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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
the quarterly period ended October 3, 1998
Commission File Number 1-12375
THE LEARNING COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-2562108
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(Address of Principal Executive Offices)
(617) 494-1200
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
As of November 2, 1998, there were 85,556,631 outstanding shares of the
issuer's common stock, par value $.01 per share.
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THE LEARNING COMPANY, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
-------------------------------
<TABLE>
<CAPTION>
PAGE
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ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997...................... 3
Condensed Consolidated Statements of
Operations for the Three and Nine Months Ended
September 30, 1998 and 1997................................... 4
Condensed Consolidated Statements of
Cash Flows for the Three and Nine Months
Ended September 30, 1998 and 1997............................. 5
Notes to Condensed Consolidated Financial Statements.......... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 12
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings............................................. 18
ITEM 4. Submission of Matters to a Vote of Security Holders........... 18
ITEM 6. Exhibits and Reports on Form 8-K.............................. 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term investments $234,796 $188,956
Accounts receivable (less allowances for returns
of $46,637 and $47,643, respectively) 117,247 161,927
Inventories 44,507 39,382
Other current assets 51,941 35,863
-------- --------
448,491 426,128
Intangible assets, net 179,404 145,848
Other long-term assets 63,711 51,798
-------- --------
$691,606 $623,774
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $252,997 $220,192
-------- --------
LONG-TERM OBLIGATIONS:
Long-term debt 190,955 294,356
Accrued and deferred income taxes 70,586 75,167
Other long-term obligations 4,134 8,069
-------- --------
265,675 377,592
-------- --------
STOCKHOLDERS' EQUITY 172,934 25,990
-------- --------
$691,606 $623,774
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES $212,723 $ 141,737 $ 564,042 $ 401,532
COSTS AND EXPENSES:
Costs of production 63,011 40,326 185,039 118,291
Sales and marketing 54,529 38,746 163,223 103,806
General and administrative 14,132 10,755 43,668 34,534
Development and software costs 24,947 25,041 72,809 65,991
Amortization, merger and other charges 63,659 148,400 282,852 403,058
-------- ---------- ---------- ---------
220,278 263,268 747,591 725,680
-------- ---------- ---------- ---------
OPERATING LOSS (7,555) (121,531) (183,549) (324,148)
INTEREST EXPENSE AND OTHER, net (1,215) (4,798) (4,006) (12,355)
-------- ---------- ---------- ---------
LOSS BEFORE TAXES (8,770) (126,329) (187,555) (336,503)
PROVISION FOR INCOME TAXES 12,442 (13,167) 12,442 (8,558)
-------- ---------- ---------- --------
NET LOSS $(21,212) $ (113,162) $ (199,997) $(327,945)
======== ========== ========== =========
NET LOSS PER SHARE - basic and diluted $ (0.24) $ (1.72) $ (2.55) $ (5.00)
WEIGHTED AVERAGE NUMBER
OF BASIC AND DILUTED SHARES OUTSTANDING 89,457,000 65,895,000 78,534,000 65,561,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
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THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(199,997) $(327,945)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, amortization and other 170,183 386,538
Provisions for returns and doubtful accounts 76,484 52,819
Charge for incomplete technology 119,924 29,297
Changes in operating assets and liabilities:
Accounts receivable (25,395) (22,959)
Accounts payable and accruals (40,510) (1,905)
Other (20,585) (53,056)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,104 62,789
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets and other (26,694) (13,171)
Businesses acquired, net of cash acquired (99,135) (89,486)
Acquisition related items (66,195) (604)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (192,024) (103,261)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (1,171) (515)
Borrowings under line of credit (2,300) 10,000
Repurchase of Senior Convertible Notes (6,000) (28,000)
Proceeds from issuance of common stock 35,189 7,403
Proceeds from the issuance of special warrants, net 134,346 --
Other (3,578) (15,105)
--------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES 156,486 (26,217)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 201 (1,846)
--------- ---------
EFFECT OF BRODERBUND EXCLUDED PERIOD 1,073 --
--------- ---------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS 45,840 (68,535)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 188,956 259,223
--------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 234,796 $ 190,688
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1998 1997
------------- --------------
<S> <S> <S>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued to acquire Mindscape $30,000 $ --
Common stock issued to acquire Sofsource 45,000 --
Common stock issued to settle earn-out agreements 5,573 --
Common stock issued in exchange for Senior Notes 96,695 --
Common stock issued to settle note payable to related party -- 3,053
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE LEARNING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Learning Company, Inc.
("TLC" or the "Company") for the Three Months and Nine Months Ended September
30, 1998 and 1997 are unaudited and reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K, as amended, for the year ended January 3, 1998 and
the supplemental consolidated financial statements and notes thereto included in
the Company's Current Report on Form 8-K dated August 31, 1998, as amended. The
results of operations for the Three Months and Nine Months Ended September 30,
1998 are not necessarily indicative of the results for the entire year ending
December 31, 1998.
On August 31, 1998, the Company acquired Broderbund Software, Inc.
("Broderbund"), a developer and publisher of consumer software for the home and
school. This transaction was accounted for using the pooling-of-interest method
of accounting. The accompanying financial statements have been restated to
include the results and balances of Broderbund for all periods presented.
The third quarter reporting period for 1998 ended on October 3, 1998 and the
third quarter reporting period for 1997 ended on October 4, 1997. The periods
from July 5, 1998 to October 3, 1998 and from July 7, 1997 to October 4, 1997
are referred to as the "Third Quarter 1998" and the "Third Quarter 1997" or the
"Three Months Ended September 30, 1998" and the "Three Months Ended September
30, 1997," respectively. The periods from January 4, 1998 to October 3, 1998 and
from January 7, 1997 to October 4, 1997 are referred to as the "Nine Months
Ended September 30, 1998" and the "Nine Months Ended September 30, 1997,"
respectively, throughout these financial statements and Form 10-Q.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions regarding items
such as return reserves and allowances, net realizable value of intangible
assets and valuation allowances for deferred tax assets that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates in
these financial statements include: return reserves, inventory reserves,
valuation of deferred tax assets and valuation and useful lives of intangible
assets. Actual results could differ from these estimates.
2. BUSINESS COMBINATIONS
BRODERBUND
- ----------
On August 31, 1998, the Company acquired all of the issued and outstanding
common shares of Broderbund in exchange for 16,848,753 shares of common stock of
the Company pursuant to an agreement and plan of merger dated June 21, 1998
whereby each share of common stock of Broderbund was exchanged into 0.80 shares
of the Company's common stock. This acquisition has been accounted for using the
pooling-of-interests method of accounting. The balances as at December 31, 1997
and the results for the Nine Months Ended September 30, 1998 and 1997 have been
restated to include the balances and results of Broderbund. The balance sheet of
the Company as at December 31, 1997 has been combined with the balance sheet of
Broderbund as at November 30, 1997. Retained earnings have been charged with the
net income for the omitted period of December 31, 1997 of $682. Revenues,
operating expenses and operating income for the excluded month of December 1997
were $28,712, $27,974 and $738, respectively. The financial results for the Nine
Months Ended September 30, 1998 include the results of the previously separate
businesses for the Six Months Ended June 30, 1998. Revenues and net loss from
the previously separate operations of the Company and Broderbund were revenues
of $242,853 and $108,466 and net loss of $154,159 and $24,636, respectively, in
the Six Month Period Ended June 30, 1998, which are included in these financial
statements.
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Results of the previously separate entities for the Nine Months Ended
September 30, 1997 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Combined
September 30, 1997 TLC Broderbund Adjustments Restated
- --------------------------- ------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $272,237 $129,295 $ -- $401,532
Operating loss (291,815) (39,083) (6,750) (324,148)
Net loss (307,678) (22,377) 2,110 (327,945)
Net loss per share $ (6.28) $ (1.35) $ (5.00)
</TABLE>
In order to conform the application of generally accepted accounting principles
between the two separate entities, an adjustment of $3,601 and $4,640 to
increase the valuation allowance for income tax assets was recorded in each of
the Nine Month Periods Ended September 30, 1998 and 1997, respectively. The
adjustments increase the valuation allowance for uncertainty of recoverability
of income tax assets of Broderbund as it was determined that it was more likely
than not that some or all of the assets would not be realized under the combined
entity. There were no intercompany transactions between the two companies other
than a termination fee of $18,000 paid by The Learning Company, a corporation
that the Company acquired in 1995 (the "Former Learning Company"), to Broderbund
in December 1995 related to the proposed merger between the two companies that
was terminated. This amount was recorded as other income by Broderbund and was
included in the determination of the purchase price of the Former Learning
Company by the Company. Accordingly, the merger termination fee was eliminated
from the Broderbund net income for the year ended August 31, 1996 and the
purchase price of the Former Learning Company was reduced, resulting in a
reduction in amortization of goodwill in the Nine Months Ended September 30,
1997 of $6,750.
MINDSCAPE
- ---------
On March 5, 1998, the Company acquired control of Mindscape, Inc., a consumer
software company, and certain affiliated companies ("Mindscape") for a total
purchase price of $152,557 paid in cash of $122,557 and the remainder through
the issuance of 1,366,743 shares of common stock. The transaction was accounted
for using the purchase method of accounting. The purchase price for Mindscape
was allocated as follows:
<TABLE>
<S> <C>
Purchase price $152,557
Plus: fair value of net liabilities assumed 3,297
--------
155,854
--------
Excess allocated to:
Incomplete technology 103,000
Completed technology and products 13,000
Brands and trade names 30,000
--------
146,000
--------
Goodwill $ 9,854
========
</TABLE>
The Company primarily used the income approach to determine the fair value of
the identified intangible assets acquired. The debt-free cash flows, net of
provision for operating expenses, were discounted to a net present value. The
Company believes that the incomplete products under development had not reached
technical feasibility at the date of the acquisition, had no alternative future
use and additional development is required to ensure their commercial viability.
In order to develop the acquired incomplete technology into commercially viable
products the Company will be required to complete development of proprietary
code, development of the artistic and graphic works and design of the remaining
storyboards. Complete technology is being amortized using the straight-line
method over its estimated useful life of five years and goodwill and brands and
trade names are being amortized using the straight-line method over its
estimated useful life of ten years.
Summarized pro forma combined results of operations for the Nine Months Ended
September 30, 1998 and 1997 are shown as if the transaction had occurred at the
beginning of the period presented. Pro forma adjustments relate
8
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primarily to amortization of goodwill and complete technology. These pro forma
combined results of operations include the historical results from Mindscape and
do not reflect any reductions in operating costs derived from consolidation of
functional departments. In addition, the pro forma combined operating loss
includes pro forma amortization of acquired intangible assets resulting from the
acquisition of Mindscape for the Nine Months Ended September 30, 1998 and 1997
of $2,621 and 5,070, respectively.
<TABLE>
<CAPTION>
Mindscape
Nine Months Ended The Learning Including Pro Forma Pro Forma
September 30, 1998 Company, Inc. Adjustments Combined
- ------------------- ------------- ------------------- ----------
<S> <C> <C> <C>
Revenues $564,042 $ 9,090 $ 573,132
Operating loss (183,549) (44,270) (227,819)
Net loss (199,997) (45,330) (245,327)
Net loss per share $ (2.55) $ (3.07)
Mindscape
Nine Months Ended The Learning Including Pro Forma Pro Forma
September 30, 1997 Company, Inc. Adjustments Combined
- ------------------- ------------- ------------------- ----------
Revenues $ 401,532 $71,621 $ 473,153
Operating loss (324,148) (28,826) (352,974)
Net loss (327,945) (22,129) (350,074)
Net loss per share $ (5.00) $ (4.69)
</TABLE>
SOFSOURCE, INC.
- ---------------
On June 2, 1998, the Company acquired control of Sofsource, Inc. an educational
software company, for a total purchase price of $45,000 which was settled
through the issuance of 1,641,138 shares of common stock. Under the terms of the
stock purchase agreement, the sellers have the right to require the Company to
repurchase any shares of common stock issued to satisfy the purchase price that
are not sold by December 31, 1998. In the event that the sellers receive less
than $45,000 of proceeds from the sale of such common stock, the Company is
obligated to pay to the sellers the shortfall in cash. In the event that the
sellers receive more than $45,000, the sellers are obligated to pay the Company
such excess amount received. Any such payment in the future would be recorded as
an adjustment to stockholders' equity. Pro forma results for Sofsource were not
material.
This acquisition was accounted for using the purchase method of accounting. The
purchase price for Sofsource was allocated as follows:
Purchase price $45,000
Plus: fair value of net liabilities assumed 2,287
-------
Excess to allocate 47,287
-------
Less: excess allocated to
Incomplete technology 14,924
Brands and trade names 3,322
-------
18,246
-------
Goodwill $29,041
=======
The Company primarily used the income approach to determine the fair value of
the identified intangible assets acquired. The debt-free cash flows, net of
provision for operating expenses, were discounted to a net present value. The
Company believes that the incomplete products under development had not reached
technical feasibility at the date of the acquisition, had no alternative future
use and additional development is required to ensure their commercial viability.
In order to develop the acquired incomplete technology into commercially viable
products the Company will be required to complete development of proprietary
code, development of the artistic and graphic works and design of the remaining
storyboards. Goodwill and brands and trade names are being amortized using the
straight-line method over its estimated useful life of ten years.
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\3. ISSUANCE OF SPECIAL WARRANTS
On March 12, 1998, the Company's Canadian subsidiary, SoftKey Software Products
Inc. ("SoftKey"), issued in a private placement in Canada 8,687,500 special
warrants for net proceeds of approximately $134,000. On July 9, 1998 each
special warrant was exchanged into one exchangeable non-voting share of SoftKey
(an "Exchangeable Share") without additional payment. The Exchangeable Shares
are exchangeable at the option of the holder on a one-for-one basis for common
stock of the Company without additional payment.
4. BORROWINGS
On August 7, 1998, the Company amended its revolving line of credit (the
"Line") to provide a maximum availability of $147,500, of which $40,000 is
outstanding at September 30, 1998. Borrowings under the line are due July 1,
2000 and bears interest at variable rates. The Line is subject to certain
financial covenants, is secured by a general security interest in certain
operating subsidiaries of the Company and by a pledge of the stock of certain of
its subsidiaries. The outstanding balance of $40,000 was repaid after
October 3, 1998.
5. COMPREHENSIVE LOSS
Effective January 4, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income." The Company's comprehensive
loss was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1998 1997 1998 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $(21,212) $(113,162) $(199,997) $(327,945)
Other comprehensive loss (592) (1,978) (6,236) (5,099)
-------- --------- --------- ---------
Total comprehensive loss $(21,804) $(115,140) (206,233) $(333,044)
======== ========= ========= =========
</TABLE>
Other comprehensive loss includes losses on foreign currency translation and
the unrealized gain (loss) on short-term investments.
6. INVENTORIES
Inventories are stated at the lower of weighted average cost or net realizable
value and include third-party assembly costs, CD-ROM discs, manuals and an
allocation of fixed overhead.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Components $ 1,802 $ 8,333
Finished goods 42,705 31,049
------- -------
$44,507 $39,382
======= =======
</TABLE>
7. COMPUTATION OF EARNINGS PER SHARE
For the year ended December 31, 1997, the Company adopted Statement of
Accounting Standard No. 128 ("FAS 128"), which requires the presentation of
Basic and Dilutive earnings per share, which replaces primary and fully diluted
earnings per share. Basic net loss per share is computed using the weighted
average number of common shares outstanding during the period. Dilutive net loss
per share is computed using the weighted average number of common shares
outstanding during the period, plus the dilutive effect of common stock
equivalents. Common stock equivalents consist of convertible debentures,
preferred stock, stock options and warrants. The dilutive computations do not
include common stock equivalents for the Three and Nine Months Ended September
30, 1998 and 1997 as their inclusion would be antidilutive. Dilutive elements
would include the 750,000 shares of Series A Preferred Stock (which is
ultimately convertible into 15,000,000 shares of common stock) issued on
December 5, 1997 and employee stock options totaling 16,269,038 and 13,641,086
at September 30, 1998 and 1997, respectively.
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8. SALE OF INCOME TAX SOFTWARE BUSINESS
On July 9, 1998, the Company sold its Canadian income tax software business for
approximately $45,000 in cash. The net gain on sale was not material.
9. AMORTIZATION, MERGER AND OTHER CHARGES
During the Third Quarter 1998, the Company announced a restructuring plan
related to the merger with Broderbund. A total of $63,659 was charged in the
Third Quarter 1998 as amortization, merger and other charges. Included in the
charge are termination benefits of $17,962 related to the termination of
approximately 600 employees at Broderbund and the Company in areas of
administration, development, manufacturing, sales and marketing. The charge also
includes facility closure cost of $22,050, professional fees and other
transaction costs of $10,128, amortization of intangible assets of $4,249 and
discontinued product costs of $9,270. The amortization, merger and other charges
for the Nine Months Ended September 30, 1998 includes a charge for incomplete
technology related primarily to the acquisitions of Mindscape and Sofsource
totaling $119,826.
10. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS No. 133 by January 1,
2000 and does not expect SFAS No. 133 to have a material impact on its financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which changes the way public companies
report information about operating segments. SFAS No. 131 which is based on the
management approach to segment reporting establishes requirements to report
selected segment information quarterly and to report entity wide disclosures
about products and services major customers and the material countries in which
the entity holds assets and reports revenue. Management is currently evaluating
the effects of this change on its reporting of segment information. The Company
will adopt SFAS No. 131 for its fiscal year ending December 31, 1998.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K, as amended, for the year ended January 3,
1998 and the supplemental consolidated financial statements and notes thereto
included in the Company's Current Report on Form 8-K dated August 31, 1998, as
amended. All dollar amounts presented in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are presented in
thousands, except per share amounts. Certain of the information contained in
this Quarterly Report on Form 10-Q which are not historical facts may include
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company's actual
results may differ materially from those set forth in such forward-looking
statements. Certain risks and uncertainties including, but not limited to, those
discussed below in "Factors Affecting Future Operating Results," as well as in
the Company's Annual Report on Form 10-K, as amended, for the 1997 fiscal year
as filed with the Securities and Exchange Commission (the "SEC"), as well as
other factors, may also cause actual results to differ materially from those
projected. The Company assumes no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements. The information contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations is provided pursuant to applicable regulations of the SEC and is not
intended to serve as a basis for projections of future events.
INTRODUCTION
The Learning Company, Inc. ("TLC" or the "Company") develops and publishes a
broad range of high quality branded consumer software for personal computers
("PCs") that educate and entertain across every age category, from young
children to adults. The Company's primary emphasis is in educational,
productivity and reference software, but it also offers a selection of lifestyle
and entertainment products, both in North America and internationally.
The Company has a history of acquiring companies in order to broaden its
product lines and sales channels. During the first nine months of 1998, the
Company acquired Mindscape, Inc. and certain affiliated companies ("Mindscape"),
Sofsource, Inc. ("Sofsource") and Broderbund Software, Inc. ("Broderbund").
The Company distributes its products through retail channels, including direct
sales to computer electronics stores, office superstores, mass merchandisers,
discount warehouse stores and software specialty stores which control over
23,000 North American storefronts. The Company also sells its products directly
to consumers through the mail, telemarketing and the Internet, and directly to
schools. The Company's international sales are conducted from subsidiaries in
Germany, France, Holland, Ireland, the United Kingdom, Australia and Japan. The
Company also derives revenue from licensing its products to original equipment
manufacturers ("OEMs"), which bundle the Company's products for sale with
computer systems or components and through on-line offerings.
RESULTS OF OPERATIONS
NET LOSS. The Company incurred a net loss of $21,212 ($.24 per share)
and $199,997 ($2.55 per share) on revenues of $212,723 and $564,042 in the Third
Quarter 1998 and the Nine Months Ended September 30, 1998 as compared to a net
loss of $113,162 ($1.72 per share) and $327,945 ($5.00 per share) on revenues of
$141,737 and $401,532 in the Third Quarter 1997 and the Nine Months Ended
September 30, 1997. The net loss in the Third Quarter 1998, the Nine Months
Ended September 30, 1998, the Third Quarter 1997 and the Nine Months Ended
September 30, 1997 is a result of the effect of the amortization, merger and
other charges of $63,659, $282,852, $148,400 and $403,058, respectively.
REVENUES. Revenues by distribution channel for the Third Quarter 1998
as compared to the Third Quarter 1997 and the Nine Months Ended September 30,
1998 as compared to the Nine Months Ended September 30, 1997 are as follows:
12
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<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------- -----------------------------------------
1998 % 1997 % 1998 % 1997 %
--------- ------ --------- ------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail $117,848 56% $71,091 50% $289,619 51% $199,004 50%
OEM 11,347 5% 9,873 7% 30,964 5% 24,163 6%
School 19,769 9% 16,175 11% 56,968 10% 46,031 11%
Direct response 24,801 12% 19,244 14% 81,716 15% 56,283 14%
On-line 5,126 2% -- -- 9,521 2% -- --
International 33,832 16% 22,380 16% 86,511 15% 63,195 16%
Tax software and
services -- -- 2,974 2% 8,744 2% 12,855 3%
-------- --- -------- --- -------- --- -------- ---
$212,723 100% $141,737 100% $564,043 100% $401,531 100%
======== === ======== === ======== === ======== ===
</TABLE>
Revenues increased in dollars and as a percentage of total revenue for the Three
and Nine Months Ended September 30, 1998 as compared to the Three and Nine
Months Ended September 30, 1997 primarily due to growth in the demand for
consumer software. Retail revenues also were higher than the prior year due to
the acquisitions of Mindscape and Sofsource and the launch of several new and
upgraded products, which included: Reader Rabbit's Math Ages 4-6, The American
Girls Premiere - 2nd Edition, Compton's Encyclopedia 1999 Deluxe, Cosmopolitan
Virtual Makeover, National Geographic Maps, Dr. Seuss: Preschool, Rugrats
Adventure Game, among others. OEM sales increased in dollars for the Three and
Nine Months Ended September 30, 1998 as compared to the Three and Nine Months
Ended September 30, 1997 primarily due to additional demand from PC
manufacturers across the industry. International sales increased in dollars for
the Three and Nine Months Ended September 30, 1998 as compared to the Three and
Nine Months Ended September 30, 1997 primarily as a result of the higher PC
sales in Europe and revenues from the acquisition of Mindscape. Direct response
revenues increased in dollars for the Three and Nine Months Ended September 30,
1998 as compared to the Three and Nine Months Ended September 30, 1997 due to
growth in the Company's catalog based sales to end users and due to revenues
from Mindscape. School sales increased in dollars for the Three and Nine Months
Ended September 30, 1998 as compared to the Three and Nine Months Ended
September 30, 1997 due to the increasing demand for software in American
schools. The tax software business was sold on July 9, 1998.
COSTS AND EXPENSES. The Company's costs and expenses and the respective
percentages of revenues for the Third Quarter 1998 as compared to the Third
Quarter 1997 and the Nine Months Ended September 30, 1998 as compared to the
Nine Months Ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months Ended September 30,
------------------------------------------ -------------------------------------------
1998 % 1997 % 1998 % 1997 %
--------- ------ --------- ------ --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Costs of
production $63,011 30% $40,326 28% $185,039 33% $118,291 29%
Sales and
marketing 54,529 26% 38,746 27% 163,223 29% 103,806 26%
Development and
software costs 24,947 12% 25,041 18% 72,809 13% 65,991 16%
General and
administrative 14,132 7% 10,755 8% 43,668 8% 34,534 9%
-------- --- -------- --- -------- --- -------- ---
$156,619 75% $114,868 81% $464,739 83% $322,622 80%
======== === ======== === ======== === ======== ===
</TABLE>
Costs of production includes the cost of manuals, packaging, diskettes,
duplication, assembly and fulfillment charges. In addition, costs of production
includes royalties paid to third-party developers and inventory obsolescence
reserves. Costs of production as a percentage of revenues increased in the Third
Quarter 1998 and the Nine Months Ended September 30, 1998 as compared to the
Third Quarter 1997 and the Nine Months Ended September 30, 1997 from 28% and 29%
to 30% and 33%, respectively. The increase in costs of production as a
percentage of revenues in Third Quarter 1998 and the Nine Months Ended September
30, 1998 from Third Quarter 1997 and the Nine Months Ended September 30, 1997
was caused by sale of products from the acquisitions of Mindscape, Sofsource,
and Creative Wonders that have
13
<PAGE> 14
higher production costs and royalty rates and was also due to a higher
proportion of sales of entertainment and affiliate label products in the first
nine months of the year over prior years.
Sales and marketing expenses decreased to 26% of revenues in the Third Quarter
1998 as compared to 27% of revenues in the Third Quarter 1997 and increased to
29% of revenues in the Nine Months Ended September 30, 1998 as compared to 26%
in the Nine Months ended September 30, 1997. The decrease in the Third Quarter
1998 is due to a lower spending level on entertainment titles, which had in the
past comprised a greater proportion of the product mix. In addition, the Company
began to realize savings from the integration of the Broderbund sales and
marketing operations.
Development and software costs decreased to 12% of revenues in the Third Quarter
1998 and to 13% of revenues in the Nine Months Ended September 30, 1998 as
compared to 18% and 16% of revenues in the Third Quarter 1997 and the Nine
Months Ended September 30, 1997 due to the timing of product introduction and a
decrease in spending on entertainment development projects, which typically have
a higher cost of development.
General and administrative expenses decreased to 7% of revenues in the Third
Quarter 1998 and to 8% of revenues in the Nine Months Ended September 30, 1998
as compared to 8% and 9% of revenues in the Second Quarter 1997 and the Nine
Months Ended September 30, 1997 due to continued efforts to reduce both fixed
costs and employee headcount related to the integration of the Company's
acquisitions. In absolute dollars general and administrative expenses increased
in the Third Quarter 1998 and the Nine Months Ended September 30, 1998 as
compared to the Third Quarter 1997 and the Nine Months Ended September 30, 1997
due to the costs from the Mindscape operations, the acquisition of which was
accounted for using the purchase method of accounting.
The Company reported amortization, merger and other charges in the Third Quarter
1998 and the Nine Months Ended September 30, 1998 and the Third Quarter 1997 and
the Nine Months Ended September 30, 1997 of $63,659, $282,852, $148,400, and
$403,058, resulting primarily from the acquisitions. The charges in the Third
Quarter 1998 include costs of severance, facility closure, discontinued product
costs, professional fees and printing costs related to the merger with
Broderbund. The charges in the Nine Months Ended September 30, 1998 include
$119,924 of incomplete technology write-offs related to the acquisitions of
Mindscape and Sofsource, with the remainder relating to amortization of
goodwill, amortization of acquired technology related assets and other expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased from $188,956 at December 31, 1997 to
$234,796 at September 30, 1998. This increase was attributable to the issuance
by the Company's Canadian subsidiary, SoftKey Software Products Inc.
("SoftKey"), of 8,687,500 special warrants in a private placement for proceeds
of approximately $134,000 offset by the cash paid to acquire Mindscape of
approximately $120,000. Other financing activities generated a further $22,486
and investing activities used $72,024 offset by cash generated from operating
activities of $80,104.
As of October 3, 1998, the Company has outstanding $200,955 principal amount
Senior Convertible Notes ($10,000 is included as current). The Senior
Convertible Notes will be redeemable by the Company on or after November 2, 1998
at declining redemption prices. Should the Senior Convertible Notes not convert
under their terms into common stock, there can be no assurances that the Company
will have sufficient cash flows from future operations to meet payment
requirements under the debt or be able to refinance the notes under favorable
terms or at all.
On August 7, 1998, the Company amended its revolving line of credit (the
"Line") to provide a maximum availability of $147,500, of which $40,000 was
outstanding at September 30, 1998. Borrowings under the line are due July 1,
2000 and bear interest at variable rates. The Line is subject to certain
financial covenants, is secured by a general security interest in certain
operating subsidiaries of the Company and by a pledge of the stock of certain of
its subsidiaries. The outstanding balance of $40,000 was repaid after
October 3, 1998.
14
<PAGE> 15
The Company, through its wholly owned subsidiary, The Learning Company Funding,
Inc. (a separate special purpose corporation), is party to a receivables
purchase agreement whereby it can sell without recourse undivided interests in
eligible pools of trade accounts receivable on a revolving basis during a five
year period ending September 30, 2002 of up to $100,000, of which $75,000 was
used as of October 3, 1998. The Company acts as servicing agent for the sold
receivables in the collection and administration of the accounts. In addition,
the Company has a European accounts receivable factoring facility where it can
sell up to $25,000 of European accounts receivable on a recourse basis to its
banks, of which $25,000 was used as of October 3, 1998.
Income generated by the Company's subsidiaries in certain foreign countries
cannot be repatriated to the Company in the United States without payment of
additional taxes since the Company does not currently receive a U.S. tax credit
with respect to income taxes paid by the Company (including its subsidiaries) in
those foreign countries.
At the present time, the Company expects that its cash flows from operations
will be sufficient to finance the Company's operations for at least the next
twelve months. Longer-term cash requirements are dictated by a number of
external factors, which include the Company's ability to launch new and
competitive products, the strength of competition in the consumer software
industry and the growth of the home computer and software markets. In addition,
the Company's Senior Convertible Notes mature November 1, 2000. If not converted
to common stock, the Company may be required to secure alternative financing
sources. There can be no assurance that alternative financing sources will be
available on terms acceptable to the Company in the future or at all. The
Company continuously evaluates products and technologies for acquisitions,
however no estimation of short-term or long-term cash requirements for such
acquisitions can be made at this time.
FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment that is subject to many
risks and uncertainties. Some of the important risks and uncertainties which may
cause the Company's operating results to differ materially or adversely are
discussed below and in the Company's Annual Report on Form 10-K, as amended, for
the 1997 fiscal year on file with the SEC.
The Company's future operating results are subject to a number of uncertainties,
including its ability to develop and introduce new products, the introduction of
competitive products and general economic conditions. In addition, the Company
competes for retail shelf space and general consumer awareness with a number of
companies that market consumer software, including competitors and potential
competitors that possess significantly greater capital, marketing resources and
brand recognition than the Company. Furthermore, the rapid changes in the market
and the increasing number of new products available to consumers have increased,
and are expected to continue to increase, the degree of consumer acceptance risk
with respect to any specific title that the Company may publish.
YEAR 2000 COMPLIANCE
Many existing computer systems use only the last two digits to identify a year.
Consequently, as the year 2000 approaches, many systems do not yet recognize the
difference in a year that begins with "20" instead of "19." Unless corrected,
this, as well as other date-related processing issues, may result in systems
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Year 2000 issue also may
affect the Company's products.
The Company has appointed a Year 2000 project team to develop and implement a
comprehensive four-phase Year 2000 readiness plan for its worldwide operations
relating to the following three areas: (1) the Company's internal systems
(including information technology such as financial and order entry systems and
non-information technology systems such as facilities); (2) third party
customers, vendors and others with whom the Company does business and (3) the
Company's products. The project team includes members of senior management and
prepares progress reports to the board of directors on a regular basis.
15
<PAGE> 16
Phase One (inventory) consists of identifying all the Company's systems,
relationships and products that may be impacted by Year 2000. Phase Two
(assessment) involves determining the Company's current state of Year 2000
readiness for those areas identified in the inventory phase and prioritizing the
areas that need to be fixed. Phase Three (remediation) will consist of
developing a plan for those areas identified as needing correction in the
assessment phase. Phase Four (implementation) will consist of executing the
action plan and completing the steps identified to attain Year 2000 readiness.
The Company is currently in the inventory phase of the plan for both its
internal systems and its third party relationships, although, for certain known
critical internal systems, the Company has completed the assessment and
remediation phases. For the Company's products, it is either in the inventory or
assessment phase of the plan. The Company has not yet determined a date by which
it expects to complete implementation for all of the targeted areas, but it
intends to complete such implementation well in advance of January 1, 2000.
INTERNAL SYSTEMS AND THIRD PARTY ISSUES
The Company for some time has been taking, and will continue to take, actions
intended to resolve Year 2000 issues through planned replacement or upgrades of
its internal computer equipment and software systems. For this purpose, the term
"computer equipment and software" includes systems that are commonly considered
IT systems, including accounting, data processing and telephone/PBX systems, as
well as systems that are not commonly considered IT systems such as security
systems, fax machines or other miscellaneous systems. Both IT and non-IT systems
may contain embedded technology, which complicates the Company's Year 2000
inventory, assessment, remediation and implementation efforts.
The Company currently believes that the cost of its Year 2000 inventory,
assessment, remediation and implementation efforts with respect to internal
systems, as well as the costs to be incurred with respect to Year 2000 issues of
third parties, should not exceed $1,000,000, which expenditures will be funded
from operating cash flows. Because the Company is still in the inventory phase
of its readiness plan with respect to many of its internal systems and with
respect to third parties, it is difficult to estimate with certainty the
ultimate amount of such costs. As discussed below, the Company believes that a
substantial portion of its remediation and implementation efforts with respect
to internal systems will be conducted in connection with the integration of the
businesses acquired by the Company in 1998 with the Company's operations. As of
August 31, 1998 the Company estimates that it has incurred costs of
approximately $350,000 related to its Year 2000 inventory, assessment,
remediation and implementation efforts with respect to internal systems. All of
the $350,000 relates to analysis, repair or replacement of existing software,
upgrades of existing software, evaluation of information received from
significant vendors, service providers or customers, or consulting advisory
agents. Other non-Year 2000 IT efforts have not been materially delayed or
impacted by Year 2000 initiatives.
In 1998 the Company acquired Mindscape, Sofsource, PF.Magic and Broderbund, as
well as their respective subsidiaries. None of these companies had made
substantial progress in its own Year 2000 readiness plans with respect to
internal systems or third parties. While the Company is in the process of
integrating these businesses into its Year 2000 readiness plan, their addition
complicates the Company's Year 2000 inventory, assessment, remediation and
implementation efforts. This effect is mitigated somewhat because the Company
intends in most instances to move, or in certain cases has moved or is in the
process of moving, most accounting, data processing, telephone/PBX and other IT
processes of these businesses to the Company's systems, which are to a greater
extent already Year 2000 ready. For example, the Company's primary software
package for sales order processing, distribution, manufacturing and finance is
the JD Edwards software package for Sales Order Processing, Distribution,
Manufacturing and Finance version 7.3, which the Company has been informed by JD
Edwards and believes is Year 2000 ready. In connection with the planned
integration of the operations of Company's recently acquired businesses, these
businesses will operate from the same JD Edwards system.
While the Company is dedicating substantial resources toward attaining Year 2000
readiness, there is no assurance that the Company will be successful in its
efforts to address all Year 2000 systems issues. If all Year 2000 issues are not
properly identified, or assessment, remediation or implementation are not
effected timely with respect to Year 2000 issues that are identified, there can
be no assurance that the Year 2000 issue will not materially adversely impact
the Company's results of operations or adversely affect the Company's
relationships with customers, vendors or others. For example, failure to achieve
Year 2000
16
<PAGE> 17
readiness for the Company's internal systems could delay its ability
to manufacture and ship products, disrupt customer service and technical support
facilities, or interrupt customer access to online products and services. The
Company also relies heavily on third parties such as manufacturing suppliers,
service providers and a large retail distribution channel. If these or other
third parties experience Year 2000 failures or malfunctions, there could be a
material adverse impact on the Company's ability to conduct ongoing operations.
For example, the ability to manufacture and ship products into the retail
channel, to receive retail sales information necessary to maintain proper
inventory levels, or to complete online transactions dependent upon third party
service providers could be affected.
PRODUCTS
The Company and its subsidiaries currently sell hundreds of different software
products primarily for use in homes and schools, and have sold over the last few
years many hundreds of additional products that have been discontinued but may
still be used by consumers. As a matter of course, products currently under
development are being designed to be Year 2000 compliant. The Company is also in
the process of testing certain of its products for Year 2000 compliance.
Because the Company's products tend to have few time-sensitive components, the
Company is able to use existing internal staff to identify and test its
products, and the resources necessary to test its products are not significant.
Because the Company is still in the inventory and assessment phases of its
readiness plan with respect to its products, it is difficult to estimate with
certainty the ultimate cost of its Year 2000 inventory, assessment, remediation
and implementation efforts with respect to products. Due to the nature of the
Company's products, however, the Company does not currently believe that such
costs will be material.
If the Company's products are not Year 2000 ready, the Company could suffer
increased costs, lost sales or other negative consequences resulting from
customer dissatisfaction, including litigation. The Company is aware of the
potential for claims against it and other companies for damages arising from
products that are or were not Year 2000 ready. In addition, because of the large
number of products sold by the Company currently and in the past, the Company
could face lawsuits relating to the Year 2000 readiness of products that it no
longer sells and that it no longer supports. The Company believes, however, that
any such claims with respect to its current or past products would be without
merit.
The Company does not currently have any Year 2000 related contingency plans. The
Company expects to institute appropriate contingency planning at the completion
of the assessment phase of its Year 2000 readiness plan.
The above discussion regarding costs, risks and estimated completion dates for
the Year 2000 is based on the Company's best estimates given information that is
currently available, and is subject to change. Actual results will differ
materially from these estimates.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to various pending claims. Management, after review and
consultation with counsel, considers that any liability from the disposition of
such lawsuits in the aggregate would not have a material adverse effect upon the
consolidated financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held a Special Meeting of Stockholders on August 31, 1998.
(b) The Special Meeting did not involve the election of directors.
(c) The first matter voted upon at the Special Meeting was a proposal to
approve the issuance of shares of Common Stock, par value $.01 per
share, of the Company ("Common Stock"), as contemplated by the
Agreement and Plan of Merger dated as of June 21, 1998 among the
Company, TLC Merger Corp. and Broderbund. Such proposal was approved.
The votes were reported as follows:
For: 60,914,700
Against: 64,507
Abstain: 51,408
The second matter voted upon at the Special Meeting was a proposal to
approve an amendment to the Company's Long Term Equity Incentive Plan
to increase the number of shares of Common Stock issuable thereunder
from 9,000,000 to 14,000,000. Such proposal was approved. The votes
were reported as follows:
For: 40,951,902
Against: 18,755,013
Abstain: 1,323,600
Broker Non-Votes: 100
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation, as amended1
3.2 Certificate of Designation of Series A Convertible Participating Preferred
Stock Setting Forth the Powers, Preferences, Rights, Qualifications,
Limitations and Restrictions of such Series of Preferred Stock2
3.3 Bylaws of the Company, as amended3
18
<PAGE> 19
4.1 Indenture dated as of October 16, 1995 between the Company and State Street
Bank and Trust Company, as Trustee, for 5 1/2% Senior Convertible Notes due
2000 (the "Indenture")4
4.2 First Supplemental Indenture to the Indenture, dated as of November 22,
1995, by and between the Company and State Street Bank and Trust Company,
as Trustee5
4.3 Note Resale Registration Rights Agreement dated as of October 23, 1995 by
and between the Company, on the one hand, and the Initial Purchasers set
forth therein, on the other hand (the "Registration Rights Agreement")5
4.4 Letter Agreement dated November 22, 1995 amending the Registration Rights
Agreement5
4.5 Form of Securities Resale Registration Rights Agreement by and among the
Company and Tribune Company6
4.6 Voting and Exchange Trust Agreement dated as of February 4, 1994 among the
Company and SoftKey Software Products Inc. and R-M Trust Company, as
Trustee7
4.7 Plan of Arrangement of SoftKey Software Products Inc. under Section 182 of
the Business Corporations Act (Ontario)7
4.8 Special Warrant Indenture dated March 12, 1998 between SoftKey Software
Products Inc. and CIBC Mellon Trust Company8
4.9 Registration Rights Agreement dated as of August 26, 1997 among the Company
and Thomas H. Lee Company, Thomas H. Lee Equity Fund III, L.P., Thomas H.
Lee Foreign Fund III, L.P., Bain Capital Fund V, L.P., Bain Capital V-B.
L.P., BCIP Associates, L.P., BCIP Trust Associates, L.P., Centre Capital
Investors II, L.P., Centre Capital Tax-Exempt Investors II, L.P., Centre
Capital Offshore Investors II, L.P. , State Board of Administration of
Florida, Centre Parallel Management Partners, L.P. and Centre Partners
Coinvestment, L.P. 3
10.1 Long-Term Equity Incentive Plan, restated as of August 31, 1998*
10.2 Third Amendment, dated as of August 7, 1998, to Amended and Restated Credit
Agreement dated as of May 6, 1998 among Fleet National Bank, as agent,
Goldman Sachs Credit Partners L.P., as syndication agent, the lenders named
therein, TLC Multimedia Inc., Learning Company Properties Inc., TEC Direct,
Inc., Learning Services, Inc., Skills Bank Corporation, Microsystems
Software, Inc. and Mindscape, Inc.
10.3 Second Amendment, dated as of August 7, 1998, to the Receivables Purchase
Agreement dated as of June 30, 1997 among The Learning Company Funding,
Inc., Lexington Parker Capital Company, LLC, Fleet National Bank, as agent,
TLC Multimedia Inc. and the Company
27.1 Financial Data Schedule
- -------------------------
* Denotes management contract or compensatory plan or arrangement.
1 Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 4, 1998.
19
<PAGE> 20
2 Incorporated by reference to exhibits filed with the Company's Definitive
Proxy Statement filed October 24, 1997.
3 Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 3, 1998.
4 Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995.
5 Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-3 (Reg . No. 333-145) filed January 26, 1996.
6 Filed as exhibits to the Agreement and Plan of Merger dated November 30,
1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc., Tribune
Company, Compton's NewMedia, Inc. and Compton's Learning Company,
incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
7 Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-3 (Reg . No. 333-40549) filed December 3, 1997.
8 Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 4, 1998.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated July 24, 1998
reporting that the Company had entered into an Underwriting Agreement with
Tribune Company and Smith Barney, Inc. and that the Company had issued 4,404
shares of Common Stock to four foreign investors.
The Company filed a Current Report on Form 8-K dated August 31, 1998
reporting that the Company had acquired Broderbund by means of the merger of TLC
Merger Corp., a wholly owned subsidiary of the Company, with and into
Broderbund, with Broderbund remaining as the surviving corporation.
20
<PAGE> 21
SIGNATURES
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 thereunto duly authorized.
THE LEARNING COMPANY, INC.
/S/ R. Scott Murray
------------------------------------------
R. Scott Murray
Executive Vice President and Chief
Financial Officer (principal financial and
accounting officer)
November 9, 1998
21
<PAGE> 22
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation, as amended1
3.2 Certificate of Designation of Series A Convertible Participating Preferred
Stock Setting Forth the Powers, Preferences, Rights, Qualifications,
Limitations and Restrictions of such Series of Preferred Stock2
3.3 Bylaws of the Company, as amended3
4.1 Indenture dated as of October 16, 1995 between the Company and State Street
Bank and Trust Company, as Trustee, for 5 1/2% Senior Convertible Notes due
2000 (the "Indenture")4
4.2 First Supplemental Indenture to the Indenture, dated as of November 22,
1995, by and between the Company and State Street Bank and Trust Company,
as Trustee5
4.3 Note Resale Registration Rights Agreement dated as of October 23, 1995 by
and between the Company, on the one hand, and the Initial Purchasers set
forth therein, on the other hand (the "Registration Rights Agreement")5
4.4 Letter Agreement dated November 22, 1995 amending the Registration Rights
Agreement5
4.5 Form of Securities Resale Registration Rights Agreement by and among the
Company and Tribune Company6
4.6 Voting and Exchange Trust Agreement dated as of February 4, 1994 among the
Company and SoftKey Software Products Inc. and R-M Trust Company, as
Trustee7
4.7 Plan of Arrangement of SoftKey Software Products Inc. under Section 182 of
the Business Corporations Act (Ontario)7
4.8 Special Warrant Indenture dated March 12, 1998 between SoftKey Software
Products Inc. and CIBC Mellon Trust Company8
4.9 Registration Rights Agreement dated as of August 26, 1997 among the Company
and Thomas H. Lee Company, Thomas H. Lee Equity Fund III, L.P., Thomas H.
Lee Foreign Fund III, L.P., Bain Capital Fund V, L.P., Bain Capital V-B.
L.P., BCIP Associates, L.P., BCIP Trust Associates, L.P., Centre Capital
Investors II, L.P., Centre Capital Tax-Exempt Investors II, L.P., Centre
Capital Offshore Investors II, L.P. , State Board of Administration of
Florida, Centre Parallel Management Partners, L.P. and Centre Partners
Coinvestment, L.P. 3
10.1 Long-Term Equity Incentive Plan, restated as of August 31, 1998*
10.2 Third Amendment, dated as of August 7, 1998, to Amended and Restated Credit
Agreement dated as of May 6, 1998 among Fleet National Bank, as agent,
Goldman Sachs Credit Partners L.P., as syndication agent, the lenders named
therein, TLC Multimedia Inc., Learning Company Properties Inc., TEC Direct,
Inc., Learning Services, Inc., Skills Bank Corporation, Microsystems
Software, Inc. and Mindscape, Inc.
10.3 Second Amendment, dated as of August 7, 1998, to the Receivables Purchase
Agreement, dated as of June 30, 1997, among The Learning Company Funding,
Inc., Lexington
22
<PAGE> 23
Parker Capital Company, LLC, Fleet National Bank, as agent, TLC Multimedia
Inc. and the Company
27.1 Financial Data Schedule
- -------------------------
* Denotes management contract or compensatory plan or arrangement.
1 Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 4, 1998.
2 Incorporated by reference to exhibits filed with the Company's Definitive
Proxy Statement filed October 24, 1997.
3 Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 3, 1998.
4 Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995.
5 Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-3 (Reg . No. 333-145) filed January 26, 1996.
6 Filed as exhibits to the Agreement and Plan of Merger dated November 30,
1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc., Tribune
Company, Compton's NewMedia, Inc. and Compton's Learning Company,
incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
7 Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-3 (Reg. No. 333-40549) filed December 3, 1997.
8 Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 4, 1998.
<PAGE> 1
EXHIBIT 10.1
THE LEARNING COMPANY, INC.
LONG TERM EQUITY INCENTIVE PLAN
RESTATED AS OF AUGUST 31, 1998
1. PURPOSE; DEFINITIONS.
A. PURPOSE. The purpose of the Plan is to provide selected
eligible employees of, and consultants to, The Learning Company, Inc., a
Delaware corporation, its Subsidiaries (as defined herein) and Affiliates (as
defined herein) an opportunity to participate in The Learning Company, Inc.'s
future by offering them long-term, performance-based and other incentives and
equity interests in The Learning Company, Inc. so as to retain, attract and
motivate management personnel.
B. DEFINITIONS. For purposes of the Plan, the following terms
have the following meanings:
1. "AFFILIATE" means a parent or subsidiary corporation,
as defined in the applicable provisions (currently Section 425) of the Code.
2. "ANNUAL BASE SALARY" with respect to a participant
who is a Covered Employee as of the end of the year shall mean the annual rate
of base salary of such participant as in effect as of the first day of any year,
without regard to any optional or mandatory deferral of base salary pursuant to
a salary deferral arrangement.
3. "AWARD" means any award under the Plan, including any
Option, Stock Appreciation Right, Restricted Stock, Stock Purchase Right, or
Performance Share Award.
4. "AWARD AGREEMENT" means, with respect to each Award,
the signed written agreement between the Company and the Plan participant
setting forth the terms and conditions of the Award.
5. "BOARD" means the Board of Directors of the Company.
6. "CHANGE IN CONTROL" has the meaning set forth in
Section 10A.
7. "CHANGE IN CONTROL PRICE" has the meaning set forth
in Section 10C.
8. "CODE" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor.
9. "COMMISSION" means the Securities and Exchange
Commission and any successor agency.
10. "COMMITTEE" means the Committee referred to in
Section 2, or the
<PAGE> 2
Board in its capacity as administrator of the Plan in accordance with Section 2.
11. "COMPANY" means The Learning Company, Inc., a
Delaware corporation.
12. "COVERED EMPLOYEE" has the meaning set forth in
Section 162(m)(3) of the Code.
13. [Intentionally Omitted]
14. "DISABILITY" means permanent and total disability as
determined by the Committee for purposes of the Plan.
15. "DISINTERESTED PERSON" has the meaning set forth in
Rule 16b-3(d)(3) under the Exchange Act and any successor definition adopted by
the Commission.
16. "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended from time to time, and any successor.
17. "FAIR MARKET VALUE" means as of any given date:
(a) If the Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market, the closing sale price for the Stock or the closing bid,
if no sales are reported, as quoted on such system or exchange (or the largest
such exchange) for the date the value is to be determined (or if there are no
sales for such date, then for the last preceding business day on which there
were sales), as reported in the WALL STREET JOURNAL or similar publication.
(b) If the Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the mean
between the high bid and low asked prices for the Stock on the date the value is
to be determined (or if there are no quoted prices for the date of grant, then
for the last preceding business day on which there were quoted prices).
(c) In the absence of an established market for
the Stock, as determined in good faith by the Committee, with reference to the
Company's net worth, prospective earning power, dividend-paying capacity, and
other relevant factors, including the goodwill of the Company, the economic
outlook in the Company's industry, the Company's position in the industry and
its management and the values of stock of other corporations in the same or a
similar line of business.
18. "INCENTIVE STOCK OPTION" means any Option intended to
be and designated as an "Incentive Stock Option" within the meaning of Section
422 of the Code.
18A. "NON-EMPLOYEE DIRECTOR" has the meaning set forth in
Rule 16b-3 under the Exchange Act and any successor definition adopted by the
Commission.
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<PAGE> 3
19. "NON-QUALIFIED STOCK OPTION" means any Option that is
not an Incentive Stock Option.
20. "OUTSIDE DIRECTOR" has the meaning set forth in
Section 162(m).
21. "OPTION" means an Option granted under Section 5.
22. "PERFORMANCE SHARE" means the equivalent, as of any
time such assessment is made, of the Fair Market Value of one share of Stock.
23. "PERFORMANCE SHARE AWARD" means an Award under
Section 9.
24. "PLAN" means this Learning Company, Inc. Long Term
Equity Incentive Plan, as amended from time to time.
25. "PRE-TAX PROFIT" shall mean the net profit before
income taxes of the Company for each year determined in accordance with
generally accepted accounting principles and reported upon by the Company's
independent accountants.
26. "RESTRICTED STOCK" means an Award of Stock subject to
restrictions, as more fully described in Section 7.
27. "RULE 16b-3" means Rule 16b-3 under Section 16(b) of
the Exchange Act, as amended from time to time, and any successor rule.
28. "SECTION 162(m)" means Section 162(m) of the Code, as
amended from time to time, and any successor provision.
29. "STOCK" means the Common Stock, $0.01 par value, of
the Company, and any successor security.
30. "STOCK APPRECIATION RIGHT" means an Award granted
under Section 6.
31. "STOCK PURCHASE RIGHT" means an Award granted under
Section 8.
32. "SUBSIDIARY" has the meaning set forth in Section 425
of the Code.
33. "TERMINATION" means, for purposes of the Plan, with
respect to a participant, that the participant has ceased to be, for any reason,
with or without cause, an employee of, or a consultant to, the Company, or a
Subsidiary or Affiliate of the Company, such that such participant is neither an
employee of, or a consultant to, the Company, a Subsidiary, or any Affiliate.
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<PAGE> 4
2. ADMINISTRATION.
A. COMMITTEE. The Plan shall be administered by the Board or,
upon delegation by the Board, by a committee of the Board comprised of not less
than two members (i) each member of which shall be, to the extent required to
comply with Rule 16b-3 and unless the Committee determines that Rule 16b-3 is
not applicable to the Plan, a Non-Employee Director, and (ii) each member of
which shall be, to the extent required to comply with Section 162(m) and unless
the Committee determines that Rule 162(m) is not applicable to the Plan, an
Outside Director. In connection with the administration of the Plan, the
Committee shall have the powers possessed by the Board. The Committee may act
only by a majority of its members, except that the Committee (i) may authorize
any one or more of its members or any officer of the Company to execute and
deliver documents on behalf of the Committee and (ii) so long as not otherwise
required for the Plan to comply with Rule 16b-3 (unless the Committee determines
that Rule 16b-3 is not applicable to the Plan) and so long as not otherwise
required for the Plan to comply with Section 162(m) (unless the Committee
determines that Section 162(m) is not applicable to the Plan), may delegate to
one or more officers or directors of the Company authority to grant Awards to
persons who are not subject to Section 16 of the Exchange Act with respect to
Stock and who are not Covered Employees. The Board at any time may abolish the
Committee and revest in the Board the administration of the Plan.
B. AUTHORITY. The Committee shall grant Awards to eligible
employees and consultants. In particular and without limitation, the Committee,
subject to the terms of the Plan, shall:
1. Select the officers, other employees and consultants
to whom Awards may be granted;
2. Determine whether and to what extent Awards are to be
granted under the Plan;
3. Determine the number of shares to be covered by each
Award granted under the Plan;
(a) determine the terms and conditions of any
Award granted under the Plan and any related loans to be made by the Company,
based upon factors determined by the Committee;
(b) determine to what extent and under what
circumstances any Award payments may be deferred by a Plan participant; and
4. Make adjustments in the Performance Goals (as
hereinafter defined) in recognition of unusual or non-recurring events affecting
the Company or the financial statements of the Company, or in response to
changes in applicable laws, regulations, or accounting principles.
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<PAGE> 5
C. COMMITTEE DETERMINATIONS BINDING. The Committee may adopt,
alter and repeal administrative rules, guidelines and practices governing the
Plan as it from time to time shall deem advisable, interpret the terms and
provisions of the Plan, any Award, any Award Agreement and otherwise supervise
the administration of the Plan. Any determination made by the Committee pursuant
to the provisions of the Plan with respect to any Award shall be made in its
sole discretion at the time of the grant of the Award or, unless in
contravention of any express term of the Plan or Award, at any later time. All
decisions made by the Committee under the Plan shall be binding on all persons,
including the Company and Plan participants.
3. STOCK SUBJECT TO PLAN.
A. NUMBER OF SHARES. The total number of shares of Stock reserved
and available for issuance pursuant to Awards under the Plan shall be 14,000,000
shares. Such shares may consist, in whole or in part, of authorized and unissued
shares or shares reacquired in private transactions or open market purchases,
but all shares issued under the Plan regardless of source shall be counted
against the 14,000,000 share limitation. If any Option terminates or expires
without being exercised in full or if any shares of Stock subject to an Award
are forfeited or if an Award otherwise terminates without a payment being made
to the participant in the form of Stock, the shares issuable under such Option
or Award shall again be available for issuance in connection with Awards;
provided that, to the extent required for the Plan to comply with Rule 16b-3, in
the case of forfeiture, cancellation, exchange or surrender of shares of
Restricted Stock, the number of shares with respect to such Awards shall not be
available for Awards hereunder unless dividends paid on such shares are also
forfeited, canceled, exchanged or surrendered. If any shares of Stock subject to
an Award are repurchased by the Company, the shares issuable under such Award
shall again be available for issuance in connection with Awards other than
Options and Stock Appreciation Rights. To the extent an Award is paid in cash,
the number of shares of Stock representing, at Fair Market Value on the date of
the payment, the value of the cash payment shall not be available for later
grant under the Plan.
B. INDIVIDUAL LIMITS. In any year during the term of this Plan
(commencing January 1, 1995), no Plan participant can receive stock-based Awards
including Options, Stock Appreciation Rights which are granted without reference
to an Option, Restricted Stock, Stock Purchase Rights and Performance Shares,
relating to shares of Stock which in the aggregate exceed 20% of the total
number of shares of Stock authorized pursuant to the Plan, as adjusted pursuant
to the terms hereof.
C. ADJUSTMENTS. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split, spin-off, sale of
substantial assets or other change in corporate structure affecting the Stock,
such substitution or adjustments shall be made in the aggregate number and kind
of shares of Stock reserved for issuance under the Plan, in the number, kind and
exercise price of shares subject to outstanding Options, in the number, kind and
purchase price of shares subject to outstanding Stock Purchase Rights and in the
number
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<PAGE> 6
and kind of shares subject to other outstanding Awards, as may be determined to
be appropriate by the Committee in its sole discretion; provided that the number
and kind of shares subject to any Award shall always be rounded down to the
nearest whole number; and provided further that with respect to Incentive Stock
Options, such adjustment shall be made in accordance with Section 424 of the
Code. Such adjusted exercise price shall also be used to determine the amount
payable by the Company upon the exercise of any Stock Appreciation Right
associated with any Option.
4. ELIGIBILITY.
Awards may be granted to officers and other employees of, and
consultants to, the Company, its Subsidiaries and its Affiliates (excluding any
person who serves only as a director).
5. STOCK OPTIONS.
A. TYPES. Any Option granted under the Plan shall be in such form
as the Committee may from time to time approve. The Committee shall have the
authority to grant to any Plan participant Incentive Stock Options,
Non-Qualified Stock Options, or any type of Option (in each case with or without
Stock Appreciation Rights). Incentive Stock Options may be granted only to
employees of the Company, its parent (within the meaning of Section 425 of the
Code) or its Subsidiaries. Any portion of an Option that does not qualify as an
Incentive Stock Option shall constitute a Non-Qualified Stock Option.
B. TERMS AND CONDITIONS. Options granted under the Plan shall be
subject to the following terms and conditions:
1. OPTION TERM. The term of each Option shall be fixed
by the Committee, but no Incentive Stock Option shall be exercisable more than
ten years after the date the Option is granted, and no Non-Qualified Stock
Option shall be exercisable more than 11 years after the date the Option is
granted. If, at the time the Company grants an Incentive Stock Option, the
optionee owns directly or by attribution stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or any
Affiliate of the Company, the Incentive Stock Option shall not be exercisable
more than five years after the date of grant.
2. GRANT DATE. The Company may grant Options under the
Plan at any time and from time to time before the Plan terminates. The Committee
shall specify the date of grant or, if it fails to do so, the date of grant
shall be the date of action taken by the Committee to grant the Option; provided
that no Option may be exercised prior to execution of the applicable Award
Agreement. However, if an Option is approved in anticipation of employment, the
date of grant shall be the date the intended optionee is first treated as an
employee for payroll purposes.
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<PAGE> 7
3. EXERCISE PRICE. The exercise price per share of Stock
purchasable under a Non-Qualified Stock Option shall be equal to at least 50%,
and not more than 100%, of the Fair Market Value on the date of grant, provided
that no Option granted to an employee whom the Committee determines is likely to
be a Covered Employee at the end of the year shall have an exercise price below
100% of Fair Market Value on the date of grant. The exercise price per share of
Stock purchasable under an Incentive Stock Option shall be equal to at least the
Fair Market Value on the date of grant; provided that if at the time the Company
grants an Incentive Stock Option, the optionee owns directly or by attribution
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company or any Affiliate of the Company the exercise price shall
be not less than 110% of the Fair Market Value on the date the Incentive Stock
Option is granted.
4. EXERCISABILITY. Subject to the other provisions of
the Plan, an Option shall be exercisable in its entirety at the time of grant or
at such times and in such amounts as are specified in the Award Agreement
evidencing the Option. The Committee, in its absolute discretion, at any time
may waive any limitations respecting the time at which an Option first becomes
exercisable in whole or in part.
5. METHOD OF EXERCISE; PAYMENT. To the extent the right
to purchase shares has accrued, Options may be exercised, in whole or in part,
from time to time, by written notice from the optionee to the Company stating
the number of Shares being purchased, accompanied by payment of the exercise
price for the shares. The Committee, in its discretion, may elect at the time of
Option exercise that any Non-Qualified Stock Option be settled in cash rather
than Stock.
6. NO DISQUALIFICATION. Notwithstanding any other
provision in the Plan, no term of the Plan relating to Incentive Stock Options
shall be interpreted, amended or altered nor shall any discretion or authority
granted under the Plan be exercised so as to disqualify the Plan under Section
422 of the Code or, without the consent of the optionee affected, to disqualify
any Incentive Stock Option under such Section 422.
6. STOCK APPRECIATION RIGHTS.
A. RELATIONSHIP TO OPTIONS; NO PAYMENT BY PARTICIPANT. A Stock
Appreciation Right may be awarded either (i) with respect to Stock subject to an
Option held by a participant or (ii) without reference to an Option. If an
Option is an Incentive Stock Option, a Stock Appreciation Right granted with
respect to such Option may be granted only at the time of grant of the related
Incentive Stock Option, but if the Option is a Non-Qualified Stock Option, the
Stock Appreciation Right may be granted either simultaneously with the grant of
the related Non-Qualified Stock Option or at any time during the term of such
related Non-Qualified Stock Option. No consideration shall be paid by a
participant with respect to a Stock Appreciation Right.
B. WHEN EXERCISABLE. A Stock Appreciation Right shall be
exercisable at such
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<PAGE> 8
times and in whole or in part, each as determined by the Committee, subject,
with respect to Plan participants subject to Section 16(b) of the Exchange Act,
to Rule 16b-3. Any exercise by the participant of a Stock Appreciation Right for
cash shall be made only during the window period specified in Rule
16b-3(e)(3)(iii) and any successor rule (the "Window Period"), unless the
Committee determines that Rule 16b-3 is not applicable to the Plan. If a Stock
Appreciation Right is granted with respect to an Option, unless the Award
Agreement otherwise provides, the Stock Appreciation Right may be exercised only
to the extent to which shares covered by the Option are not at the time of
exercise subject to repurchase by the Company.
C. EFFECT ON RELATED RIGHT; TERMINATION OF STOCK APPRECIATION
RIGHT. If a Stock Appreciation Right granted with respect to an Option is
exercised, the Option shall cease to be exercisable and shall be canceled to the
extent of the number of shares with respect to which the Stock Appreciation
Right was exercised. Upon the exercise or termination of an Option, related
Stock Appreciation Rights shall terminate to the extent of the number of shares
as to which the Option was exercised or terminated, except that, unless
otherwise determined by the Committee at the time of grant, a Stock Appreciation
Right granted with respect to less than the full number of shares covered by a
related Option shall not be reduced until the number of shares covered by
exercise or termination of the related Option exceeds the number of shares not
covered by the Stock Appreciation Right. A Stock Appreciation Right granted
independently from an Option shall terminate and shall be no longer exercisable
at the time determined by the Committee at the time of grant, but not later than
10 years from the date of grant. Upon the Termination of the participant, a
Stock Appreciation Right granted with respect to an Option shall be exercisable
only to the extent to which the Option is then exercisable.
D. FORM OF PAYMENT UPON EXERCISE. Despite any attempt by a Plan
participant to elect payment in a particular form upon exercise of a Stock
Appreciation Right, the Committee, in its discretion, may elect to cause the
Company to pay cash, Stock, or a combination of cash and Stock upon exercise of
the Stock Appreciation Right.
E. AMOUNT OF PAYMENT UPON EXERCISE. Upon the exercise of a Stock
Appreciation Right, the Plan participant shall be entitled to receive one of the
following payments, as determined by the Committee under Section 6D. hereof:
1. STOCK. That number of whole shares of Stock equal to
the number computed by dividing (A) an amount (the "Stock Appreciation Right
Spread"), rounded to the nearest whole dollar, equal to the product computed by
multiplying (x) the excess of (1) if the Stock Appreciation Right may only be
exercised during the Window Period, the highest Fair Market Value on any day
during the Window Period, and otherwise, the Fair Market Value on the date the
Stock Appreciation Right is exercised, over (2) the exercise price per share of
Stock of the related Option, or in the case of a Stock Appreciation Right
granted without reference to an Option, such other price as the Committee
establishes at the time the Stock Appreciation Right is granted, by (y) the
number of shares of Stock with respect to
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<PAGE> 9
which a Stock Appreciation Right is being exercised by (B) (1) if the Stock
Appreciation Right may only be exercised during the Window Period, the highest
Fair Market Value during the Window Period in which the Stock Appreciation Right
was exercised, and (2) otherwise, the Fair Market Value on the date the Stock
Appreciation Right is exercised; plus, if the foregoing calculation yields a
fractional share, an amount of cash equal to the applicable Fair Market Value
multiplied by such fraction (such payment to be the difference of the fractional
share); or
2. CASH. An amount in cash equal to the Stock
Appreciation Right Spread; or
3. CASH AND STOCK. A combination of cash and Stock, the
combined value of which shall equal the Stock Appreciation Right Spread.
7. RESTRICTED STOCK.
Shares of Restricted Stock shall be subject to the following terms and
conditions:
A. PRICE. Plan participants awarded Restricted Stock, within 45
days of receipt of the applicable Award Agreement, which in no event shall be
later than ten (10) days after the Award grant date, shall pay to the Company,
if required by applicable law, an amount equal to the par value of the Stock
subject to the Award. If such payment is not made and received by the Company by
such date, the Award of Restricted Stock shall lapse.
B. RESTRICTIONS. Subject to the provisions of the Plan and the
Award Agreement, during a period set by the Committee, commencing with, and not
exceeding 10 years from, the date of such award (the "Restriction Period"), the
Plan participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock. Within these limits, the
Committee may in its discretion provide for the lapse of such restrictions in
installments and may accelerate or waive such restrictions, in whole or in part,
based on service, performance or such other factors or criteria as the Committee
may determine.
C. DIVIDENDS. Unless otherwise determined by the Committee, cash
dividends with respect to shares of Restricted Stock shall be automatically
reinvested in additional Restricted Stock, and dividends payable in Stock shall
be paid in the form of Restricted Stock.
D. TERMINATION. Except to the extent otherwise provided in the
Award Agreement and pursuant to Section 7B., upon termination of a Plan
participant's employment for any reason during the Restriction Period, all
shares still subject to restriction shall be forfeited by the participant.
E. SPECIAL PROVISIONS REGARDING AWARDS. Notwithstanding anything
to the contrary contained in this Section 7, all awards of Restricted Stock
granted pursuant to this Section 7 to participants who are employees whom the
Committee determines are likely to
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<PAGE> 10
be Covered Employees at the end of the year shall have restrictions which will
lapse contingent on the attainment of such performance goals as may be
established by the Committee which may be based on earnings, earnings growth,
revenues, gross margin, expenses, market share, improvement of financial ratings
or achievement of balance sheet or income statement objectives and may be
absolute in their terms or measured against or in relationship to other
companies comparably or similarly situated. Such performance goals may be
particular to a participant or the division, department, line of business,
subsidiary or other unit in which the participant works, or may be based on the
performance of the Company generally, and may cover such period as may be
specified by the Committee. Notwithstanding the foregoing, all performance
objectives shall comply with the provisions of Section 162(m) of the Code and
the regulations promulgated thereunder.
F. TIME AND FORM OF PAYMENT. In the case of Plan participants who
are Covered Employees as of the end of the year, unless otherwise determined by
the Committee, shares of Restricted Stock shall be released from restrictions
only after achievement of the applicable performance goals has been certified by
the Committee.
8. STOCK PURCHASE RIGHTS.
A. PRICE. The Committee may grant Stock Purchase Rights which
shall enable the recipients to purchase Stock at a price equal to not less than
50%, and not more than 100%, of Fair Market Value on the date of grant.
B. EXERCISABILITY. Stock Purchase Rights shall be exercisable for
a period determined by the Committee not exceeding 30 days from the date of
grant. The Committee, however, may provide that, if required under Rule 16b-3,
Stock Purchase Rights granted to persons subject to Section 16(b) of the
Exchange Act shall not become exercisable until six months and one day after the
grant date and shall then be exercisable for 10 trading days at the purchase
price specified by the Committee in accordance with Section 8A.
C. SPECIAL PROVISIONS REGARDING AWARDS. In no event shall any
awards be granted under this Section 8 to an employee who the Committee
determines is likely to be a Covered Employee at the end of the year.
9. PERFORMANCE SHARES.
A. AWARDS. The Committee shall determine the nature, length
(which shall in no event be greater than 10 years) and starting date of the
performance (the "Performance Period") for each Performance Share Award. The
consideration payable to a participant with respect to a Performance Share Award
shall be an amount determined by the Committee in the exercise of the
Committee's discretion at the time of the Award; provided that the amount of
consideration may be zero and may in no event exceed 50% of a Plan participant's
Annual Base Salary at the time of grant. The Committee shall determine the
performance objectives to be used in awarding Performance Shares (the
"Performance Goals") and the extent to
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<PAGE> 11
which such Performance Shares have been earned. Performance Periods may overlap
and participants may participate simultaneously with respect to Performance
Share Awards that are subject to different Performance Periods and different
performance factors and criteria. At the beginning of each Performance Period,
the Committee shall determine for each Performance Share Award subject to such
Performance Period the number of shares of Stock (which may constitute
Restricted Stock) to be awarded to the participant at the end of the Performance
Period if and to the extent that the relevant measures of performance for such
Performance Share Award are met. Such number of shares of Stock may be fixed or
may vary in accordance with such performance or other criteria as may be
determined by the Committee. The Committee may provide that amounts equivalent
to interest at such rates as the Committee may determine or amounts equivalent
to dividends paid shall be payable with respect to Performance Share Awards. In
addition to the provisions set forth in Section 11J., the Committee, in its
discretion, may modify the terms of any Performance Share Award (except for
those Participants who are Covered Employees), including the specification and
measurement of performance goals.
B. TERMINATION OF EMPLOYMENT. Except as otherwise provided in the
Award Agreement or determined by the Committee, in the event of Termination
during a Performance Period for any reason, then the Plan participant shall not
be entitled to any payment with respect to the Performance Shares subject to the
Performance Period.
C. FORM OF PAYMENT. Payment shall be made in the form of cash or
whole shares of Stock as the Committee, in its discretion, shall determine.
D. SPECIAL PROVISIONS REGARDING AWARDS. In no event shall any
awards be granted under this Section 9 to an employee whom the Committee
determines is likely to be a Covered Employee at the end of the year.
10. CHANGE IN CONTROL.
A. DEFINITION OF "CHANGE IN CONTROL". For purposes of Section
1B., a "Change in Control" means the occurrence of either of the following:
1. Any "person", as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, a Company Subsidiary, a
Company Affiliate, or a Company employee benefit plan, including any trustee of
such plan acting as trustee) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company (or a successor to the Company) representing 35% or more of the combined
voting power of the then outstanding securities of the Company or such
successor; or
2. At any time that the Company has registered shares
under the Exchange Act, at least 40% of the directors of the Company constitute
persons who were not at the time of their first election to the Board,
candidates proposed by a majority of the Board in office prior to the time of
such first election; or
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3. The dissolution of the Company or liquidation of more
than 50% in value of the Company or a sale of assets involving 50% or more in
value of the assets of the Company, (x) any merger or reorganization of the
Company whether or not another entity is the survivor, (y) a transaction
pursuant to which the holders, as a group, of all of the shares of the Company
outstanding prior to the transaction hold, as a group, less than 50% of the
combined voting power of the Company or any successor company outstanding after
the transaction, or (z) any other event which the Board determines, in its
discretion, would materially alter the structure of the Company or its
ownership.
B. IMPACT OF EVENT. Except as expressly provided in any Award
agreement, in the event of a "Change in Control" as defined in Section 10A, the
following provisions shall apply:
1. Any Stock Appreciation Rights and Options outstanding
as of the date such Change in Control is determined to have occurred and not
then exercisable and vested shall become fully exercisable and vested; provided,
that in the case of the holder of Stock Appreciation Rights who is actually
subject to Section 16(b) of the Exchange Act, such Stock Appreciation Rights
shall have been outstanding for at least six months at the date such Change in
Control is determined to have occurred;
2. The restrictions and limitations applicable to any
Restricted Stock and Stock Purchase Rights shall lapse and such Restricted Stock
shall become fully vested;
3. The value (net of any exercise price and required tax
withholdings) of all outstanding Options, Stock Appreciation Rights, Restricted
Stock, and Stock Purchase Rights, unless otherwise determined by the Committee
at or after grant and subject to Rule 16b-3, shall be cashed out on the basis of
the "Change in Control Price," as defined in Section 11C., as of the date such
Change in Control is determined to have occurred or such other date as the Board
may determine prior to the Change in Control;
4. Any outstanding Performance Share Awards shall be
vested and paid in full as if all performance criteria had been met; provided,
however, that the foregoing provision shall only apply, with respect to the
events described in Section 10A.1, 10A.3(x), 10A.3(z), and 10A.4, if and to the
extent so specifically determined by the Committee in the exercise of the
Committee's discretion, which determination may be amended or reversed only by
the affirmative vote of a majority of the persons who were directors at the time
such determination was made.
C. CHANGE IN CONTROL PRICE. For purposes of this Section 10,
"Change in Control Price" means the highest price per share paid in any
transaction reported on any established stock exchange, national market system
or other established market for the Stock, or paid or offered in any bona fide
transaction related to a potential or actual Change in Control of the Company at
any time during the preceding 60-day period as determined by the Committee,
except that in the case of Incentive Stock Options and Stock Appreciation Rights
relating to
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Incentive Stock Options, such price shall be based only on transactions reported
for the date on which the Board decides to cash out such Options.
11. GENERAL PROVISIONS.
A. AWARD GRANTS. Any Award may be granted either alone or in
addition to other Awards granted under the Plan. Subject to the terms and
restrictions set forth elsewhere in the Plan, the Committee shall determine the
consideration, if any, payable by the participant for any Award and, in addition
to those set forth in the Plan, any other terms and conditions of the Awards.
The Committee may condition the grant or payment of any Award upon the
attainment of Performance Goals or such other factors or criteria, including
vesting based on continued employment or consulting, as the Committee shall
determine. Performance Goals may vary from Plan participant to Plan participant
and among groups of Plan participants and shall be based upon such Company,
subsidiary, group or division factors or criteria as the Committee may deem
appropriate, including, but not limited to, earnings per share or return on
equity (except as otherwise required for Plan participants who are Covered
Employees as of the end of the year in order to comply with Section 162(m)). The
other provisions of Awards also need not be the same with respect to each
recipient. Unless otherwise specified in the Plan or by the Committee, the date
of grant of an Award shall be the date of action by the Committee to grant the
Award. The Committee may also substitute new Options for previously granted
Options, including previously granted Options having higher exercise prices.
B. TYPES OF SHARES. The Committee, in its discretion, may
determine at the time of an Award that in lieu of Stock there shall be issuable
under, or applicable to the measurement of, any Award any of the following: (i)
Restricted Stock; (ii) shares of any series of common stock of the Company other
than Stock and shares of any series of common stock of any Subsidiary or
Affiliate of the Company ("Common Shares"); or (iii) shares of any series of
preferred stock of the Company ("Preferred Shares"); provided that (A) with
respect to shares issuable upon exercise of Incentive Stock Options, Common
Shares and Preferred Shares shall be limited to shares of any Subsidiary
authorized as of the date the Plan is approved by the Board and (B) with respect
to shares issuable upon exercise of Non-Qualified Stock Options and Stock
Appreciation Rights, Common Shares and Preferred Shares shall be limited to
shares of any Subsidiary or Affiliate of the Company. In such event, the
Committee shall determine the number of shares of Stock equivalent to such
Restricted Stock, Common Shares or Preferred Shares for the purpose of
calculating the shares of Stock issued under the Plan; provided that a Common
Share or a Preferred Share in no event shall be deemed equal to less than one
share of Stock.
C. AWARD AGREEMENT. As soon as practicable after the date of an
Award grant, the Company and the participant shall enter into a written Award
Agreement specifying the date of grant and the terms and conditions of the
Award.
D. CERTIFICATES. All certificates for shares of Stock or other
securities delivered under the Plan shall be subject to such stock transfer
orders, legends and other restrictions as
13
<PAGE> 14
the Committee may deem advisable under the rules, regulations and other
requirements of the Commission, any stock exchange upon which the Stock is then
listed, any national market system over which the Stock is then quoted and any
applicable federal, state or foreign securities law.
E. TERMINATION. With respect to Awards (other than Options), in
the event of Termination for any reason other than death or Disability, Awards
held at the date of Termination (and only to the extent then exercisable or
payable, as the case may be) may be exercised in whole or in part at any time
within 90 days after the date of Termination, or such lesser period specified in
the Award Agreement (but in no event after the expiration date of the Award),
but not thereafter. With respect to Options, in the event of Termination for any
reason other than death or Disability, Options held at the date of Termination
(to the extent then exercisable) may be exercised in whole or in part within 90
days after the date of Termination, or such other period (which may be longer or
shorter than 90 days) which shall be specified in the Award Agreement (but in no
event shall any Option remain exercisable after the expiration date of such
Option). If Termination is due to death or Disability, or a participant dies or
becomes disabled within the period that the Award remains exercisable or
payable, as the case may be, after Termination, only Awards (including Options)
held at the date of death or Disability (and only to the extent then exercisable
or payable, as the case may be) may be exercised in whole or in part by the
participant in the case of Disability, by the participant's personal
representative or by the person to whom the Award is transferred by will or the
laws of descent and distribution, at any time within 18 months after the death
or one year after the Disability, as the case may be, of the participant (or
such other period which shall be specified in the Award Agreement, but in no
event shall any Award remain exercisable after the expiration of such Award). In
the event of Termination by reason of the participant's retirement (as
determined in the exercise of the Committee's sole discretion), Awards
(including Options) may be exercised in whole or in part at any time within two
years after the date of Termination (or such other period which shall be
specified in the Award Agreement, but in no event shall any Award remain
exercisable after the expiration date of such Award).
F. DELIVERY OF PURCHASE PRICE. Plan participants shall make all
or any portion of any payment due to the Company with respect to the
consideration payable for, upon exercise of, or for federal, state, local or
foreign tax payable in connection with, an Award by delivery of cash; and if and
only to the extent authorized by the Committee, all or any portion of such
payment may be made by delivery of any property (including without limitation a
promissory note of the participant or shares of Stock or other securities and,
in the case of an Option, surrender of shares issuable upon exercise of that
Option) other than cash, so long as, if applicable, such property constitutes
valid consideration for the Stock under applicable law. To the extent
participants may make payments due to the Company upon grant or exercise of
Awards by the delivery of shares of Stock or other securities, the Committee, in
its discretion, may permit participants constructively to deliver for any such
payment securities of the Company held by the participant for at least three
months. Constructive delivery shall be effected by (i) identification by the
participant of shares intended to be delivered constructively, (ii) confirmation
by the Company of participant's ownership of such shares
14
<PAGE> 15
(for example, by reference to the Company's stock records, or by some other
means of verification) and (iii) if applicable, upon exercise, delivery to the
participant of a certificate for that number of shares equal to the number of
shares for which the Award is exercised less the number of shares constructively
delivered.
G. TAX WITHHOLDING. If and to the extent authorized by the
Committee in its discretion, a person who has received an Award or payment under
an Award may make an election to deliver to the Company a promissory note of the
Plan participant on the terms set forth in Section 11F or to have shares of
Stock or other securities of the Company withheld by the Company or to tender
any such securities to the Company to pay the amount of tax that the Committee
in its discretion determines to be required to be withheld by the Company.
1. Such election shall be irrevocable;
2. Such election shall be subject to the disapproval of
the Committee;
3. In the case of participants subject to Section 16(b)
of the Exchange Act, the election and the exercise of the Award may not be made
within six months after the grant of the Award (and in the case of a Stock
Appreciation Right, any related Award) to be exercised (except that this
limitation shall not apply in the event of death or Disability of such person
before the six-month period expires); and
4. In the case of participants subject to Section 16(b)
of the Exchange Act, such election may be made either (A) at least six months
before the date that the amount of tax to be withheld in connection with such
exercise is determined or (B) in any ten-day period beginning on the third
business day following the date of release for publication of quarterly or
annual summary statements of sales and earnings.
Any shares or other securities so withheld or tendered will be valued by the
Committee as of the date they are withheld or tendered; provided, that Stock
shall be valued at the Fair Market Value on such date. The value of the shares
withheld or tendered may not exceed the required federal, state, local and
foreign withholding tax obligations as computed by the Company. Unless the
Committee permits otherwise, the Plan participant shall pay to the Company in
cash, promptly when the amount of such obligations becomes determinable, all
applicable federal, state, local and foreign withholding taxes that the
Committee in its discretion determines to result from the lapse of restrictions
imposed upon an Award or upon exercise of an Award or from a transfer or other
disposition of shares acquired upon exercise or payment of an Award or otherwise
related to the Award or the shares acquired in connection with an Award.
H. TRANSFERABILITY. Unless otherwise provided in an Award
Agreement, no Award shall be assignable or otherwise transferable by the
participant other than by will or by the laws of descent and distribution, and,
during the life of the participant, an Award shall be exercisable, and any
elections with respect to an Award shall be made, only by the Plan
15
<PAGE> 16
participant or such participant's guardian or legal representative.
I. RIGHTS OF FIRST REFUSAL. At the time of grant, the Committee
may provide in connection with any Award that the shares of Stock received as a
result of such Award shall be subject to a right of first refusal pursuant to
which the participant shall be required to offer to the Company any shares that
the participant wishes to sell at the then Fair Market Value subject to such
other terms and conditions as the Committee may specify at the time of grant
J. ADJUSTMENT OF AWARDS; WAIVERS. The Committee may adjust the
Performance Goals and measurements applicable to Awards (i) to take into account
changes in law and accounting and tax rules, (ii) to make such adjustments as
the Committee deems necessary or appropriate to reflect the inclusion or
exclusion of the impact of extraordinary or unusual items, events, or
circumstances in order to avoid windfalls or hardships, (iii) to make such
adjustments as the Committee deems necessary or appropriate to reflect any
material changes in business conditions and (iv) in any other manner determined
in its discretion. In the event of hardship or other special circumstances of a
participant and otherwise in its discretion, the Committee may waive in whole or
in part any or all restrictions, conditions, vesting, or forfeiture with respect
to any Award granted to such Plan participant.
K. ELECTION TO DEFER PAYMENT. To the extent, if any, permitted by
the Committee, a Plan participant may elect, at such time as the Committee may
in its discretion specify, to defer payment of all or a portion of an Award.
L. NON-COMPETITION. The Committee may condition the Committee's
discretionary waiver of a forfeiture or vesting acceleration at the time of
Termination of a Plan participant holding any unexercised or unearned Award or
the waiver of restrictions upon any Award upon a requirement that such
participant agree to and actually (i) not engage in any business or activity
competitive with any business or activity conducted by the Company and (ii) be
available, unless such participant shall have died, for consultations at the
request of the Company's management, all on such terms and conditions (including
conditions in addition to (i) and (ii)) as the Committee may determine.
M. DIVIDENDS. The reinvestment of dividends in additional Stock
or Restricted Stock at the time of any dividend payment shall only be
permissible if sufficient shares of Stock are available under Section 3 for such
reinvestment (taking into account then outstanding Awards).
N. REGULATORY COMPLIANCE. Each Award under the Plan shall be
subject to the condition that, if at any time the Committee shall determine that
(i) the listing, registration or qualification of the shares of Stock upon any
securities exchange or under any state or federal law, (ii) the consent or
approval of any government or regulatory body, or (iii) an agreement or
representations by the participant with respect thereto, is necessary or
desirable, then such Award shall not be consummated in whole or in part unless
such listing, registration, qualification, consent, approval, agreement or
representations shall have been effected or obtained free of any conditions not
acceptable to the Committee.
16
<PAGE> 17
O. RIGHTS AS STOCKHOLDER. Unless the Plan or the Committee
expressly specifies otherwise, a Plan participant shall have no rights as a
stockholder with respect to any shares covered by an Award until the participant
is entitled, under the terms of the Award, to receive such shares. Subject to
Sections 3B. and 7C., no adjustment shall be made for dividends or other rights
for which the record date is prior to the date the certificates are delivered.
P. BENEFICIARY DESIGNATION. The Committee, in its discretion, may
establish procedures for a participant to designate a beneficiary to whom any
amounts payable in the event of the participant's death are to be paid.
Q. ADDITIONAL PLANS. Nothing contained in the Plan shall prevent
the Company or a Subsidiary or Affiliate of the Company from adopting other or
additional compensation arrangements for its employees.
R. NO EMPLOYMENT RIGHTS. The adoption of the Plan shall not
confer upon any employee any right to continued employment nor shall it
interfere in any way with the right of the Company or a Subsidiary or Affiliate
of the Company to terminate the employment of any employee at any time.
S. INTERPRETATION. Notwithstanding any provision of the Plan, the
Plan shall always be administered, and Awards shall always be granted and
exercised, in such a manner as to conform to the provisions of Rule 16b-3 and
Section 162(m), unless the Committee determines that Rule 16b-3 or Section
162(m) are not applicable to the Plan. The Plan is designed and intended to
comply with Rule 16b-3 and, to the extent applicable, with Section 162(m), and
all provisions hereof shall be construed in a manner to so comply.
T. GOVERNING LAW. The Plan and all Awards shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts.
U. USE OF PROCEEDS. All cash proceeds to the Company under the
Plan shall constitute general funds of the Company.
V. UNFUNDED STATUS OF PLAN. The Plan shall constitute an
"unfunded" plan for incentive and deferred compensation. The Committee may
authorize the creation of trusts or arrangements to meet the obligations created
under the Plan to deliver Stock or make payments; provided, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements shall be consistent with the "unfunded" status of the Plan.
W. ASSUMPTION BY SUCCESSOR. The obligations of the Company under
the Plan and under any outstanding Award may be assumed by any successor
corporation, which for purposes of the Plan shall be included within the meaning
of "Company".
X. PLAN DESIGNATION AND STATUS. Notwithstanding the designation
of this
17
<PAGE> 18
document as a plan for convenience of reference and to standardize certain
provisions applicable to all types of Awards, each type of Award shall be deemed
to be a separate "plan" for purposes of Section 16 of the Exchange Act and any
applicable state securities laws.
12. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuance shall be made which would impair the rights of a
participant under an outstanding Award without the Plan participant's consent.
In addition, to the extent required for the Plan to comply with Rule 16b-3 or
Section 162(m) or, with respect to provisions solely as they relate to Incentive
Stock Options, to the extent required for the Plan to comply with Section 422A
of the Code, the Board may not amend or alter the Plan without the approval of a
majority of the votes cast at a duly held stockholders' meeting at which a
quorum of the voting power of the Company is represented in person or by proxy,
where such amendment or alteration would:
A. Except as expressly provided in the Plan, increase the total
number of shares reserved for issuance pursuant to Awards under the Plan;
B. Except as expressly provided in the Plan, change the minimum
price terms of Section 5B.3 or Section 8A;
C. Change the class of employees and consultants eligible to
participate in the Plan;
D. Extend the maximum Option term under Section 5B. or the
maximum exercise period under Section 8B.; or
E. Materially increase the benefits accruing to participants
under the Plan.
The Board of Directors may, at any time without stockholder approval,
amend the Plan and the terms of any Award outstanding under the Plan, provided
that such amendment is designed to maximize federal income tax benefits accorded
to Awards or, if the Committee determines that Rule 16b-3 is applicable to the
Plan, to comply with Rule 16b-3 and provided further that with respect to
outstanding Awards, the Plan participant consents to such amendment.
13. EFFECTIVE DATE OF PLAN.
The Plan, and any amendments thereto, shall be effective on the date
the same is adopted by the Board, but all Awards shall be conditioned upon
approval of the Plan, and any amendment thereto requiring such approval, at a
duly held stockholders' meeting by the affirmative vote of the holders of shares
representing a majority of the voting power of the Company represented in person
or by proxy and entitled to vote at the meeting.
18
<PAGE> 19
14. TERM OF PLAN.
No Award shall be granted on or after July 1, 2000, but Awards granted
prior to July 1, 2000 (including, without limitation, Performance Share Awards
for Performance Periods commencing prior to July 1, 2000) may extend beyond that
date.
19
<PAGE> 1
EXHIBIT 10.2
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIRD AMENDMENT, dated as of August 7, 1998 (this "THIRD AMENDMENT"),
to Amended and Restated Credit Agreement, dated as of May 6, 1998, as amended
(the "AGREEMENT"; capitalized terms used herein and not defined herein shall
have the meanings assigned to such terms in the Agreement), among TLC Multimedia
Inc., Learning Company Properties Inc., TEC Direct, Inc., Learning Services
Inc., Skills Bank Corporation, Microsystems Software, Inc., and Mindscape, Inc.,
as borrowers, the financial institutions named therein as lenders (the
"LENDERS"), and Fleet National Bank, as agent for the Lenders (the "AGENT").
W I T N E S E T H
WHEREAS, pursuant to the First Amendment to Amended and Restated Credit
Agreement dated as of July 1, 1998 (the "FIRST AMENDMENT"), the Borrowers, the
Lenders and the Agent previously amended the Agreement to provide for a
temporary reduction in the Commitment of Fleet National Bank ("FLEET") and the
Total Commitment thereunder;
WHEREAS, pursuant to the Second Amendment to Amended and Restated
Credit Agreement dated as of July 24, 1998, the Borrowers, the Lenders and the
Agent amended the Agreement to extend the period of said temporary reduction by
thirty (30) days to August 27, 1998;
WHEREAS, the parties wish to provide for the expiration of the period
of reduction prior to August 27, 1998 upon the execution and delivery of certain
other financing agreements; and
WHEREAS, the parties wish to reduce by $1,000,000 both the Commitment
of Fleet and the Total Commitment on the terms set forth below;
NOW, THEREFORE, in consideration of the premises and the mutual
promises and agreements set forth herein, the Borrowers, the Lenders and the
Agent agree as follows:
1. Upon the earlier of (a) August 27, 1998 and (b) the
execution, delivery and effectiveness of an Amended and Restated Liquidity
Agreement amending and restating the Liquidity Agreement originally dated as of
June 30, 1997 among The Learning Company Funding, Inc., Lexington Parker Capital
Company, LLC, certain liquidity institutions and Fleet National Bank as agent
for such institutions, and provided that the Commitments have not been
terminated pursuant to the terms of the Agreement, the Commitment of Fleet shall
be $122,500,000 and the Total Commitment shall be $147,500,000.
<PAGE> 2
2. On or before August 31, 1998, the Borrowers shall
cause to be pledged to the Agent approximately 65% (but in any event less than
66 2/3%) of the outstanding capital stock of each Designated Foreign Subsidiary.
3. Except as specifically amended by this Third
Amendment, the Agreement is hereby ratified, confirmed and approved. The
Agreement, as supplemented and amended by this Third Amendment, shall be
construed as one and the same instrument. This Third Amendment may be executed
in any number of counterparts, each of which counterpart, when so executed,
shall be deemed to be an original and such counterparts shall constitute one and
the same instrument.
4. This Third Amendment shall be governed by and
construed in accordance with the internal laws of The Commonwealth of
Massachusetts and the obligations, rights and remedies of the parties hereunder
shall be determined in accordance with such laws.
[Remainder of page blank.]
-2-
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have duly executed this
Third Amendment to Amended and Restated Credit Agreement under seal as of the
date first above written.
TLC MULTIMEDIA INC.
LEARNING COMPANY PROPERTIES INC.
TEC DIRECT, INC.
LEARNING SERVICES, INC.
SKILLS BANK CORPORATION
MICROSYSTEMS SOFTWARE, INC.
By: /s/ R. Scott Murray
------------------------------------
R. Scott Murray
Chief Financial Officer
MINDSCAPE, INC.
By: /s/ R. Scott Murray
------------------------------------
R. Scott Murray
Vice President
GOLDMAN SACHS CREDIT PARTNERS L.P.
By:
------------------------------------
Name:
Title:
FLEET NATIONAL BANK, INDIVIDUALLY AND AS
AGENT
By:
------------------------------------
Name:
Title:
-3-
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have duly executed this
Third Amendment to Amended and Restated Credit Agreement under seal as of the
date first above written.
TLC MULTIMEDIA INC.
LEARNING COMPANY PROPERTIES INC.
TEC DIRECT, INC.
LEARNING SERVICES, INC.
SKILLS BANK CORPORATION
MICROSYSTEMS SOFTWARE, INC.
By:
------------------------------------
R. Scott Murray
Chief Financial Officer
MINDSCAPE, INC.
By:
------------------------------------
R. Scott Murray
Vice President
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ STEPHEN B. KING
------------------------------------
Name: STEPHEN B. KING
Title: AUTHORIZED SIGNATURE
FLEET NATIONAL BANK, INDIVIDUALLY AND AS
AGENT
By:
------------------------------------
Name:
Title:
-3-
<PAGE> 5
IN WITNESS WHEREOF, the undersigned have duly executed this
Third Amendment to Amended and Restated Credit Agreement under seal as of the
date first above written.
TLC MULTIMEDIA INC.
LEARNING COMPANY PROPERTIES INC.
TEC DIRECT, INC.
LEARNING SERVICES, INC.
SKILLS BANK CORPORATION
MICROSYSTEMS SOFTWARE, INC.
By:
------------------------------------
R. Scott Murray
Chief Financial Officer
MINDSCAPE, INC.
By:
------------------------------------
R. Scott Murray
Vice President
GOLDMAN SACHS CREDIT PARTNERS L.P.
By:
------------------------------------
Name:
Title:
FLEET NATIONAL BANK, INDIVIDUALLY AND AS
AGENT
By: /s/ Daniel G. Head, Jr.
------------------------------------
Name: Daniel G. Head, Jr.
Title: Senior Vice President
-3-
<PAGE> 1
EXHIBIT 10.3
SECOND AMENDMENT
TO RECEIVABLES PURCHASE AGREEMENT
THIS SECOND AMENDMENT (this "SECOND AMENDMENT"), made as of August 7,
1998, to Receivables Purchase Agreement, dated as of June 30, 1997, as amended,
by and among THE LEARNING COMPANY FUNDING, INC., a Delaware corporation (the
"SELLER"), LEXINGTON PARKER CAPITAL COMPANY, LLC, a Delaware limited liability
company, as purchaser (the "PURCHASER"), FLEET NATIONAL BANK, a national banking
association, as the agent (the "AGENT"), TLC MULTIMEDIA INC., a Minnesota
corporation, as servicer ("TLC MULTIMEDIA" or "SERVICER"), and THE LEARNING
COMPANY, INC., a Delaware corporation ("TLC").
WITNESSETH:
WHEREAS, the Seller, the Purchaser, the Agent, the Servicer and TLC are
parties to a certain Receivables Purchase Agreement, dated as of June 30, 1997,
as amended (the "RECEIVABLES PURCHASE AGREEMENT"); and
WHEREAS, the parties hereto wish to amend the Receivables Purchase
Agreement pursuant to Section 9.2(b) thereof.
NOW THEREFORE, in consideration of the mutual promises and agreements
herein, the parties hereto agree as follows:
1. The definitions of "LIQUIDITY AGREEMENT" and "PURCHASE LIMIT"
in Exhibit I to the Receivables Purchase Agreement are amended and restated in
their entireties to read, respectively, as follows:
"'LIQUIDITY AGREEMENT' means the Amended and Restated
Liquidity Agreement dated as of August 7, 1998, as amended and in
effect from time to time, among Purchaser, the Liquidity Banks and
Fleet as agent."
"'PURCHASE LIMIT' means $100,000,000."
2. Except as specifically amended by this Second Amendment, the
Receivables Purchase Agreement is hereby ratified, confirmed and approved. The
Receivables Purchase Agreement, as supplemented and amended by this Second
Amendment, shall be construed as one and the same instrument. This Second
Amendment may be executed in any number of counterparts, each of which
counterpart, when so executed, shall be deemed to be an original and such
counterparts shall constitute one and the same instrument.
<PAGE> 2
3. This Second Amendment shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws.
[Remainder of page intentionally left blank]
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to Receivables Purchase Agreement to be executed and delivered as an
instrument under seal by their duly authorized officers as of the date first
above written.
SELLER:
THE LEARNING COMPANY
FUNDING, INC.
By: /s/ R. Scott Murray
------------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
PURCHASER:
LEXINGTON PARKER CAPITAL
COMPANY, LLC
By:
------------------------------------
Name:
Title:
AGENT:
FLEET NATIONAL BANK
By:
------------------------------------
Name:
Title:
SERVICER:
TLC MULTIMEDIA INC.
By: /s/ R. Scott Murray
------------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
THE LEARNING COMPANY, INC.
By: /s/ R. Scott Murray
------------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to Receivables Purchase Agreement to be executed and delivered as an
instrument under seal by their duly authorized officers as of the date first
above written.
SELLER:
THE LEARNING COMPANY
FUNDING, INC.
By:
------------------------------------
Name:
Title:
PURCHASER:
LEXINGTON PARKER CAPITAL
COMPANY, LLC
By: /s/ Thomas J. Irvin
------------------------------------
Name: Thomas J. Irvin
Title: Manager
AGENT:
FLEET NATIONAL BANK
By:
------------------------------------
Name:
Title:
SERVICER:
TLC MULTIMEDIA INC.
By:
------------------------------------
Name:
Title:
THE LEARNING COMPANY, INC.
By:
------------------------------------
Name:
Title:
-3-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to Receivables Purchase Agreement to be executed and delivered as an
instrument under seal by their duly authorized officers as of the date first
above written.
SELLER:
THE LEARNING COMPANY
FUNDING, INC.
By:
------------------------------------
Name:
Title:
PURCHASER:
LEXINGTON PARKER CAPITAL
COMPANY, LLC
By:
------------------------------------
Name:
Title:
AGENT:
FLEET NATIONAL BANK
By: /s/ Daniel G. Head, Jr.
------------------------------------
Name: Daniel G. Head, Jr.
Title: Senior Vice President
SERVICER:
TLC MULTIMEDIA INC.
By:
------------------------------------
Name:
Title:
THE LEARNING COMPANY, INC.
By:
------------------------------------
Name:
Title:
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000719612
<NAME> THE LEARNING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JUL-05-1998
<PERIOD-END> OCT-03-1998
<EXCHANGE-RATE> 1
<CASH> 234,796
<SECURITIES> 0
<RECEIVABLES> 117,247
<ALLOWANCES> 46,637
<INVENTORY> 44,507
<CURRENT-ASSETS> 51,941
<PP&E> 63,711
<DEPRECIATION> 0
<TOTAL-ASSETS> 691,606
<CURRENT-LIABILITIES> 252,997
<BONDS> 190,955
0
0
<COMMON> 0
<OTHER-SE> 172,934
<TOTAL-LIABILITY-AND-EQUITY> 691,606
<SALES> 212,723
<TOTAL-REVENUES> 212,723
<CGS> 63,011
<TOTAL-COSTS> 157,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,215)
<INCOME-PRETAX> (8,770)
<INCOME-TAX> 12,442
<INCOME-CONTINUING> (21,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,212)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
