Closing shall be subject to the
following conditions, except to the extent waived in writing by Sellers:
(a) REPRESENTATIONS AND WARRANTIES AND COVENANTS OF BUYER. The
representations and warranties of Buyer herein contained that are qualified by
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materiality shall be true and correct, and the representations and warranties of
Buyer herein contained that are not so qualified shall be true in all material
respects, at the Closing Date with the same effect as though made at such time,
other than those that speak as of a specific date, which in the case of those
qualified by materiality shall be true and correct and in the case of those not
so qualified, shall be true in all material respects at and as of such date;
Buyer shall have in all material respects performed all obligations and complied
with all covenants and conditions required by this Agreement to be performed or
complied with by it at or prior to the Closing Date, and Buyer shall have
delivered to Seller a certificate of Buyer in form and substance satisfactory to
Sellers, dated the Closing Date and signed by its Chief Executive Officer and
Chief Financial Officer, to such effect.
(b) NO MATERIAL ADVERSE CHANGE. There shall not have been any Buyer
Material Adverse Effect subsequent to the date of this Agreement.
(c) REGISTRATION RIGHTS AGREEMENT. Buyer shall have entered into a
Registration Rights Agreement with Sellers, in the form attached as Exhibit B.
ARTICLE VII
TERMINATION OF OBLIGATIONS; SURVIVAL
7.1 TERMINATION OF AGREEMENT.
Anything herein to the Contrary notwithstanding, this Agreement and the
transactions contemplated by this Agreement shall terminate if the Closing does
not occur on or before the close of business on June 1, 1998, unless extended by
mutual agreement in writing of Buyer and Sellers and otherwise may be terminated
at any time before the Closing as follows and in no other manner:
(a) MUTUAL CONSENT. By mutual consent in writing of Buyer and
Sellers.
(b) CERTAIN CONDITIONS NOT MET BY EARLIER DATE. By Buyer, or Sellers,
as applicable, if any conditions of such other party, as set forth in Article
VI, shall not have been satisfied or waived by June 1, 1998.
(c) ILLEGALITY. By either Buyer or Sellers if there shall be a final,
non-appealable order of a Governmental Entity of competent jurisdiction in
effect preventing the Closing.
(d) CONDITIONS TO BUYER'S PERFORMANCE NOT MET. By Buyer by written
notice to Sellers if any event occurs or condition exists which would render
impossible the satisfaction of one or more conditions to the obligations of
Buyer to
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consummate the transactions contemplated by this Agreement as set forth in
Section 6.1 or 6.3.
(e) CONDITIONS TO SELLER'S PERFORMANCE NOT MET. By Sellers by Written
notice to Buyer if any event occurs or condition exists which would render
impossible the satisfaction of one or more conditions to the obligation of
Sellers to consummate the transactions contemplated by this Agreement as set
forth in Section 6.1 or 6.2.
(f) MATERIAL BREACH. By Buyer or Sellers if there has been a material
misrepresentation or other material breach by the other party in its
representations, warranties and covenants set forth herein; provided, however,
that if such breach is susceptible to cure, the breaching party shall have 10
business days after receipt of notice from the other party of its intention to
terminate this Agreement if such breach continues, in which to cure such breach.
7.2 EFFECT OF TERMINATION.
Subject to the immediately following sentence, if this Agreement shall be
terminated pursuant to Section 7.1, all further obligations of the parties under
this Agreement shall terminate without further liability of any party to
another; provided that the obligations of the parties contained in Section 4.6
(Confidentiality) and Section 9.11 (Expenses and Attorney's fees) shall survive
any such termination. A termination under Section 7.1 shall not relieve any
party of any liability for a breach of, or for any misrepresentation under, this
Agreement, or be deemed to constitute a waiver of any available remedy
(including specific performance if available) for any such breach or
misrepresentation.
ARTICLE VIII
INDEMNIFICATION
8.1 OBLIGATIONS OF SELLERS.
Sellers agree to indemnify and hold harmless Buyer, and its directors,
officers, employees, Affiliates, agents and assigns from and against any and all
Lasses of Buyer or Company, directly or indirectly, as a result of, or based
upon or arising from any breach of any representation, warranty or covenant of
Seller made in this Agreement. In addition, Seller shall indemnify Buyer with
respect to any liability arising under ERISA or any other Laws with respect to
the Company or any Company Subsidiary as a result of the Company or such Company
Subsidiary having been an ERISA Affiliate of (i) any Seller, or, (ii) any
Seller's ERISA Affiliates.
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8.2 OBLIGATIONS OF BUYER.
Buyer agrees to indemnify and hold harmless each Seller and its respective
directors, officers, employees, Affiliates, agents and assigns from and against
any and all losses, directly or indirectly as a result of, or based upon or
arising from, any breach of any representation, warranty or covenant of Buyer
made in this Agreement.
8.3 CERTAIN TAX MATTERS.
(a) SELLERS INDEMNITY. Sellers agree to indemnify, defend and hold
harmless Buyer against (i) any Tax payable by or on behalf of any Company or any
Company Subsidiary for any Pre-Closing Period (other than sales tax, but
including the California sales tax matter identified Section 2.4 of the Seller
Disclosure Schedule), (ii) any deficiencies in any Tax payable by or on behalf
of any Company or any Company Subsidiary arising from any audit by any taxing
agency or authority with respect to any Pre-Closing Period, (iii) Taxes of any
member of a consolidated or combined tax group of which any Seller was, or were
at any time, a member, for which any Company, or any Company Subsidiary and/or
any Seller is jointly or severally liable as a result of its inclusion in such
group, and (iv) any claim or demand for reimbursement or indemnification
resulting from any transfer by Seller prior to the Closing of any Tax benefits
or credits to any other person.
(b) AUDIT MATTERS. Sellers shall have the responsibility for, and the
right to control, at Seller's expense, the audit (and disposition thereof) of
any Tax Return relating to periods ending on or prior to the Closing Date and to
participate in the disposition of the audit of any Tax Return relating to the
periods ending after the Closing Date if such audit or disposition thereof could
give rise to a claim for indemnification hereunder. Buyer shall have the right,
directly or through its designated representatives, to review in advance,
comment upon, and approve all submissions made in the course of audits or
appeals thereof to any Governmental Entity relating to periods ending on or
prior to the Closing Date and to approve the disposition of any audit adjustment
with respect to such periods if such submission or disposition will or might
reasonably be expected to result in an increase in Taxes of Buyer or Company for
any period beginning at or after the Closing.
(c) SECTION 338(h)(10) ELECTION/RELATED PAYMENTS.
(1) At Buyer's request, Sellers will join with Buyer in making
an election under Section 338(h)(10) of the Code and/or any similar state
law provision in any state or States as Buyer shall designate, with respect
to the sale of the Stock to Buyer hereunder. Any such request must be
delivered to such Seller in writing not later than 90 days following the
Closing Date. If the Section 338(h)(10) election is made, the parties will
allocate the '.deemed selling price as computed under Treasury Regulations
Section 1.338(h)(10)-1(f)
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for tax purposes in accordance with Buyer's reasonable determination of
their fair market values, which determination shall be delivered to Seller
no later than 90 days following the Closing Date.
(2) In the event that an election is made under
Section 338(h)(10) of the Code and any similar state law provision with
respect to the sale of the Stock to Buyer hereunder, Buyer shall pay to
such Seller, as an addition to the purchase price, such amount, which after
deduction for all federal income and state income or franchise taxes
thereon (i.e., the payment required hereunder is grossed up for Taxes)
equals the excess of (A) the federal and state income taxes payable by such
Seller (and its Affiliates) with respect to the sale of the Stock hereunder
(other than on this payment) over (B) the federal and state income taxes
that would have been payable by such Seller (and its Affiliates) with
respect to the sale of the Stock hereunder if an election under Section
338(h)(10) and any similar state law provision had not been made; The
amount payable pursuant to the preceding sentence shall be calculated (i)
on the basis of the highest marginal rates applicable to the type of income
and the company (or companies) with respect to which the calculation is
being made, and (ii) without taking into account any losses, credits, or
other tax attributes attributable to or available to any Member of Seller's
US consolidated group other than Mindscape and its US Subsidiaries, whether
from the sale of Stock hereunder, or otherwise.
(3) No later than March 15 1999, Sellers shall prepare and
submit to Buyer a calculation of the amount or amounts payable by Buyer to
Seller pursuant to Section 8.3(c)(2). In this regard, Sellers will provide
Buyer and its designated representatives with such assistance and such
documents reasonably requested by them that are relevant to their ability
to confirm or determine the amount of any payment or payments to be made
hereunder. In the event of a dispute between Buyer and Sellers as to the
proper calculation of such payment or payments, the parties shall cooperate
with each other to mutually resolve such dispute in a reasonable manner;
PROVIDED, HOWEVER, that in the event the parties still disagree in good
faith, after 45 days after the date Sellers have submitted such
calculation, upon 10 days notice by Buyer or Sellers, the disputed matter
shall be submitted to a mutually agreed upon nationally recognized
accounting firm (that does not have a relationship with either party) for
final determination. Buyer shall pay any amounts due under Section
8.3(c)(2) no later than five (5) business days after Buyer and Sellers have
agreed upon the amount due or the amount due has been finally determined by
arbitration.
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8.4 INDEMNIFICATION PROCEDURE.
(a) NOTICE. Any party seeking indemnification with respect to any
Loss (the "INDEMNIFIED PARTY") shall give prompt notice to the party required to
provide indemnity hereunder (the "INDEMNIFYING PARTY").
(b) THIRD-PARTY CLAIMS If any claim, demand or liability is asserted
by any third party against any Indemnified Party (a "THIRD-PARTY CLAIM"), the
Indemnified Party shall (upon notice of said claim or demand) promptly notify
the Indemnifying Party and the Indemnifying Party shall defend and/or settle any
actions or proceedings brought against the Indemnified Party in respect of
matters embraced by the indemnity with counsel reasonably satisfactory to the
Indemnified Party. If the Indemnifying Party does not promptly defend or settle
any such claims, the Indemnified Party shall have the right to control any
defense or settlement, at the expense of the Indemnifying Party. No claim shall
be settled or compromised without the prior written consent of each party to be
affected by such settlement or compromise, with such consent not being
unreasonably withheld. The Indemnified Party shall at all times also have the
right to fully participate in the defense at its own expense. The parties shall
cooperate in the defense of all third party claims which may give rise to
Indemnifiable Claims hereunder. In Connection with the defense of any claim,
each party shall make available to the party controlling such defense, any
books, records or other documents within its control that are reasonably
requested in the course of such defense.
(c) CLAIMS BETWEEN THE PARTIES AND THEIR AFFILIATES. If the
Indemnified Party has a claim against the Indemnifying Party that does not
involve a Third-Party Claim (an "INTER-PARTY CLAIM"), the Indemnified Party will
notify the Indemnifying Party with reasonable promptness of such claim,
specifying the nature, estimated amount and the specific basis for such claim.
The Indemnifying Party shall respond within 45 days of receipt of such notice of
an Inter-Party Claim. If the Indemnifying Party fails to so respond the
estimated amount of such claim specified by the Indemnified Party shall be
conclusively deemed a liability of the Indemnifying Party. If the Indemnifying
Party timely disputes such claim, the Indemnified and the Indemnifying Party
shall negotiate in' good faith to resolve such dispute, and if not so resolved,
either party may pursue whatever remedies it may have.
(d) INSURANCE MATTERS. If any Loss is Covered by insurance, whether
by the insurance policies disclosed on any Seller Disclosure Schedule or
otherwise, Buyer shall use good faith efforts to exhaust claims against such
policies. The provisions of this Article VIII are subject to the rights of any
Indemnified Party's insurer which may be defending any such claim.
(e) SUBROGATION. If the Indemnifying Party makes any payment
hereunder of a Loss, the Indemnifying Party shall be subrogated, to the extent
of
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such payment, to the rights of the Indemnified Party against any insurer or
third party with respect to such Loss.
(f) ADJUSTMENTS FOR INSURANCE PROCEEDS. Nothing in this Section 8.4
shall be deemed to obligate any person to maintain any insurance or to pursue
any claim against any insurer or third party.
8.5 LIMITATION ON INDEMNITY.
(a) Notwithstanding the foregoing, Sellers shall not be obligated to
indemnify Buyer or its officers, directors, employees, agents or assigns
pursuant to Section 8.1 unless and until the aggregate amount of the
Indemnifiable Claims thereunder exceeds $1,000,000, it being understood that
after such amount exceeds $1,000,000, the Sellers shall be liable only for all
amounts in excess of $ 1,000,000 of Indemnifiable Claims (subject to the
following sentence), it being further understood that to the extent Losses
relate to or arise out of any single breach of a representation, warranty or
Covenant, such Losses shall not result in an Indemnifiable Claim hereunder
unless such Losses exceed $50,000. Further, the maximum amount for which Sellers
shall be liable to Buyer or its officers, directors, employees, agents or
assigns, excluding amounts relating to Section 2.2 (Stock), pursuant to this
Article shall be $30,000,000.
(b) Notwithstanding the foregoing, Buyer shall not be obligated to
indemnify Sellers or their respective officers, directors, employees, agents or
assigns pursuant to Sections 8.2 unless and until the aggregate amount of the
Indemnifiable Claims thereunder exceeds $ 1,000,000, it being understood that
after such amount exceeds $1,000,000, Buyer shall be liable only for all amounts
in excess of $1,000,000 of Indemnifiable Claims (subject to the following
sentence), it being further understood that to the extent Losses relate to or
arise out of any single breach of a representation, warranty or covenant, such
Losses shall not result in an Indemnifiable 'Claim hereunder unless such Losses
exceed $50,000. Further, the maximum amount for which Buyer shall be liable to
Sellers or their respective officers, directors, employees, agents or assigns,
excluding amounts relating to Section 3.2 (Stock), pursuant to this Article
shall be $10,100,000.
8.6 ABSOLUTE INDEMNITY.
The indemnification provided in this Article VIII shall constitute the
exclusive remedy of the parties hereto and their respective directors, officers,
employees, Affiliates, agents and assigns from and against any and all Losses
asserted against, resulting to, imposed upon or incurred or suffered by, any of
them, directly or indirectly, as a result of, or based upon or arising from the
breach of any representation or warranty or the nonfulfillment of any agreement
or covenant in or
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pursuant to this Agreement or any other agreement, document, or instrument
required hereunder, except in the case of fraud.
8.7 SURVIVAL.
The representations and warranties contained in or made pursuant to this
Agreement shall survive the Closing and expire on the one year anniversary of
the Closing, except that (i) the representations and warranties contained in
Sections 2.1 (Subsidiaries; Organization and Related Matters), 2.2. (Stock),
2.4. (Tax and Other Returns and Reports), 2.11 (Authorization; No Conflicts;
Approvals), 2.16 (Employee Benefits), 2.21 (No Brokers or Finders), 3.2
(Organization and Related Matters), 3.4 (Stock), 3.8 (Tax and Other Returns or
Reports), 3.11 (Authorization; No Conflicts; Approvals) and 3.17 (No Brokers or
Finders) shall survive the Closing and shall continue until the expiration of
the applicable statute of limitations as the same may be extended, (ii) the
agreements made in Article V and this Article VIII snail t)e continuing, and
(iii) if a claim or notice is given under this Article VIII with respect to any
representation or warranty prior to the applicable expiration date, such
representation or warranty shall continue indefinitely until such claim is
finally resolved or the statute of limitations with respect to such claim has
expired.
ARTICLE IX
GENERAL
9.1 AMENDMENTS; WAIVERS.
This Agreement and any schedule or exhibit attached hereto may be amended
only by agreement in writing of all parties. No waiver of any provision nor
consent to any exception to the terms of this Agreement or any agreement
contemplated hereby shall be effective unless in writing and signed by the party
to be bound and then only to the specific purpose, extent and instance so
provided.
9.2 SCHEDULES; EXHIBITS; INTEGRATION.
Each schedule and exhibit delivered pursuant to the terms of this Agreement
shall be in writing and shall constitute a part of this Agreement, although
schedules need not be attached to each copy of this Agreement. This Agreement,
together with such schedules and exhibits, constitutes the entire agreement
among the parties pertaining to the subject matter hereof and supersedes all
prior agreements and understandings of the parties in connection therewith,
including, but not limited to, the information contained in the Descriptive
Memorandum provided to Buyer by Sellers' agent and the confidentiality agreement
executed by Buyer in connection with receiving said Descriptive Memorandum.
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9.3 REASONABLE BEST EFFORTS; FURTHER ASSURANCES.
(a) STANDARD. Each party will use its reasonable best efforts to
cause all conditions to its obligations hereunder to be timely satisfied and to
perform and fulfill all obligations on its part to be performed and fulfilled
under this Agreement, to the end that the transactions contemplated by this
Agreement shall be effected substantially 'in accordance with its terms as soon
as reasonably practicable. Each party shall execute and deliver both before and
after the Closing such further certificates, agreements and other documents and
take such other actions as the other party may reasonably request to consummate
or implement the transactions contemplated hereby or to evidence such events or
matters.
(b) CERTAIN FILINGS. Each of Sellers and Buyer shall prepare and file
any filings (including but not limited to all filings related to the
Hart-Scott-Rodino Act, which shall be made is provided in Section 4.3) required
to be filed by them for consummation of the transactions contemplated by this
Agreement.. Sellers and Buyer shall cooperate with each other and provide to
each other all information necessary in order to prepare the filings. The
information provided by Sellers and Buyer for use in the filings shall at all
times prior to the Closing Date be true and correct in all material respects and
shall not omit to state any material fact required to be stated therein or
necessary in order to make such information not false or misleading. Each such
filing shall, when filed, comply in all material respects with applicable Law.
(c) MINUTES BOOKS, ETC. Sellers will use reasonable efforts, both
before and after the Closing, to locate and/or generate such corporate records
(i.e., minute books, articles, bylaws, and analogous foreign documents) as Buyer
may reasonably request.
(d) MINDSCAPE, NZ STOCK. Sellers will use their best efforts to cause
to be transferred to Buyer or its designee, to the extent legally permissible,
the 1 % ownership of Ray Mortimer in Mindscape, International (NZ) Ltd.
(e) LIMITATION. As used in this Agreement, the term "reasonable best
efforts" shall not mean efforts which require the performing party to do any act
that is unreasonable under the circumstances, to make any capital contribution
or to expend any funds other than reasonable out-of-pocket expenses incurred in
satisfying its obligations hereunder, including but not limited to the fees,
expenses and disbursements of its accountants, actuaries, counsel and other
professionals.
9.4 GOVERNING LAW.
This Agreement and the legal relations between the parties shall be
governed by and construed in accordance with the laws of the State of California
applicable to
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contracts made and performed in such State and without regard to conflicts of
law doctrines except to the extent that certain matters are preempted by federal
law or are governed by the law of the jurisdiction of organization of the
respective parties.
9.5 NO ASSIGNMENT.
Neither this Agreement nor any rights or obligations under it are
assignable except that Buyer may assign its rights hereunder (including but not
limited to its rights under Article VIII) to any wholly-owned subsidiary of
Buyer or to any post-Closing purchaser of the Stock or of substantially all of
the assets of the Companies; PROVIDED, HOWEVER, that Buyer shall remain liable
to Sellers for the payment of the Purchase Price and all other obligations of
Buyer hereunder notwithstanding a permitted assignment.
9.6 HEADINGS.
The descriptive headings of the Articles, Sections and subSections of this
Agreement are for convenience only and do not constitute a part of this
Agreement.
9.7 COUNTERPARTS.
This Agreement and any amendment hereto or any other agreement (or
document) delivered pursuant hereto may be executed in one or more counterparts
and by different parties in separate counterparts. All of such counterparts
shall constitute one and the same agreement (or other document) and shall become
effective (unless otherwise provided therein) when one or more counterparts have
been signed by each party and delivered to the other party (including delivery
by facsimile with assurances that the original signature will be subsequently
delivered).
9.8 PUBLICITY AND REPORTS.
Sellers and Buyer shall coordinate all publicity relating to the
transactions contemplated by this Agreement and no party shall issue any press
release, publicity statement or other public notice relating to this Agreement,
or the transactions contemplated by this Agreement, without obtaining the prior
consent of the other party except if such announcement is required by recognized
stock exchange rules or to the extent that a particular action is required by
applicable law.
9.9 PARTIES IN INTEREST.
This Agreement shall be binding upon and inure to the benefit of each
party, and nothing in this Agreement, express or implied, is intended to confer
upon any other person any rights or remedies of any nature whatsoever under or
by reason of this Agreement. Nothing in this Agreement is intended to relieve or
discharge the
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obligation of any third person to (or to confer any right of subrogation or
action over against) any party to this Agreement.
9.10 NOTICES.
Any notice or other communication hereunder must be given in writing and
(a) delivered in person, (b) transmitted by telex, telefax or telecommunications
mechanism provided that any notice so given is also mailed as provided in clause
(c) or (c) mailed by certified or registered mail, postage prepaid, receipt
requested as follows:
IF TO BUYER, ADDRESSED TO:
The Learning Company
One Athenaeum Street
Cambridge, Massachusetts 02142
Attention: General Counsel
WITH A COPY TO:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Mark G. Borden, Esq.
IF TO ANY SELLER OR TO ALL SELLERS, ADDRESSED TO:
Pearson Inc.
30 Rockefeller Plaza, 50th Floor
New York, New York 10112
Fax: 212-641-2500
Attention: Chief Financial Officer
WITH A COPY TO:
O'Melveny & Myers LLP
1999 Avenue of the Stars, Suite 700
Los Angeles, California 90067
Fax: 310-246-6779
Attention: Robert D. Haymer, Esq.
or to such other address or to such other person as either party shall have last
designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted
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to the applicable number so specified in (or pursuant to) this Section 9.10 and
an appropriate answerback is received, (ii) if given by mail, three days after
such communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iii) if given by any other means, when actually
delivered at such address.
9.11 EXPENSES AND ATTORNEYS FEES.
Sellers and Buyer shall each pay their own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including but not limited to the fees, expenses and
disbursements of their respective investment bankers, accountants and counsel.
Expenses of the Companies and Company Subsidiaries relating to negotiation and
closing of this transaction shall be paid by the Sellers, except as provided in
the Registration Rights Agreement. Each party shall bear their own costs for the
filing fee and other costs imposed on such party as a result of its
Hart-Scott-Rodino filing and any other required anti-trust related filings. In
the event of any Action for the breach of this Agreement or misrepresentation by
any party, the prevailing party shall be entitled to reasonable attorney's fees,
costs and expenses incurred in such Action.
9.12 SPECIFIC PERFORMANCE.
Sellers and Buyer each acknowledge that, in view of the uniqueness of the
Business and the transactions contemplated by this Agreement, each party would
not have an adequate remedy at law for money damages in the event that this
Agreement has not been performed in accordance with its terms, and therefore
agrees that the other party shall be entitled to specific enforcement of the
terms hereof in addition to any other remedy to which it may be entitled, at law
or in equity.
9.13 DAMAGES.
Notwithstanding anything to the contrary elsewhere in this Agreement, no
party shall, in any event, be liable to any other party for any consequential
damages, including, but not limited to, loss of revenue or income, cost of
capital, or loss of business reputation or opportunity, relating to the breach
or alleged breach of this Agreement. Each party agrees that it will not seek
punitive damages as to any matter under, relating to, or arising out of this
Agreement.
9.14 REPRESENTATION BY COUNSEL; INTERPRETATION.
The Companies, Buyer and Sellers acknowledge that they have been
represented by counsel in connection with this Agreement and the transactions
contemplated by this Agreement. Accordingly, any rule of law, including but not
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limited to Section 1654 of the California Civil Code, or any legal decision that
would require interpretation of any claimed ambiguities in this Agreement
against the patty that drafted it, has no application and is expressly waived.
The provisions of this Agreement shall be interpreted in a reasonable manner to
effect the intent of Buyer, Sellers and the Companies.
ARTICLE X
DEFINITIONS
10.1 DEFINITIONS.
For all purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires,
(a) the terms defined in this Article X have the meanings assigned to
them in this Article X and include the plural as well as the singular,
(b) all accounting terms not otherwise defined herein have the
meanings assigned under US generally accepted accounting principles,
(c) all references in this Agreement to designated "Articles,"
"Sections" and other subdivisions are to the designated Articles, Sections and
other subdivisions of the body of this Agreement,
(d) pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms, and
(e) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
As used in this Agreement and the Exhibits and Schedules delivered pursuant
to this Agreement, the following definitions shall apply:
"ACCOUNTANT" has the meaning given to such term in Section 1.5.
"ACTION" means any action, complaint, petition, investigation, suit or
other proceeding, whether civil or criminal, in law or in equity, or before ANY
arbitrator or Governmental Entity.
"AFFILIATE" means a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
a specified Person.
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"AGREEMENT" means this Agreement by and among Buyer, on the one hand, and
Sellers, on the other hand, as amended or supplemented. together with all
Exhibits and Schedules attached or incorporated by reference.
"APPROVAL" means any approval, authorization, consent, qualification or
registration, or any waiver of any of the foregoing, required to be obtained
from, or any notice, statement or other communication required to be filed with
or delivered to, any Governmental Entity or any other Person.
"ASSOCIATE" of a Person means
(i) a corporation or organization (other than the Companies or a
party to this Agreement) of which such person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities;
(ii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a similar
capacity; and
(iii) any relative or spouse of such person or any relative of such
spouse who has the same home as such person or who is a director or officer of
any of the Companies or any of the Affiliates.
"BALANCE SHEET" has the meaning set forth in Section 2.3.
"BALANCE SHEET DATE" MEANS the date of the Balance Sheet.
"BUSINESS" means the business of the Companies and the Company
Subsidiaries, taken as a whole.
"BUYER" has the meaning set forth in the Recitals.
"BUYER SUBSIDIARIES" has the meaning set forth in Section 3.2.
"BUYER MATERIAL ADVERSE EFFECT" means any change in or effect on the
business of Buyer and the Buyer Subsidiaries or any part thereof that would be
materially adverse to the results of operations or financial condition of Buyer
and the Buyer Subsidiaries taken as a whole, provided that none of the following
shall constitute a Buyer Material Adverse Effect: (i) occurrences due to a
disruption of Buyer or the Buyer Subsidiaries' businesses as a result of the
announcement of the execution of this Agreement, (ii) general economic
conditions or (iii) any changes generally affecting the industries in which
Buyer and the Buyer Subsidiaries operate, including changes due to seasonality.
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"CASH" has the meaning set forth in Section 1.2.
"CLOSING" means the consummation of the purchase and sale of the Stock
under this Agreement.
"CLOSING DATE" means the date of the Closing.
"CLOSING WORKING CAPITAL STATEMENT" is the statement to be prepared
according to Section 1.5, as described in Schedule 1.5.
"CODE" means the Internal Revenue Code of 1986, as amended, or as hereafter
amended.
"COMMISSION" has the meaning set forth in Section 3.1.
"COMMON STOCK" means the common stock of Buyer, .01 par value-per share.
"COMPANIES" means Mindscape, Inc., a Delaware corporation ("Mindscape"),
Mindscape International Ltd., a United Kingdom corporation and Mindscape France
SARL, a French corporation and "COMPANY" shall mean each of the aforementioned
Companies.
"COMPANY SUBSIDIARIES" has the meaning set forth in Section 2.1. For the
purpose of this Agreement, neither Headland Media, which will be spun out from
the Companies prior to the Closing Date, nor any of its Subsidiaries, will be
considered a Company Subsidiary.
"CONTRACT" means any agreement, arrangement, bond, commitment, franchise,
indemnity, indenture, instrument, lease, license or understanding, whether or
not in writing.
"DISCLOSURE SCHEDULE" means the Disclosure Schedule dated the date of this
Agreement and delivered by Sellers to Buyer (the "Seller Disclosure Schedule"),
or Buyer to Sellers (the "Buyer Disclosure Schedule"), as the case may be. The
Sections of the respective Disclosure Schedules shall be numbered to correspond
to the applicable Section of this Agreement and, together with all matters under
such heading, shall be deemed to qualify only that section; PROVIDED, HOWEVER,
that any information set forth in any Section of the respective Disclosure
Schedules shall be deemed to be set forth in every other Section OF such
Disclosure Schedule to the extent the applicability of such information to such
other Sections OF the Disclosure Schedule is apparent from the entry in the
Disclosure Schedule.
"ENCUMBRANCE" means any claim, charge, easement, encumbrance, lease,
covenant, security interest, lien, option, pledge, rights of others, or
restriction
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<PAGE> 51
(whether on voting, sale, transfer, disposition or otherwise), whether imposed
by agreement, understanding, law, equity or otherwise, except for any
restrictions on transfer generally arising under any applicable federal or state
securities law.
"EQUITY SECURITIES" means any capital stock or other equity interest or any
securities convertible into or exchangeable for capital stock or any other
rights, warrants or options to acquire any of the foregoing securities.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the related regulations and published interpretations.
"EXCHANGE ACT" has the meaning set forth in Section 3.1.
"FINANCIAL STATEMENTS" has the meaning given to such term in Section 2.3.
"GOVERNMENTAL ENTITY" means any government or any agency, district, bureau,
board, commission, court, department, official, political subdivision, tribunal
or other instrumentality of any government, whether federal, State or local,
domestic or foreign.
"HART-SCOTT-RODINO ACT" means the Hart-Scott-Rodino Antitrust Improvement
Act of 1976, as amended, and the related regulations and published
"HAZARDOUS SUBSTANCE" means (but shall not be limited to) substances that
are defined or listed in, or otherwise classified pursuant to, any applicable
Laws as "hazardous substances," "hazardous materials," "hazardous wastes" or
"toxic substances," or any other formulation intended to define, list or
classify substances by reason of deleterious properties such as ignitibility,
corrosivity, reactivity, radioactivity, carcinogenicity, reproductive toxicity
or "EP toxicity," and petroleum and drilling fluids, produced waters and other
wastes associated with the exploration, development, or production of crude oil,
natural gas or geothermal energy.
"INDEMNIFIABLE CLAIM" means any Loss for or against which any party is
entitled to indemnification under this Agreement.
"INDEMNIFIED PARTY" has the meaning given to such term in Section 8.4.
"INDEMNIFYING PARTY" has the meaning given to such term in Section 8.4.
"INTANGIBLE PROPERTY" means any trade secret, secret process or other
confidential information or know-how and any and all Marks.
"INTELLECTUAL PROPERTY RIGHTS" has the meaning set forth in Section 2.9.
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<PAGE> 52
"INTER-PARTY CLAIM" has the meaning given to such term in Section 8.4.
"IRS" means the internal Revenue Service or any successor entity.
"KNOWLEDGE" with respect to Sellers means the knowledge of David Veit, John
Moore, Cynthia Hudson, James Prather, Gordon Landies, Ian Rose and Chuck Kregal
and with respect to Buyer means the knowledge of the present CEO, President and
CFO of Buyer.
"LAW" means any constitutional provision, statute or other law, rule,
regulation, or interpretation of any Governmental Entity and any Order.
"LOSS" means any action, cost, damage, disbursement, expense, liability,
loss, deficiency, diminution in value, obligation, penalty or settlement OF any
kind or nature, including but not limited to, interest or other carrying costs,
penalties, legal, accounting and other professional fees and expenses incurred
in the investigation, collection, prosecution and defense of claims and amounts
paid in settlement, that MAY be imposed on or otherwise incurred or suffered by
the specified person.
"MARK" means any brand name, copyright, patent, service mark, trademark,
trade name, and all registrations or application for registration of any of the
foregoing.
"MATERIAL ADVERSE EFFECT" means any change in or effect on the Business or
any part thereof that would be materially adverse to the results of operations
or financial condition of the Companies and the Company Subsidiaries taken as a
whole, provided that none of the following shall constitute a Material Adverse
Effect: (i) occurrences due to a disruption of the Companies' or the Company
Subsidiaries' businesses as a result of the announcement of the execution of
this Agreement, (ii) general economic conditions or (iii) any changes generally
affecting the industries in which the Companies and the Company Subsidiaries
operate, including changes due to seasonality.
"MATERIAL CONTRACT" has the meaning given to such term in Section 2.5.
"ORDER" means any decree, injunction, judgment, order, ruling, assessment
or writ. "PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
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<PAGE> 53
"PERMIT" means any license, permit, franchise, certificate of authority, or
order, or any waiver of the foregoing, required to be issued by any Governmental
Entity.
"PERMITTED ENCUMBRANCES" means (a) statutory Encumbrances not yet
delinquent; (b) Encumbrances, with respect to the properties or assets of a
Person and its Subsidiaries taken as a whole, that do not individually or in the
aggregate, materially impair or materially interfere with the present use of the
properties or assets or otherwise materially impair present business operations
at such properties; (c) Encumbrances for Taxes not yet delinquent or the
validity of which are being contested in good faith by appropriate actions and
(d) Encumbrances reflected on the financial statements or on the Disclosure
Schedule of such Person.
"PERSON" means an association, a corporation, an individual, a partnership,
a trust or any other entity or organization, including a Governmental Entity.
"POST-CLOSING STRADDLE PERIOD" means the portion of any Straddle Period
that begins on the day after the Closing Date.
"PRE-CLOSING PERIOD" means any Taxable Period, or portion thereof, that
ends on or before the Closing Date, including any pre-Closing Straddle Period.
"PRE-CLOSING STRADDLE PERIOD" means the portion of any Straddle Period that
ends on the Closing Date.
"PURCHASE PRICE" has the meaning set forth in Section 1.2.
"REGISTRATION RIGHTS AGREEMENT" means the agreement referenced in Section
6.3(a).
"SEC REPORTS" has the meaning set forth in Section 3.1.
"SECURITIES ACT" has the meaning set forth in Section 3.1.
"SELLER" has the meaning set forth in the Recitals.
"SELLERS" has the meaning set forth in the Recitals.
"SHARES" has the meaning set forth in Section 1.2.
"STOCK" means all of the outstanding capital stock of the Companies.
"STRADDLE PERIOD" means any Taxable Period that begins before the Closing
Date and ends after the Closing Date.
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<PAGE> 54
"SUBSIDIARY" means any Person in which any Company has a direct or indirect
equity or ownership interest in excess of 25 %.
"SUCCESSOR PLAN" has the meaning given to such term in Section 5.3.
"SUCCESSOR TRUST" has the meaning given to such term in Section 5.3.
"TAXABLE PERIOD" means any taxable year or any other period that is treated
as a taxable year with respect to which any Tax may be imposed under any
applicable statute, rule or regulation.
"TAX" means any foreign, federal, state, county or local income, sales,
use, excise, franchise, ad valorem, real and personal property, transfer, gross
receipt, stamp, premium, profits, customs, duties, windfall profits, capital
stock, production, business and occupation, disability, employment, payroll,
severance or withholding taxes, fees, assessments or charges of any kind
whatever imposed by any Governmental Entity, any interest and penalties (civil
or criminal), additions to tax, payments in lieu of taxes or additional amounts
related thereto or to the nonpayment thereof, and any loss in connection with
the determination, settlement or litigation of any Tax liability.
"TAX RETURN" means a declaration, statement, report, return or other
document or information required to be filed or supplied with respect to Taxes
including, where permitted or required, combined or consolidated returns for any
group of entities that includes any Company or any Company Subsidiary.
"THIRD-PARTY CLAIM" has the meaning given to such term in Section 8.4.
"UK" means the United Kingdom.
"UK EMPLOYEES" means those individuals employed by Mindscape International
Limited or its Subsidiaries formed under the UK Laws at the Closing Date.
"US" means the United States of America.
"US EMPLOYEES" means those individuals employed by Mindscape, Inc. or its
United States Subsidiaries at the Closing Date.
"WORKING CAPITAL" means the "working capital" of Sellers, as calculated
pursuant to Schedule 1.5.
[Remainder of page intentionally left blank]
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<PAGE> 55
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its duly authorized officers as of the day and year first above
written.
BUYER
THE LEARNING COMPANY, INC.
By: /s/ R. Scott Murray
---------------------------------------
Name: Scott Murray
-------------------------------------
Title: Executive Vice President and
Chief Financial Officer
-------------------------------------
SELLERS
MINDSCAPE HOLDING COMPANY
By: /s/ John Davis
---------------------------------------
Name: John Davis
-------------------------------------
Title:
-------------------------------------
PEARSON OVERSEAS HOLDINGS LTD.
By: /s/ John Davis
---------------------------------------
Name: John Davis
-------------------------------------
Title:
-------------------------------------
PEARSON NETHERLANDS, BV
By: /s/ John Davis
---------------------------------------
Name: John Davis
-------------------------------------
Title:
-------------------------------------
S-1
<PAGE> 56
March 26, 1998
The Learning Company, Inc.
One Athenaeum Street
Cambridge, MA 02142
Re: Stock Purchase Agreement dated as of March 5, 1998
by and between The Learning Company, Inc., Mindscape
Holding Company, Pearson Overseas Holdings, Ltd.
and Pearson Netherlands, BV (the "Purchase Agreement")
------------------------------------------------------
Gentlemen:
This letter should confirm that The Learning Company, Inc. ("TLC") and the
undersigned have agreed as follows:
1. Section 1.2(a) of the Purchase Agreement is hereby amended to read in
its entirety as follows:
"Subject to the terms and conditions of this Agreement, Buyer agrees
to acquire the Stock from Sellers and to (i) pay (x) $120,000,000 in
cash plus (y) an amount equal to all bank cash balances held by any
Company or Company Subsidiary as of the Closing, in cash
(collectively, the "Cash") and (ii) issue to Sellers a number of
shares of Common Stock ("Shares") equal to the quotient obtained by
dividing (i) $30,000,000 by (ii) the average closing price of the
Common Stock on the New York Stock Exchange during the five trading
days ended two days prior to the Closing."
2. Section 1.2 of the Purchase Agreement is hereby amended by changing
"$52,500,000" to "$30,000,000" in all places.
3. The phrase "an underwritten sale of Shares" in the third sentence of
Section 1.2(b) of the Purchase Agreement is hereby amended to read "a sale of
Shares".
4. The following paragraph is added at the end of Section 2(a) of the
Registration Rights Agreement appended as Exhibit A to the Purchase Agreement:
"Notwithstanding the foregoing provisions, the Shares covered by the
Registration Statement may be sold by the Holder pursuant to one or
more block trades effected through a broker-dealer selected by the
Company and approved by the Holder (which approval shall not be
unreasonably withheld), provided no such block trade shall
<PAGE> 57
be made on terms that are not approved by the Company and provided
further that the Holder shall not be required to seek any such block
trades."
Sincerely,
MINDSCAPE HOLDING COMPANY
By: /s/ David Veit
------------------------------------
PEARSON OVERSEAS HOLDINGS, LTD.
By:/s/ David Veit
------------------------------------
PEARSON NETHERLANDS, BV
By:/s/ David Veit
------------------------------------
Accepted:
THE LEARNING COMPANY, INC.
By: /s/ R. Scott Murray
-------------------------------
<PAGE> 1
Exhibit 10.1
REGISTRATION RIGHTS AGREEMENT
Dated as of March 27, 1998
by and among
The Learning Company, Inc.
and
Mindscape Holding Company
<PAGE> 2
This Registration Rights Agreement (this "Agreement") is made and entered
into as of March 27, 1998 by and among The Learning Company, Inc., a Delaware
corporation (the "Company"), and Mindscape Holding Company (the "Holder").
This Agreement is made pursuant to the Stock Purchase Agreement, dated
March 27, 1998 (the "Purchase Agreement"), by and among the Company and the
Holder.
The parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings:
Act: The Securities Act of 1933, as amended.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions
in New York, New York or Boston, Massachusetts are
authorized or obligated by law or executive order to
close.
Common Stock: Common Stock, $.01 par value per share, of the Company.
Commission: The Securities and Exchange Commission.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Person: Any individual or entity.
Questionnaire: Means a Selling Securityholder Questionnaire, in the
form attached, containing the information specified in
Item 507 or 508 of Regulation S-K, as applicable, of the
Act and such other information with respect to a Holder
and the intended distribution of the Shares as may be
required in connection with the Registration Statement.
Prospectus: The prospectus included in the Registration Statement at
the time such Registration Statement is declared
effective, as amended or supplemented by any prospectus
supplement and by all other amendments thereto,
including post-effective amendments, all material
incorporated by reference
<PAGE> 3
into such Prospectus and any information previously
omitted in reliance upon Rule 430A of the Act.
Special Counsel: Special counsel to the Holder.
Shares: The shares of Common Stock issued to the Holder pursuant
to the Purchase Agreement.
2. REGISTRATION
(a) REGISTRATION. No later than 30 days after the date hereof, the Company
shall file with the Commission a registration statement on Form S-3 (the
"Registration Statement") covering the resale of the Shares, and shall use its
reasonable best efforts to cause such Registration Statement to become effective
as soon as possible thereafter. Any sale of Shares pursuant to the Registration
Statement shall be made only pursuant to an underwritten offering (an
"Underwritten Offering"), and, if necessary, the Company shall file such
amendments to the Registration Statement, and such supplements to the
Prospectus, as may be necessary to reflect the terms of the Underwritten
Offering. The Company may elect to include shares of Common Stock for its own
account in the Underwritten Offering, PROVIDED, that if the managing underwriter
determines that the number of shares to be included therein should be limited,
the shares to be offered for the account of the Company shall be excluded before
any Shares are excluded. The Company shall have the right to select the managing
underwriter(s) for the Underwritten Offering, subject to the approval of the
Holder, which approval will not be unreasonably withheld.
The Company shall use its reasonable best efforts to keep the Registration
Statement continuously effective, supplemented and amended as required by and
subject to the provisions of Section 3 hereof to the extent necessary to ensure
that it is available for sales of Shares by the Holder, and to ensure that it
conforms with the requirements of this Agreement, the Act and the policies,
rules and regulations of the Commission as announced from time to time, for a
period of one year following the date on which such Registration Statement first
became effective under the Act, or such shorter period as will terminate when
all Shares covered by such Registration Statement have been sold pursuant
thereto.
Notwithstanding the foregoing provisions, the Shares covered by the
Registration Statement may be sold by the Holder pursuant to one or more block
trades effected through a broker-dealer selected by the Company and approved by
the Holder (which approval shall not be unreasonably withheld), provided no such
block trade shall be made on terms that are not approved by the Company and
provided further that the Holder shall not be required to seek any such block
trades.
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<PAGE> 4
(b) PROVISION BY THE HOLDER OF CERTAIN INFORMATION IN CONNECTION WITH THE
REGISTRATION STATEMENT. The Holder may not include any of its Shares in the
Registration Statement pursuant to this Agreement unless and until the Holder
furnishes to the Company a Questionnaire within 25 days after the Closing. The
Holder agrees to furnish in a reasonable period of time such additional
information as may be reasonably requested in writing by the Company in
connection with the Registration Statement.
3. REGISTRATION PROCEDURES
In connection with the Registration Statement and Underwritten Offering,
the Company shall:
(i) upon the occurrence of any event that would cause the
Registration Statement or any Prospectus contained therein (A) to contain a
material misstatement or omission or (B) not to be effective and usable for
resale of Shares during the period required by this Agreement, the Company shall
file promptly an appropriate amendment to such Registration Statement curing
such defect, and, if Commission review is required, use its reasonable best
efforts to cause such amendment to be declared effective as soon as practicable;
(ii) advise the Holder or its Special Counsel and underwriters
promptly and, if requested by such Persons, confirm such advice in writing, (A)
when the Prospectus or any Prospectus supplement relating to the Holder or
post-effective amendment has been filed, and, with respect to the Registration
Statement or any post-effective amendment thereto, when the same has become
effective, (B) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements relating to the Holder to
the Prospectus or for additional information relating thereto, (C) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement under the Act or of the suspension by any state
securities commission of the qualification of the Shares for offering or sale in
any jurisdiction, or the initiation of any proceeding for any of the preceding
purposes, (D) of the existence of any fact or the happening of any event that
makes any statement of a material fact made in the Registration Statement, the
Prospectus, any amendment or supplement thereto or any document incorporated by
reference therein untrue, or that requires the making of any additions to or
changes in the Registration Statement in order to make the statements therein
not misleading; or that requires the making of any additions to or changes in
the Prospectus in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(iii) if at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, or any state
securities commission or other regulatory authority shall issue an order
suspending the
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<PAGE> 5
qualification or exemption from qualification of the Shares under state
securities or Blue Sky laws, the Company shall use its reasonable best efforts
to obtain the withdrawal or lifting of such order at the earliest possible time;
(iv) make available at reasonable times for inspection by a
representative of the Holder, and any attorney or accountant retained by the
Holder, or underwriters, all relevant financial and other records and pertinent
corporate documents of the Company and cause the Company's officers, directors
and employees to supply all information reasonably requested by any the Holder,
underwriters, attorney or accountant in connection with such Registration
Statement or any post-effective amendment thereto subsequent to the filing
thereof and prior to its effectiveness, in each case as is customary for similar
due diligence investigations; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at the time
of delivery of such information shall be kept confidential by the Holder,
attorney, accountant or agent, unless such disclosure is made in connection with
a court proceeding or required by law, or such information becomes available to
the public generally or through a third party without an accompanying obligation
of confidentiality; and provided further that the foregoing inspection and
information gathering shall, to the greatest extent possible, be coordinated on
behalf of the Holder by one Special Counsel designated by and on behalf of the
Holder;
(v) if requested by the Holder, promptly include in any Registration
Statement or Prospectus, pursuant to a supplement or post-effective amendment if
necessary, such information as the Holder, may reasonably request to have
included therein, including, without limitation, information relating to the
"Plan of Distribution" of the Shares; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as practicable after
the Company is notified of the matters to be included in such Prospectus
supplement or post-effective amendment, provided that the Company shall not be
required to take any actions under this clause that are not, in the opinion of
its counsel, in compliance with applicable law;
(vi) furnish to the Holder, without charge, at least one copy of the
Registration Statement, as first filed with the Commission, and of each
amendment thereto, and upon reasonable request of such selling Holder or
underwriter, all documents incorporated by reference therein and all exhibits
(including exhibits incorporated therein by reference);
(vii) deliver to the Holder, without charge, as many copies of the
Prospectus (including each preliminary prospectus) and any amendment or
supplement thereto as such Persons reasonably may request; the Company hereby
consents to the use (in accordance with law) of the Prospectus and any amendment
-4-
<PAGE> 6
or supplement thereto by the Holder in connection with the offering and the
sale of the Shares covered by the Prospectus or any amendment or supplement
thereto;
(viii) enter into such agreements (including underwriting agreements)
and make such representations and warranties and take all such other actions in
connection therewith, in each case as is customary in underwritten public
offerings, in order to expedite or facilitate the disposition of the Shares
pursuant to the Underwritten Offering contemplated by this Agreement;
(ix) cooperate with the Holder, underwriters and their respective
counsel in connection with the registration and qualification of the Shares
under the securities or Blue Sky laws of such jurisdictions as such Persons may
request and do any and all other acts or things necessary or advisable to enable
the disposition in such jurisdictions of the Shares covered by the Registration
Statement; provided, however, that the Company shall not be required to register
or qualify as a foreign corporation where it is not now so qualified or to take
any action that would subject it to the service of process in suits or to
taxation in any jurisdiction where it is not now so subject;
(x) list all Shares covered by such Registration Statement on any
securities exchange on which the Common Stock is then listed;
(xi) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make generally available
to its security holders with regard to the Registration Statement, as soon as
practicable, a consolidated earnings statement meeting the requirements of Rule
158 (which need not be audited) covering a twelve-month period beginning after
the effective date of the Registration Statement (as such term is defined in
paragraph (c) of Rule 158 under the Act); and
(xii) take all such action as may reasonably be necessary to effect
the sale of the Shares pursuant to the Underwritten Offering.
4. REGISTRATION EXPENSES
All expenses incident to the Company's performance of or compliance with
this Agreement will be borne by the Company, regardless of whether the
Registration Statement required by this Agreement becomes effective, including
without limitation: (i) all registration and filing fees and expenses; (ii) all
fees and expenses of compliance with federal securities and state Blue Sky or
securities laws; (iii) all expenses of printing (including printing certificates
for the Common Stock and printing of Prospectuses); (iv) all fees and
disbursements of counsel for the Company and a single counsel for the Holder;
(v) all application and filing fees in connection with listing the Common Stock
on a national securities exchange pursuant to the
-5-
<PAGE> 7
requirements hereof; and (vi) all fees and disbursements of independent
certified public accountants of the Company (including the expenses of any
special audit and comfort letters required by or incident to such performance);
PROVIDED, that the Holder shall be responsible for underwriting discounts and
commissions in connection with the sale of the Shares (subject to the "gross-up"
provisions of Section 1.2 of the Purchase Agreement).
5. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless the Holder, its
directors, its officers and each Person, if any, who controls the Holder (within
the meaning of Section 15 of the Act and Section 20 of the Exchange Act)(each
such person being sometimes referred to herein as an "Indemnified Holder"), from
and against any and all losses, claims, damages, liabilities, judgments,
(including without limitation, any reasonable legal or other expenses incurred
in connection with investigating or defending any matter, including any action
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement, preliminary Prospectus or
Prospectus (or any amendment or supplement thereto) or caused by 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, except insofar as
such losses, claims, damages, liabilities or judgments are caused by an untrue
statement or omission or alleged untrue statement or omission that is based upon
information relating to any of the Holder furnished in writing to the Company by
any of the Holder, provided, however, that the indemnification contained in this
paragraph (a) with respect to the preliminary Prospectus shall not inure to the
benefit of any Indemnified Holder (or to the benefit of any person controlling
such Indemnified Holder) on account of any such loss, claim, damage, judgment,
liability or expense arising from the sale of the Shares by such Indemnified
Holder to any person if the untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in the preliminary
Prospectus was corrected in the Prospectus and, due to the wrongful actions or
wrongful inaction of the Indemnified Holder, the Indemnified Holder did not send
or give in a timely manner, a copy of the Prospectus to such person (as then
amended or supplemented) if the Company has previously furnished sufficient
copies thereof to the Indemnified Holder on a timely basis.
(b) The Holder agrees, severally and not jointly, to indemnify and
hold harmless the Company and its directors and officers, and each person, if
any, who controls (within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act) the Company, to the same extent as the foregoing indemnity
from the Company to the Indemnified Holder, but only with reference to
information relating to such Indemnified Holder furnished in writing to the
Company by such Indemnified Holder expressly for use in the Registration
Statement (or any amendment thereto) or
-6-
<PAGE> 8
Prospectus (or any supplement thereto). In no event shall any Indemnified Holder
be liable or responsible for any amount in excess of the amount by which the
total amount received by such Indemnified Holder with respect to its sale of
Shares pursuant to the Registration Statement exceeds (i) the amount paid by
such Indemnified Holder for such Shares and (ii) the amount of any damages that
such Indemnified Holder has otherwise been required to pay to the Company
pursuant to this Section 5(b) by reason of such untrue or alleged untrue
statement or omission or alleged omission.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 5(a) or 5(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying person") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all reasonable fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 5(a) and 5(b), an Indemnified Holder shall not
be required to assume the defense of such action pursuant to this Section 5(c),
but may employ separate counsel and participate in the defense thereof, but the
fees and expenses of such counsel, except as provided below, shall be at the
expense of the Indemnified Holder). Any indemnified party shall have the right
to employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the indemnified party unless (i) the employment of such counsel shall have been
specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnified party and the indemnifying party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of the indemnified
party). In any such case, the indemnifying party shall not, in connection with
any one action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for all indemnified parties and all
such fees and expenses shall be reimbursed as they are incurred. Such firm shall
be designated in writing by a majority of the Indemnified Holder, in the case of
the parties indemnified pursuant to Section 5(a), and by the Company, in the
case of parties indemnified pursuant to Section 5(b). The indemnifying party
shall indemnify and hold harmless the indemnified party from and against any and
all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii) effected
without its written consent if the settlement is entered into
-7-
<PAGE> 9
more than twenty business days after the indemnifying party shall have received
a request from the indemnified party for reimbursement for the reasonable fees
and expenses of counsel (in any case where such fees and expenses are at the
expense of the indemnifying party) and, prior to the date of such settlement,
the indemnifying party shall have failed to comply with such reimbursement
request. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent that the indemnification provided for in this
Section 5 is unavailable to an indemnified party in respect of any losses,
claims, damages, liabilities or judgments 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 losses, claims, damages, liabilities or judgments (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company, on
the one hand, and the Holder, on the other hand, from their sale of Shares or
(ii) if the allocation provided by clause 5(d)(i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause 5(d)(i) above but also the relative fault of the
Company on the one hand, and of the Indemnified Holder, on the other hand, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative fault of the Company, on the one hand,
and of the Indemnified Holder, on the other hand, shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, on the one hand, or by the
Indemnified Holder, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and judgments referred to above shall be
deemed to include, subject to the limitations set forth in the second paragraph
of Section 5(a), any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.
The Company and the Holder, agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation (even if the Holder was treated as one entity for such purpose) or by
any other method of allocation which does not take account of the equitable
considerations
-8-
<PAGE> 10
referred to in the immediately preceding paragraph. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages, liabilities
or judgments referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any matter, including any action that could have
given rise to such losses, claims, damages, liabilities or judgments.
Notwithstanding the provisions of this Section 5, no Holder or its related
Indemnified Holder shall be required to contribute, in the aggregate, any amount
in excess of the amount by which the total received by the Holder with respect
to the sale of its Shares pursuant to the Registration Statement exceeds the sum
of (A) the amount paid by the Holder for such Shares plus (B) the amount of any
damages which the Holder has otherwise been required to pay to the Company
pursuant to this Section 5 by reason of such untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
6. MISCELLANEOUS
(a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to the provisions
hereof may not be given unless the Company has obtained the written consent of
the Holder.
(b) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to the Holder:
Mindscape Holding Company
c/o Pearson Inc.
30 Rockefeller Plaza
50th Floor
New York, NY 10112
Attention: Chief Financial Officer
Telecopier No: (212) 641-2500
With a copy to:
O'Melveny & Myers LLP
-9-
<PAGE> 11
1999 Avenue of the Stars, Suite 700
Los Angeles, CA 90067
Telecopier No.: (310) 246-6779
Attention: Robert D. Haymer, Esq.
(ii) if to the Company:
The Learning Company, Inc.
One Athenaeum Street
Cambridge, MA 02142
Telecopier No.: (617) 494-5660
Attention: General Counsel
With a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Telecopier No.: (617) 526-5000
Attention: Mark G. Borden, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when receipt
acknowledged, if telecopied; and on the next business day, if timely delivered
to an air courier guaranteeing overnight delivery.
(c) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(d) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(e) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(f) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
-10-
<PAGE> 12
(g) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final
expression of their agreement and intended (together with the Purchase
Agreement) to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein with respect to the registration
rights granted with respect to the Shares. This Agreement (together with the
Purchase Agreement) supersedes all prior agreements and understandings between
the parties with respect to such subject matter. For the avoidance of doubt, the
parties acknowledge that the payment obligations in the Purchase Agreement are
to be read in conjunction with, and in no way limited by, this Agreement.
-11-
<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
THE LEARNING COMPANY, INC.
By: /s/ R. Scott Murray
--------------------------------------
Name: R. Scott Murray
Title: Executive Vice President and
Chief Financial Officer
HOLDER:
MINDSCAPE HOLDING COMPANY
By: /s/ David Veit
-------------------------------
Name: David Veit
Title: President
-12-
<PAGE> 1
Exhibit 99.1
------------
For Immediate Release
---------------------
THE LEARNING COMPANY, INC. AND PEARSON PLC
REACH AGREEMENT ON MINDSCAPE, INC.
March 6, 1998
CAMBRIDGE, Mass., THE LEARNING COMPANY, INC. (NYSE:TLC), announced today that it
has entered into an agreement with certain affiliates of Pearson plc to acquire
all of the stock of Mindscape, Inc., a leading publisher of education,
productivity and entertainment software.
Mindscape, Inc. is the publisher of many award winning titles such as Mavis
Beacon Teaches Typing, The Complete National Geographic Collection, Print Master
Platinum, Chessmaster 5500 and The Princeton Review: Inside the SAT & ACT and
other home productivity, reference and educational titles. Mindscape had
revenues of approximately $130 million in its most recent year ended
December 31, 1997.
The Learning Company has agreed to purchase Mindscape for a purchase price of
$150 million, payable primarily in cash and the remainder through the issuance
of shares of common stock. The closing of the transaction is subject to certain
conditions, including expiration of applicable waiting periods under pre-merger
notification regulations.
Michael Perik, Chairman and Chief Executive Officer of The Learning Company,
Inc., said, "We are very impressed with the achievements and the sales momentum
that Mindscape has been able to achieve over the past twelve months. We believe
the company has built one of the best portfolios of branded content available in
the marketplace today. Mindscape's product strategy will complement that of The
Learning Company and allow us to provide an even broader array of products to
our customers. In addition, we expect that this acquisition will be accretive to
fiscal 1998 earnings by at least $.05 per share for the Learning Company."
Kevin O'Leary, President of The Learning Company said, "Mindscape brings several
premium franchises into the Learning Company's portfolio of leading educational
and reference brands. These include Mavis Beacon Teaches Typing, The Complete
National Geographic Collection, Print Master Platinum, The Princeton Review:
Inside the ACT & SAT and Chessmaster 5500. Print Master Platinum achieved
leadership in its home graphics category in January 1998, according to PC Data.
We expect to even further accelerate Print Master Platinum's momentum by
expanding its distribution through our school and direct response channels.
Furthermore, The Learning Company and Mindscape together are number-one in
dollar market share in U.S. retail in the month of January 1998, according to PC
Data."
<PAGE> 2
Marjorie Scardino, Chief Executive Officer of Pearson plc said, "We are selling
Mindscape because we believe it is always going to be worth more to a company
such as The Learning Company than it would be to Pearson. It was important to us
to find a new owner for the business who we believe values the talent, drive and
commitment of the people at Mindscape and will build on what has been achieved
over the past year."
This release contains information forecasting the results of the company after
the acquisition of Mindscape which are "forward-looking statements" under the
federal securities laws. Actual results could differ materially from those
forecasts and there can be no assurance that results will be achieved. Important
factors that could cause actual results to differ materially from those present
or estimated include: the company's ability to predict the revenues and profit
it will generate from the sale of Mindscape's product line; the effects of
general economic conditions; and the ability to achieve economies of scale and
revenue growth from the acquisition.
For additional information contact:
John Suske
Investor Relations
The Learning Company, Inc.
(617) 494-5816
[email protected]
Evelyn Dubocq
Public Relations
The Learning Company, Inc.
(510) 792-2101
[email protected]
Susan Getgood
Director of Corporate
Communications
The Learning Company, Inc.
(617) 494-1200
[email protected]
<PAGE> 1
Exhibit 99.2
------------
For Immediate Release
---------------------
THE LEARNING COMPANY, INC. COMPLETES ACQUISITION OF MINDSCAPE, INC.
March 27, 1998
CAMBRIDGE, Mass., THE LEARNING COMPANY, INC. (NYSE:TLC), announced
today that it has completed the previously-announced acquisition of
Mindscape, Inc., a leading publisher of education, productivity and
entertainment software, from certain affiliates of Pearson plc. The
Learning Company purchased Mindscape for a purchase price of $150
million.
Mindscape, Inc., based in Novato, Calif., is the publisher of many
award winning productivity, reference and educational titles including
Mavis Beacon Teaches Typing, The Complete National Geographic
Collection, Print Master Platinum, Chessmaster 5500 and The Princeton
Review: Inside the SAT & ACT. Mindscape had revenues of approximately
$130 million in its most recent year ended December 31, 1997.
The Learning Company, Inc. (NYSE:TLC) develops, publishes and markets a
family of premium software brands that educate across every age, from
young children to adults. The company's products are sold in more than
23,000 retail stores in North America and through multiple distribution
channels including school sales, online, direct marketing and OEM. The
company also develops, publishes and distributes products
internationally through subsidiaries in France, Germany, the United
Kingdom, Holland and Japan, and with distributors throughout Europe,
Latin America and the Pacific Rim. The company's corporate headquarters
are located at One Athenaeum Street, Cambridge, Mass. 02142; telephone
(617) 494-1200; fax (617) 494-1219. The corporate Web site is located
at www.learningco.com, and Customer Service can be reached at (617)
494-5700.
NOTE: All trademarks and registered trademarks are properties of their
respective holders.
For additional information contact:
John Suske
Investor Relations
The Learning Company, Inc.
(617) 494-5816
[email protected]
R. Scott Murray
Executive Vice President and
Chief Financial Officer
The Learning Company, Inc.
(617) 494-5861
[email protected]
Susan Getgood
Director of Corporate
Communications
The Learning Company, Inc.
(617) 494-1200
[email protected]
<PAGE> 1
Exhibit 99.3
------------
MINDSCAPE GROUP
(Indirect wholly-owned
subsidiaries of Pearson plc)
Combined Financial Statements
December 31, 1997
<PAGE> 2
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
INDEX TO COMBINED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.............................................2
Combined Balance Sheet........................................................3
Combined Statement of Operations..............................................4
Combined Statement of Shareholder's Equity....................................5
Combined Statement of Cash Flows..............................................6
Notes to Combined Financial Statements........................................7
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Mindscape Group
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of the
Mindscape Group at December 31, 1997, and the results of their operations and
their cash flows for the year, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the management
of the Group companies; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
March 2, 1998
2
<PAGE> 4
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
COMBINED BALANCE SHEET
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,331
Accounts receivable, net 33,071
Inventories 9,391
Royalty advances 5,851
Other current assets 1,030
---------
Total current assets 52,674
Property and equipment, net 3,479
Intangible assets, net 2,080
Other assets 1,538
---------
$ 59,771
=========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 11,848
Accrued royalties 6,734
Accrued expenses 15,512
Short-term borrowings - related party 300
---------
Total current liabilities 34,394
---------
Commitments and contingencies (Note 9)
Shareholder's equity:
Preferred Stock, $1.64 par value (aggregate liquidation amount $9,020),
5,500,000 shares authorized, issued and outstanding 9,020
Common Stock, various par values, 8,230,282 shares authorized,
8,229,282 shares issued and outstanding 13,646
Additional paid-in capital 573,092
Accumulated deficit (569,346)
Cumulative translation adjustment (1,035)
---------
Total shareholder's equity 25,377
---------
$ 59,771
=========
</TABLE>
The accompanying notes are in integral part of these combined financial
statements.
3
<PAGE> 5
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
COMBINED STATEMENT OF OPERATIONS
(amounts in thousands)
YEAR ENDED
DECEMBER 31,
1997
------------
Net revenues $ 138,520
Cost of net revenues 54,515
---------
Gross margin 84,005
---------
Costs and expenses:
Selling and marketing 43,771
Research and development 22,853
General and administrative 8,035
Amortization of intangible assets 3,727
Restructuring costs 11,898
---------
Total costs and expenses 90,284
---------
Loss from operations (6,279)
Interest expense - related party (531)
---------
Net loss $ (6,810)
=========
The accompanying notes are in integral part of these combined financial
statements.
4
<PAGE> 6
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
COMBINED STATEMENT OF SHAREHOLDER'S EQUITY
(amounts in thousands except share data)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ------------------ ADDITIONAL CUMULATIVE TOTAL
PAID-IN ACCUMULATED TRANSLATION SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
--------- ------ --------- ------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 - $ - 8,229,282 $13,646 $503,061 $(562,536) $ (13) $(45,842)
Issuance of Preferred Stock
to Shareholder 5,500,000 9,020 - - - - - 9,020
Capital contribution from
Shareholder - - - - 70,031 - - 70,031
Currency translation
adjustment - - - - - - (1,022) (1,022)
Net loss - - - - - (6,810) - (6,810)
--------- ------ --------- ------- -------- --------- ------- --------
Balance at December 31, 1997 5,500,000 $9,020 8,229,282 $13,646 $573,092 $(569,346) $(1,035) $ 25,377
--------- ------ --------- ------- -------- --------- ------- --------
</TABLE>
The accompanying notes are in integral part of these combined financial
statements.
5
<PAGE> 7
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
COMBINED STATEMENT OF CASH FLOWS
(amounts in thousands)
YEAR ENDED
DECEMBER 31,
1997
------------
Cash flows from operating activities:
Net loss $ (6,810)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 3,392
Provision for returns and price protection 29,300
Provision for doubtful accounts 1,315
Amortization of intangible assets 3,727
Provision for restructuring costs 6,697
Acquired in-process technology 975
Changes in assets and liabilities:
Accounts receivable, net (40,408)
Inventories (3,186)
Royalty advances 354
Other current assets (261)
Other assets (836)
Accounts payable 1,977
Accrued royalties (2,616)
Accrued expenses 3,068
--------
Net cash used in operating activities (3,312)
--------
Cash flows from investing activities:
Property and equipment purchases (1,705)
Cash paid for acquired businesses (2,181)
--------
Net cash used in investing activities (3,886)
--------
Cash flows from financing activities:
Short-term borrowings - related party 510
Repayment of short-term borrowings - related party (64)
Issuance of Preferred Stock to Shareholder 9,020
Contribution from Shareholder 331
--------
Net cash provided by financing activities 9,797
--------
Effect of exchange rates on cash (560)
--------
Net increase in cash and cash equivalents 2,039
Cash and cash equivalents at beginning of year 1,292
--------
Cash and cash equivalents at end of year $ 3,331
========
Supplemental disclosure of cash flow information:
Cash paid for interest - related party $ 1,631
========
Supplemental disclosure of noncash financing activity:
Conversion of short-term borrowing - related party to capital $ 69,700
========
The accompanying notes are in integral part of these combined financial
statements.
6
<PAGE> 8
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
NOTE 1 - THE COMPANY:
Mindscape Group (the "Group") develops, markets and distributes
consumer software in the educational, home and entertainment markets. The Group
sells its products in the retail channel through mass merchants, consumer
electronic stores, price clubs, office supply stores, distributors, to original
equipment manufacturers ("OEMs") and to end users through direct response
methods. The Group's principal market is in the United States. The Group has
international operations in the United Kingdom, Germany, France, Australia and
Japan.
NOTE 2 - BASIS OF PRESENTATION:
The current Mindscape, Inc. entity was incorporated originally as the
Software Toolworks ("Toolworks") in Delaware on February 2, 1988. Another
entity, the original Mindscape Inc., was acquired by Toolworks in 1989 when it
was merged with GD Acquisition, Inc., a wholly-owned subsidiary of Toolworks. In
April 1994, the outstanding capital stock of Toolworks was acquired by Pearson,
Inc., the wholly-owned United States subsidiary of Pearson plc for total
consideration of $475,678. On October 24, 1994, the original Mindscape Inc.
entity was merged with and into Toolworks, which simultaneously changed its name
to Mindscape, Inc.
The Toolworks acquisition by Pearson, Inc. was accounted for using the
purchase method. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. A portion of the purchase price was allocated to acquired
in-process technology, which represents the estimated fair value, using a
risk-adjusted income approach, of specifically identified technologies which had
not yet reached technological feasibility and had no alternative future use.
Prior to 1997, Group management assessed the carrying value of goodwill
for possible impairment based on a number of factors, including turnover of the
acquired workforce and the undiscounted value of expected future operating cash
flows in relation to the net carrying amount of goodwill. As a result of this
assessment, Group management determined that the entire net carrying amount of
goodwill associated with the Pearson, Inc. acquisition was impaired and charged
the amount to operations.
7
<PAGE> 9
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
The accompanying combined financial statements include the accounts of
the following entities, which are under the common ownership of the ultimate
parent, Pearson plc (collectively the Mindscape Group):
MINDSCAPE, INC. ("MINDSCAPE US") - Mindscape US is headquartered in
Novato, California and is responsible for worldwide product development,
publishing, management and North American sales and marketing.
MINDSCAPE INTERNATIONAL LIMITED ("MINDSCAPE UK") - Mindscape UK is
headquartered in West Sussex, England and operates as the Group's primary
European sales and marketing entity.
MINDSCAPE INTERNATIONAL SOFTWAREVERTRIEB GMBH ("MINDSCAPE GERMANY") -
Mindscape Germany is headquartered in Muelheim, Germany and operates as the
Group's German sales and marketing entity.
MINDSCAPE INTERNATIONAL PTY LIMITED ("MINDSCAPE AUSTRALIA") - Mindscape
Australia is headquartered in Castle Hill, New South Wales, Australia and
operates as the Group's primary Australian and Asia Pacific sales and marketing
entity.
MINDSCAPE INTERNATIONAL JAPAN, LNC. ("MINDSCAPE JAPAN") - Mindscape
Japan is a dormant entity with insignificant activity.
MINDSCAPE FRANCE SARL ("MINDSCAPE FRANCE") - Mindscape France is
headquartered in Rennes, France and operates as the Group's primary French sales
and marketing entity.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
the Mindscape Group. All significant intercompany balances and transactions have
been eliminated.
8
<PAGE> 10
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are primarily derived from the sale of software products and
from software licensing to OEMs.
Revenues from the sale of software products are recognized upon
shipment, provided that no significant obligations remain outstanding and
collection of the related receivable is considered probable. Costs related to
insignificant post-shipment technical support and other obligations are accrued
when revenue is recognized for the sale of related products. Allowances for
estimated returns and doubtful accounts are provided at the time of sale. The
Group evaluates the adequacy of allowances for returns and doubtful accounts
based upon its historical experience with customers and various distributions
channels. The amounts provided for returns and allowances are estimates and are
based upon information available at the reporting date. To the extent the future
market, sell-through experience, channels of distribution and general economic
conditions change, the provisions required for estimated returns and allowances
may also change.
Revenues from software licensing to OEMs are recognized on a
sell-through basis upon cash receipt and completion of any significant
obligations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term highly liquid investments
with original maturities of three months or less when purchased.
9
<PAGE> 11
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
INVENTORIES
Inventories consist of raw materials for packaging and finished goods
and are stated at the lower of cost, determined on a first-in, first-out basis,
or market value.
ROYALTY ADVANCES
Royalty advances represent prepayments made to independent software
developers under development agreements and are expensed at the contractual
royalty rate as cost of sales based on actual net product sales. Management
evaluates the future realization of royalty advances at each reporting period,
and charges to research and development expense any amounts that are unlikely to
be amortized at the contract royalty rate through product sales. During the year
ended December 31, 1997, the Group recorded charges to restructuring costs of
$6,312 for development efforts abandoned prior to achieving technological
feasibility.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
provided for using the straight-line method over the estimated useful lives of
three years for all assets.
INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net
assets acquired in acquisitions of various third party software companies.
Management estimates that such goodwill is primarily associated with the
acquired product, workforce and technological know how. As a result of the rapid
technological changes occurring in the consumer software industry and the
intense competition for qualified software professionals, recorded goodwill is
amortized on a straight-line basis over the estimated periods of benefit,
generally three years.
In the event that facts and circumstances indicate that the carrying
value of recorded goodwill may be impaired, the estimated future undiscounted
cash flows associated with the goodwill are compared to the goodwill's carrying
amount. If the carrying amount of the goodwill is greater than the undiscounted
cash flows, then the cash flows are discounted and the carrying amount is
written down to its
10
<PAGE> 12
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
discounted cash flow value. During the year ended December 31, 1997, the Group's
analysis did not identify any material goodwill impairment.
Costs of in-process technology acquired prior to the achievement of
technological feasibility, determined using the working model approach, are
expensed in the period incurred. During the year ended December 31, 1997, the
Group charged $975 to research and development expense associated with the
acquisition of certain technology assets.
INCOME TAXES
Income taxes are accounted for on a separate return basis using an
asset and liability approach which requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in the Group's
financial statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of the enacted tax law; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
As discussed in Note 7, through December 31, 1997, the Group companies
operated as reporting units of Pearson plc and were included in the consolidated
tax returns of Pearson plc and its subsidiaries. Certain net operating losses
generated by the Group have been utilized by Pearson plc or its subsidiaries.
Accordingly, the consolidated income tax benefits realized by Pearson plc have
been reflected as capital contributions in the accompanying combined financial
statements.
SOFTWARE DEVELOPMENT COSTS
Financial accounting standards provide for the capitalization of
certain software development costs after technological feasibility of the
software is attained. The capitalized software costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. No costs
were capitalized during the year ended December 31, 1997, as the impact on the
combined financial statements was not considered significant.
11
<PAGE> 13
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Group's foreign operations is the local
currency of each respective Group company. Assets and liabilities of each
foreign operation are translated into U.S. dollars at exchange rates in effect
at the balance sheet date. Income and expense items are translated at average
exchange rates during the period. Cumulative translation adjustments are
recorded in shareholder's equity. At December 31, 1997, the carrying amount of
cash and cash equivalents was denominated entirely in foreign currencies.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Group to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are deposited with high
credit quality financial institutions. The Group's revenues are derived from
transactions with customers in the United States, United Kingdom, Germany,
Australia and France. Concentrations of credit risk with respect to trade
receivables are mitigated, to some extent, by the fact that the Group's customer
base is highly diversified.
At December 31, 1997, two customers each accounted for 10 percent of
gross accounts receivable.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The adoption of both statements is required
for fiscal years beginning after December 15, 1997. Under SFAS No. 130,
companies are required to report in the financial statements, in addition to net
income, comprehensive income including, as applicable, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. SFAS No. 131 requires that companies
report separately, in the financial statements, certain financial and
descriptive information about operating segments, if applicable. The Group does
not expect the adoption of SFAS No. 130 or SFAS No. 131 to have a material
impact on its combined financial statements.
12
<PAGE> 14
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
In October 1997, the AICPA issued SoP 97-2, "Software Revenue
Recognition," which provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SoP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997. Earlier application is encouraged as of the beginning of fiscal years
or interim periods for which financial statements or information have not been
issued. Retroactive application of the provisions of this SoP is prohibited. The
Group has assessed the provisions of SoP 97-2 and does not expect that adoption
will have a material impact on its combined financial statements.
In March 1998, the AICPA issued SoP 98-1, "Software for Internal Use,"
which provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SoP 98-1 applies to all nongovernmental
entities and is effective for financial statements for fiscal years beginning
after December 15, 1998. The Group does not expect the adoption of SoP 98-1 to
have a material impact on its combined financial statements.
NOTE 4 - TRANSACTIONS WITH RELATED PARTIES:
SHORT-TERM BORROWINGS
To maintain its cash flow requirements, the Group periodically enters
into short-term borrowing arrangements with various wholly-owned Pearson plc
subsidiaries. Amounts outstanding at December 31, 1997 totaled $300 with
interest rates ranging from 4.0 to 6.5 percent.
During 1997, $69,700 of short-term borrowings from a Pearson plc
affiliate was converted to permanent capital.
ALLOCATION OF CORPORATE OVERHEAD COSTS
Pearson plc and its affiliates provide the Group with certain services,
including insurance, legal, finance and other corporate functions. During 1997,
the Group was not charged for these services as the aggregate amount was
insignificant. The Group is periodically charged a pro rata share of expenses
paid by Pearson plc on its behalf for such items as insurance premiums, audit
fees and other administrative costs. The total costs allocated from Pearson plc
in 1997 totaled $173. Management believes that
13
<PAGE> 15
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
the methodologies used to allocate these charges are reasonable and included
these charges in general and administrative expense.
During 1997, Mindscape US charged Headland Digital Media ("Headland"),
a wholly-owned subsidiary of Pearson plc, $1,096 for rent, utilities,
depreciation, telephone and other costs in connection with the sharing of the
Novato, California facility. In addition, Mindscape US provided Headland with
certain general and administrative services in 1997, including accounting, human
resources, legal, information systems and other services. The allocated costs
for these services totaled $2,046 and are excluded from the accompanying
combined financial statements. Management believes that the methodologies used
to allocate these charges are reasonable.
EMPLOYEE BENEFIT PLANS
Pearson plc has a 401(k) plan covering substantially all of the
Mindscape US employees. Mindscape US contributes 25 percent for every dollar
contributed by Plan participants subject to certain limitations on individual
contributions. Beginning in 1997, the amount Mindscape US contributes each year
will increase from 25 percent to 50 percent for every dollar contributed if
Mindscape US reaches certain specified corporate earnings targets and upon the
discretion of Mindscape US management. Mindscape US's costs of the Plan was $372
in 1997.
Pearson plc has a defined contribution plan covering substantially all
Mindscape UK employees. Employees contribute either 2.5 percent or 5 percent of
base salary and Pearson plc provides a 200 percent matching of the amounts
contributed. There is no charge to Mindscape UK under this plan. Amounts
contributed by Pearson plc were not significant during 1997.
Mindscape UK has a defined contribution plan covering several employees
not covered by the Pearson plc plan. Mindscape UK contributed 5 percent of base
salary for all non-director employees and 10 percent of base salary for all
directors. Mindscape UK's cost of this plan was $35 in 1997.
Mindscape Australia has defined contribution plans covering all
employees. Employer contributions are required at the statutory rate of 6
percent of base salary. Mindscape Australia's cost of the Plan was $13 in 1997.
14
<PAGE> 16
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
NOTE 5 - RESTRUCTURING COSTS:
During 1997, the Group recorded charges of $11,898, in connection with
the termination of 57 research and development employees, the abandonment of
certain development efforts and the partial closure of certain research and
development operations. These costs included accruals for abandoned research and
development projects, severance, office lease termination and other items. As of
December 31, 1997, $3,899 of the charge has not yet been utilized and relates
primarily to long-term real property lease commitments.
NOTE 6 - BALANCE SHEET COMPONENTS:
DECEMBER 31,
1997
------------
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $ 60,878
Less: Allowance for returns and price protection (21,786)
Less: Allowance for doubtful accounts (6,021)
--------
$ 33,071
========
INVENTORIES:
Raw materials $ 3,437
Finished goods 5,954
--------
$ 9,391
========
PROPERTY AND EQUIPMENT, NET:
Machinery and equipment $ 15,054
Leasehold improvements 803
Furniture and fixtures 1,348
--------
17,205
Less: Accumulated depreciation (13,726)
--------
$ 3,479
========
15
<PAGE> 17
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
INTANGIBLE ASSETS, NET:
Goodwill $ 387,718
Less: Accumulated amortization (385,638)
---------
$ 2,080
=========
ACCRUED EXPENSES:
Compensation, benefits and other accruals $ 11,613
Restructuring costs 3,899
---------
$ 15,512
=========
NOTE 7 - INCOME TAXES:
Through December 31, 1997, the Group companies operated as reporting
units of Pearson plc and were included in the consolidated tax returns of
Pearson plc and its subsidiaries. For purposes of preparing these combined
financial statements in accordance with generally accepted accounting
principles, the provisions for income taxes has been computed using the separate
return method as if the Group represented separate taxable entities for all
periods presented.
Certain net operating losses generated by the Group have been utilized
by Pearson plc and its subsidiaries. Accordingly, Pearson plc has allocated the
income tax benefit received to the Group companies and has historically
reflected these amounts as capital contributions.
No provision for federal, foreign and state taxes has been recorded as
the Group has incurred net operating losses through December 31, 1997. At
December 31, 1997, the Group has federal and state net operating loss
carryforwards of approximately $105,000 and $16,000, respectively, which will
expire in varying amounts through 2012. Such carryforwards may be limited in
certain circumstances including, but not limited to, cumulative stock ownership
changes of more than 50 percent over a three-year period.
Pretax loss was subject to tax in the following jurisdictions:
16
<PAGE> 18
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
YEAR ENDED
DECEMBER 31,
1997
------------
United States $ 274
Foreign (7,084)
-------
$(6,810)
=======
Deferred tax assets may be recognized for temporary differences that
will result in deductible amounts in future periods, net operating loss
carryforwards and other future tax benefits. A valuation allowance is recognized
if, on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. At December 31,
1997, the deferred tax asset valuation allowance is established at 100% of the
deferred tax asset of the Group's U.S. entities, which has a history of
operating losses. Included in other current assets are deferred tax assets and
related valuation allowances as follows:
YEAR ENDED
DECEMBER 31,
1997
------------
Net operating loss carryforwards $ 32,000
Allowance for doubtful accounts 1,000
Allowance for sales returns and price protection 5,500
Accruals 3,000
Other 500
--------
Gross deferred tax assets 42,000
Valuation allowance (42,000)
--------
$ -
========
17
<PAGE> 19
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
NOTE 8 - SHAREHOLDER'S EQUITY:
The holder of Preferred Stock is entitled to one vote per share on all
matters to be voted upon by the shareholders and entitled to receive ratably
dividends declared, if any, out of funds legally available. In the event of a
liquidation, dissolution or winding up of the Group, the holder of Preferred
Stock is entitled to receive $1.64 per share prior, and in preference, to the
holders of Common Stock and is entitled to share ratably in any proceeds
remaining after the Common Stockholder receives its amount paid in for such
shares.
The holder of Common Stock is entitled to one vote per share on all
matters to be voted upon by the shareholders and entitled to receive ratably
dividends declared, if any, out of funds legally available. In the event of a
liquidation, dissolution or winding up of the Group, the holder of Common Stock
is entitled to share ratably in all assets remaining after the payment of
liabilities then outstanding and the distribution of amounts to the Preferred
Stockholder.
18
<PAGE> 20
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
SHARES
SHARES ISSUED AND
AUTHORIZED OUTSTANDING PAR VALUE AMOUNT
---------- ----------- --------- -------
Preferred Stock:
Mindscape UK 5,500,000 5,500,000 $ 1.64 $ 9,020
--------- --------- -------
Common Stock:
Mindscape US 2,000 1,000 $ 1.00 $ 1
Mindscape UK 8,208,282 8,208,282 $ 1.62 13,297
Mindscape France 20,000 20,000 $17.40 348
--------- --------- -------
8,230,282 8,229,282 $13,646
========= ========= =======
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Group leases office space and equipment under noncancelable
operating leases, which expire from January 1998 through September 2011. The
accompanying combined financial statements reflect rent expense on a
straight-line basis over the terms of the respective lease agreements. Total
rent expense under noncancelable operating leases was $2,398 for the year ended
December 31, 1997. Future minimum payments under noncancelable operating leases
at December 31, 1997, are as follows:
19
<PAGE> 21
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
YEAR ENDING
DECEMBER 31,
- ------------
1998 $ 2,609
1999 2,042
2000 2,097
2001 2,109
2002 2,090
Thereafter 7,352
=======
$18,299
-------
ROYALTY COMMITMENTS
The Group enters into noncancelable development and royalty agreements
with various independent software developers. Commitments are tied to specific
performance milestones and future minimum payments under noncancelable
development and royalty agreements totaled $14,123 at December 31, 1997.
LEGAL PROCEEDINGS
Various claims arising in the ordinary course of business, seeking
monetary damages and other relief, are pending. The amount of liability, if any,
from such claims can not be determined with certainty; however, in the opinion
of management, the ultimate liability for such claims will not have a material
adverse effect on the Group's financial position, results of operations or cash
flows.
NOTE 10 - INDUSTRY SEGMENT AND FOREIGN OPERATIONS:
The Group operates in one primary industry segment. Financial
information by geographic area is as follows:
20
<PAGE> 22
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
YEAR ENDED
DECEMBER 31,
1997
------------
Net revenues:
United States $115,107
Europe 19,866
Other 3,547
--------
Combined net revenues $138,520
========
Income (loss) from operations:
United States $ (2,900)
Europe (4,437)
Other 1,058
--------
Combined loss from operations $ (6,279)
========
DECEMBER 31,
1997
------------
Identifiable assets:
United States $45,782
Europe 11,621
Other 2,368
-------
Combined identifiable assets $59,771
=======
Combined loss from operations excludes other income and expenses. Foreign
operations generally operate as autonomous units and there are no general
corporate allocations other than interest income and expense.
21
<PAGE> 1
Exhibit 99.4
------------
THE LEARNING COMPANY, INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
The Learning Pro Forma Combined
Company Mindscape Adjustments Pro Forma
------------ --------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,137 $ 3,331 $ - $ 98,468
Accounts receivable, net 99,677 33,071 - 132,748
Inventories 29,600 9,391 - 38,991
Other current assets 32,590 6,881 - 39,471
--------- ------- -------- --------
257,004 52,674 - 309,678
Fixed assets and other, net 32,306 5,017 - 37,323
Goodwill and other intangible assets, net 127,481 2,080 140,000 (a) 269,561
--------- ------- -------- --------
$ 416,791 $59,771 $140,000 $616,562
========= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 94,060 $34,094 $ - $128,154
Line of credit 35,150 300 - 35,450
Merger related accruals 12,533 - 2,000 (a) 14,533
Current portion of long-term obligations 10,717 - - 10,717
Purchase price payable 7,896 - 3,000 (a) $ 10,896
--------- ------- -------- --------
160,356 34,394 5,000 199,750
LONG-TERM OBLIGATIONS:
Long-term debt 294,356 - - 294,356
Accrued and deferred income taxes 59,746 - - 59,746
Other 6,119 - - 6,119
--------- ------- -------- --------
360,221 - - 360,221
STOCKHOLDERS' EQUITY (DEFICIT):
Stockholders' equity (deficit) (103,786) 25,377 135,000 (a) 56,591
--------- ------- -------- --------
$ 416,791 $59,771 $140,000 $616,562
========= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed consolidated financial statements.
<PAGE> 2
THE LEARNING COMPANY, INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
The Learning Pro Forma Combined
Company Mindscape Adjustments Pro Forma
------------ --------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 392,438 $138,520 $ -- $ 530,958
COSTS AND EXPENSES:
Costs of production 111,703 54,515 -- 166,218
Sales and marketing 86,621 43,771 -- 130,392
General and administrative 31,135 8,035 -- 39,170
Development and software costs 41,018 22,853 -- 63,871
Amortization, merger and other charges 515,016 15,625 14,000 (b) 544,641
----------- -------- ---------- -----------
Total operating expenses 785,493 144,799 14,000 944,292
OPERATING LOSS (393,055) (6,279) (14,000) (413,334)
----------- -------- ---------- -----------
INTEREST INCOME (EXPENSE):
Interest income 1,104 -- -- 1,104
Interest expense (22,482) (531) -- (23,013)
----------- -------- ---------- -----------
Total interest expense (21,378) (531) -- (21,909)
LOSS BEFORE TAXES (414,433) (6,810) (14,000) (435,243)
PROVISION FOR INCOME TAXES 61,234 -- -- 61,234
----------- -------- ---------- -----------
NET LOSS $ (475,667) $ (6,810) $ (14,000) $ (496,477)
----------- -------- ---------- -----------
NET LOSS PER SHARE:
Basic and Diluted $ (9.59) $ (8.45)
WEIGHT AVERAGE NUMBER
OF SHARES OUTSTANDING
Basic and Diluted 49,613,000 9,117,600 (c) 58,730,600
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed consolidated financial statements.
<PAGE> 3
THE LEARNING COMPANY, INC.
NOTES TO PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
A. PRO FORMA BASIS OF PRESENTATION AND ADJUSTMENTS
On March 27, 1998, pursuant to a Stock Purchase Agreement, dated as of March 5,
1998 (the "Agreement"), by and between The Learning Company, Inc. ("TLC"), on
the one hand, and Mindscape Holding Company, Pearson Overseas Holdings Ltd. and
Pearson Netherlands, BV (collectively, the "Sellers"), on the other hand, TLC
acquired from the Sellers all of the outstanding capital stock of Mindscape,
Inc., Mindscape International Ltd. and Mindscape France SARL (collectively,
"Mindscape"). The total estimated purchase price is approximately $155,000, and
includes cash, other consideration consisting of common stock, and transaction
related costs. The common stock and special warrants issued in connection with
the acquisition represent, in the aggregate, approximately 9,117,600 shares of
common stock. TLC is accounting for the acquisition using the purchase method.
TLC's fiscal year is the 52 or 53 weeks ending on or after December 31. For
clarity of presentation herein, with regard to TLC, all references to December
31, 1997 relate to balances as of January 3, 1998, and the period from January
5, 1997 to January 3, 1998 is referred to as the Year Ended December 31, 1997.
The pro forma combined condensed consolidated balance sheet sets forth the
financial position of TLC and Mindscape at December 31, 1997, as if the
acquisition of Mindscape by TLC had occurred on December 31, 1997.
The pro forma combined condensed consolidated statement of operations sets forth
the results of operations of TLC and Mindscape for the Year Ended December 31,
1997, as if the acquisition of Mindscape by TLC had occurred at the beginning of
that year.
The pro forma combined condensed consolidated financial statements are
unaudited, are intended for informational purposes, and are not necessarily
indicative of the future consolidated financial position or future results of
operations of the combined entity. These pro forma combined condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements included in TLC's Annual Report on Form 10-K
for the fiscal year ended January 3, 1998 and Mindscape Group's combined
financial statements for the year ended December 31, 1997.
<PAGE> 4
THE LEARNING COMPANY, INC.
NOTES TO PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
B. PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(a) The pro forma combined condensed consolidated balance sheet sets forth the
financial position of TLC and Mindscape at December 31, 1997, as if the
acquisition of Mindscape by TLC had occurred on December 31, 1997. The pro forma
adjustment to reflect the excess purchase price over the preliminary estimate of
the fair value of Mindscape's net assets, in the amount of approximately
$15,000, is reflected in goodwill and other intangible assets. The ultimate
allocation of the purchase price for the acquisition to the net assets, goodwill
and other intangible assets acquired, and to a charge for in-process research
and development, is subject to the final determination of their respective fair
values. Approximately $2,000 has been included in the purchase price as merger
related accruals in connection with the preliminary estimate of the fair value
of transaction related costs, including valuation and legal fees, and related
out-of-pocket expenses. Purchase price payable in the amount of $3,000 reflects
the preliminary estimate of bank cash balances due to the Sellers in conjunction
with the acquisition of Mindscape.
(b) The pro forma combined condensed consolidated statement of operations sets
forth the results of operations of TLC and Mindscape for the Year Ended December
31, 1997, as if the acquisition of Mindscape by TLC had occurred at the
beginning of that year. The pro forma adjustment in the amount of $14,000
reflects amortization of the excess purchase price over the preliminary estimate
of the fair value of the net assets acquired of Mindscape over the preliminary
estimated useful life of ten years on a straight-line basis. Any allocation of
the purchase price to the fair value of in-process research and development
related to Mindscape could result in a material charge to operations and a
reduction in the amounts of intangible assets to be amortized. There were no
intercorporate transactions that required elimination.
TLC has performed a preliminary evaluation of the estimated period of benefit
and the estimated useful life of the excess purchase price over the preliminary
estimate of the fair value of the net assets acquired in and resulting from the
acquisition of Mindscape based upon the nature of the brands and related rights
acquired. TLC has preliminarily determined that the estimated period of benefit
and the estimated useful life of the excess purchase price over the preliminary
estimate of the fair value of the net assets acquired in and resulting from the
acquisition of Mindscape is approximately ten years.
<PAGE> 5
THE LEARNING COMPANY, INC.
NOTES TO PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(c) The pro forma adjustment reflects the issuance of common stock and special
warrants, which represent in the aggregate approximately 9,117,600 shares of
TLC's common stock, in connection with the acquisition of Mindscape. TLC issued
approximately 1,366,700 shares of common stock in connection with the
acquisition of Mindscape. On March 6, 1998, TLC's Canadian subsidiary, SoftKey
Software Products Inc. ("SoftKey"), agreed to sell to certain Canadian
institutional investors 8,687,500 special warrants for aggregate proceeds of
approximately $134,500. TLC used approximately $120,000 of the proceeds in
connection with the acquisition of Mindscape. Each special warrant is
exercisable without additional payment for one of SoftKey's Exchangeable
Non-Voting Shares (the "Exchangeable Shares"). TLC has 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.
SoftKey's Exchangeable Shares are exchangeable on a one-for-one basis for TLC's
common stock without additional payment. The private placement is ultimately
subject to certain conditions, including receipt of certain regulatory
approvals. For presentation in these pro forma combined condensed consolidated
financial statements, TLC included special warrants, representing approximately
7,750,900 shares of common stock, in the computation of basic and diluted
earnings per share as if the special warrants had been exercised for
Exchangeable Shares at the beginning of the Year Ended December 31, 1997.
