-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BymCBKkOiJdA0PWRblaqvDDI3ymsQAzD/Y53ClsOjSwlpeIg64iN5mOrneyizNLS Yuuq/p3n6tjVqFvgYDwhzA== 0000950135-96-002238.txt : 19960522 0000950135-96-002238.hdr.sgml : 19960522 ACCESSION NUMBER: 0000950135-96-002238 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960517 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960521 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFTKEY INTERNATIONAL INC CENTRAL INDEX KEY: 0000719612 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942562108 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13069 FILM NUMBER: 96570272 BUSINESS ADDRESS: STREET 1: ONE ATHENAEUM ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6174941200 MAIL ADDRESS: STREET 1: ONE ATHENAEUM ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 FORMER COMPANY: FORMER CONFORMED NAME: WORDSTAR INTERNATIONAL INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MICROPRO INTERNATIONAL CORP DATE OF NAME CHANGE: 19890618 8-K 1 SOFTKEY INTERNATIONAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20579 ---------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) May 17, 1996 -------------------- SOFTKEY INTERNATIONAL INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 0-13069 94-2562108 - -------------------------------------------------------------------------------- (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) ONE ATHENAEUM STREET, CAMBRIDGE, MASSACHUSETTS 02142 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (617) 494 - 1200 - -------------------------------------------------------------------------------- Registrant's telephone number, including area code: N/A - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 Item 2. Disposition or Acquisition of Assets. ------------------------------------- (A) Acquisition of Minnesota Educational Computing Corporation (MECC). Pursuant to the terms of the previously reported Agreement and Plan of Merger dated as of October 30, 1995 (the "Merger Agreement") by and among SoftKey International Inc., a Delaware corporation (the "Company"), SchoolCo Inc., a Minnesota corporation and a wholly owned subsidiary of the Company ("SchoolCo"), and Minnesota Educational Computing Corporation (MECC), a Minnesota corporation ("MECC"), on May 17, 1996, SchoolCo merged with and into MECC (the "Merger"), with MECC surviving the Merger (the "Surviving Corporation"). At the effective time of the Merger (the "Effective Time"), the separate existence of SchoolCo ceased, and MECC became a wholly owned subsidiary of the Company. At the Effective Time: (a) each common share, par value $.01 per share, of MECC ("MECC Common Shares") outstanding immediately prior thereto (other than shares held by MECC as treasury shares or by the Company or SchoolCo and other than shares as to which dissenters' rights were or will be properly asserted under the Minnesota Business Corporation Act) was converted into the right to receive 1.14286 shares of common stock, par value $.01 per share, of the Company ("Company Common Stock"); and (b) each common share, par value $.01 per share, of SchoolCo outstanding immediately prior thereto was converted into one common share, par value $.01 per share, of the Surviving Corporation. In the Merger, each option to purchase MECC Common Shares ("MECC Option") outstanding immediately prior to the Effective Time was assumed by the Company and converted into an option to purchase a number of shares of Company Common Stock ("Company Option") equal to the product of 1.14286 and the number of MECC Common Shares formerly subject to such MECC Option, at an exercise price equal to the exercise price of such MECC Option divided by 1.14286. The Company expects to issue approximately 10,411,700 shares of Company Common Stock in connection with the Merger, including shares issuable pursuant to MECC Options which are being converted into Company Options. The foregoing description of the terms and provisions of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, together with the respective exhibits thereto, listed as Exhibit 2.1 hereto, which was filed as Exhibit 10.22 to the Quarterly Report on Form 10-Q of the Company for 2 3 the quarterly period ended September 30, 1995, and is hereby incorporated by reference herein. (b) Assets constituting plant, equipment or other physical property acquired by the Company in the Merger were used by MECC in the development, marketing and sale of software products for use on personal computers. The Company currently intends to use these assets in the same manner in which they were used prior to the Company's acquisition of MECC. Item 7. Financial Statement, Pro Forma Financial Information and Exhibits. ------------------------------------------------------------------ (a) Financial Statements of Business Acquired. The following financial statements of MECC are filed herewith as Exhibit 99.2 hereto: Independent auditors' report Balance Sheets at March 31, 1994 and 1995 and December 31, 1995 (Unaudited) Statements of Operations for the Years Ended March 31, 1993, 1994 and 1995 and for the Nine Months Ended December 31, 1994 and 1995 (Unaudited) Statements of Cash Flows for the Years Ended March 31, 1993, 1994 and 1995 and for the Nine Months Ended December 31, 1994 and 1995 (Unaudited) Statements of Shareholders' (Deficiency) Equity for the Years Ended March 31, 1993, 1994 and 1995 and for the Nine Months Ended December 31, 1995 (Unaudited) Notes to Financial Statements (b) Pro Forma Financial Information. Pro forma combined condensed consolidated financial information at March 31, 1996 and for the year ended December 31, 1995 and the quarter ended March 31, 1996 is filed herewith as Exhibit 99.3 hereto. The unaudited pro forma combined condensed consolidated financial statements give effect to the Merger under the purchase method of accounting. The unaudited pro forma combined condensed consolidated balance sheet combines the Company's unaudited balance sheet and MECC's unaudited balance sheet at March 31, 1996, as if 3 4 the Merger occurred on March 31, 1996. The unaudited pro forma combined condensed consolidated statement of operations for the year ended December 31, 1995 combines the historical results of operations of the Company, MECC, Compton's NewMedia Inc. and Compton's Learning Company (which the Company acquired in December 1995), The Learning Company ("TLC") (which the Company acquired in December 1995) and tewi Verlag GmbH (which the Company acquired in July 1995) for the year ended December 31, 1995, as if each of (i) the Merger, (ii) the foregoing acquisitions, (iii) the Company's October 23, 1995 issuance of $350 million principal amount of 5 1/2% Convertible Notes Due 2000 and (iv) the Company's December 28, 1995 issuance to Tribune Company of $150 million principal amount 5 1/2% Senior Convertible/Exchangeable Notes Due 2000 in connection with the acquisition of TLC had occurred at the beginning of such period. The unaudited pro forma combined condensed consolidated statement of operations for the quarter ended March 31, 1996 combines the historical results of operations of the Company and MECC as if the acquisition occurred at the beginning of such period. The unaudited pro forma combined condensed consolidated statement of operations for the year ended December 31, 1995 combines the pro forma results of the Company for the year ended December 31, 1995 and the results of MECC for the twelve months ended December 31, 1995. For ease of reference, as used herein, the Company's year ended January 6, 1996 (and all other dates tied to such date) is referred to as the year ended December 31, 1995 and the quarterly period ended April 6, 1996 (and all other dates tied to such date) is referred to as the quarter ended March 31, 1996. The unaudited pro forma combined condensed consolidated financial statements do not reflect cost savings and synergies which might be achieved from the Merger. The unaudited pro forma combined condensed consolidated financial statements do not purport to be indicative of the operating results or financial position that would have been achieved had the Merger been effected for the periods indicated or the results or financial position which may be obtained in the future. The unaudited pro forma combined condensed consolidated financial statements are based on and should be read in conjunction with the audited consolidated financial statements of the Company, including the notes thereto, which are included in the Company's Annual Report on Form 10-K for the year ended January 6, 1996 and the unaudited consolidated financial statements of the Company which are included in the Company's Quarterly Report on Form 10-Q for the quarter ended April 6, 1996 and the audited and unaudited financial statements of MECC, including the notes thereto, which are included as Exhibit 99.2 hereto. 4 5 (c) Exhibits. Exhibit No. Description - ----------- ----------- 2.1 Agreement and Plan of Merger dated as of October 30, 1995 by and among SoftKey International Inc., SchoolCo Inc. and Minnesota Educational Computing Corporation (MECC).(1) 99.1 Form of Press Release issued by the Company dated May 17, 1996. 99.2 Financial Statements of Minnesota Educational Computing Corporation (MECC). 99.3 Pro Forma Combined Condensed Consolidated Financial Statements of SoftKey International Inc. - ---------- (1) Incorporated by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. 5 6 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SOFTKEY INTERNATIONAL INC. By:/s/ Neal S. Winneg ----------------------------- Neal S. Winneg Vice President Date: May 21, 1996 6 7 Exhibit Index ------------- Exhibit Sequential No. Description Page No. - ------- ----------- -------- 2.1 Agreement and Plan of Merger dated as of October 30, 1995 by and among SoftKey International Inc., SchoolCo Inc. and Minnesota Educa- tional Computing Corporation (MECC).(1) 99.1 Form of Press Release issued by the Company dated May 17, 1996. 99.2 Financial Statements of Minnesota Educational Computing Corporation (MECC). 99.3 Pro Forma Combined Condensed Con- solidated Financial Statements of SoftKey International Inc. - ---------- (1) Incorporated by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. 7 EX-99.1 2 PRESS RELEASE 1 EXHIBIT 99.1 NEWS FOR IMMEDIATE RELEASE - --------------------- Press Investor Contact: Stacy Pena Relations: John Suske Don Anderson SoftKey International SoftKey MECC (510) 713-6011 International (612) 569-1513 spena@learningco.com (617) 494-5816 danderson@mecc.com jsuske@softkey.com SOFTKEY INTERNATIONAL COMPLETES MERGER OF MINNESOTA EDUCATIONAL COMPUTING CORPORATION CAMBRIDGE, MASS. - MAY 17, 1996 - SoftKey International Inc. (Nasdaq: SKEY) and Minnesota Educational Computing Corporation (MECC) (Nasdaq: MECC) today announced the completion of SoftKey's acquisition of MECC through a merger of MECC and a wholly owned subsidiary of SoftKey. The transaction was approved yesterday by the stockholders of SoftKey and MECC at each company's respective special meeting of stockholders. In the merger each outstanding MECC common share was converted into the right to receive 1.14286 shares of SoftKey common stock. As of the record date of March 20, 1996 there were 8,043,286 MECC common shares outstanding. The transaction is structured as a tax-free reorganization for federal income tax purposes and as a purchase for accounting purposes. "With the completion of the MECC merger, SoftKey is now one of the largest educational software publishers in the world, offering the most comprehensive line of top quality educational software across all age ranges and nearly every subject area" said Michael Perik, Chairman and CEO of SoftKey. "The Learning Company, Compton's and MECC brands and products, which are very complementary to one another, are highly regarded in both the home and school markets. SoftKey is committed to serving the needs of families and schools with these strong, premium product lines." "MECC is very pleased to be an integral part of SoftKey", said Dale LaFrenz, President and CEO of MECC. "The broad and deep range of SoftKey products, coupled with its outstanding distribution, position the company well. MECC looks forward to playing a significant role in SoftKey's future." Mr. LaFrenz and Charles Palmer, Chairman of the Board of Directors of MECC, are expected to join SoftKey's Board of Directors. - more - 2 The closing of this transaction completes a process which began on October 30, 1995 when SoftKey and MECC announced a definitive merger agreement. This was followed by SoftKey's December 1995 acquisitions of The Learning Company, and of Compton's NewMedia Inc. and Compton's Learning Company from the Tribune Company. "The closing of the acquisition of MECC is the culmination of SoftKey's strategic initiative to become the premier publisher of high quality consumer software" said Mr. Perik. Minnesota Educational Computing Corporation (MECC), based in Minneapolis, is a leading developer, publisher and distributor of fun, high-quality, educational software for use by children in the school and at home. MECC's products are designed principally for children ages 5 to 18, or in grades kindergarten through 12. MECC has been developing educational software and providing technology solutions for the classroom needs of teachers and children since 1973. MECC was acquired by North American Business Development, a Chicago and Fort Lauderdale based buy-out fund, in 1991 and became a public company in 1994. SoftKey International Inc. develops, publishes and markets more than 500 consumer software titles in the education, productivity, reference and lifestyle categories, targeted at the home and school users. According to the PC Data Annual Report, SoftKey is the number one publisher of consumer CD-ROM software by unit sales. SoftKey's products are sold in more than 23,000 stores across 40 countries through multiple distribution channels including retail, direct mail, OEM, school sales and more. SoftKey's product offerings include The Learning System from The Learning Company (including the popular Reader Rabbit[Registered Trademark] family of products) and Learn To Speak[Trademark] series, and such top-selling titles as Compton's[Registered Trademark] Interactive Encyclopedia, the Calendar Creator[Trademark] family, BodyWorks[Registered Trademark] 5.0, American Heritage[Registered Trademark] Dictionary Series, KeyCard[Trademark] Complete, Mosby's Medical Encyclopedia[Trademark] and the Platinum[Trademark] and KeyKids[Trademark] jewel case lines. ##### All trademarks and registered trademarks are the properties of SoftKey. 2 EX-99.2 3 FINANCIAL STATEMENTS 1 Exhibit 99.2 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) INDEX TO FINANCIAL STATEMENTS
PAGE ---- FINANCIAL STATEMENTS: Independent auditors' report................................................................. F-2 Balance Sheets at March 31, 1994 and 1995 and December 31, 1995 (Unaudited).................. F-3 Statements of Operations for the Years Ended March 31, 1993, 1994 and 1995 and for the Nine Months Ended December 31, 1994 and 1995 (Unaudited)....................................... F-4 Statements of Cash Flows for the Years Ended March 31, 1993, 1994 and 1995 and for the Nine Months Ended December 31, 1994 and 1995 (Unaudited)....................................... F-5 Statements of Shareholders' (Deficiency) Equity for the Years Ended March 31, 1993, 1994 and 1995 and for the Nine Months Ended December 31, 1995 (Unaudited).......................... F-6 Notes to Financial Statements................................................................ F-7
2 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Minnesota Educational Computing Corporation (MECC) Minneapolis, Minnesota We have audited the balance sheets of Minnesota Educational Computing Corporation (MECC) as of March 31, 1994 and 1995 and the related statements of operations, shareholders' (deficiency) equity and cash flows for each of the three years in the period ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Minnesota Educational Computing Corporation (MECC) as of March 31, 1994 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1995, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Minneapolis, Minnesota May 24, 1995 (June 30, 1995 as to the second paragraph of Note 4) F-2 3 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) BALANCE SHEETS
MARCH 31, ------------------------- DECEMBER 31, 1994 1995 1995 ---- ---- ------------ (UNAUDITED) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents................................. $12,600,365 $15,462,786 $21,214,365 Accounts receivable (net of the allowance for doubtful accounts and returns of $500,678, $1,320,839 and $1,235,655, respectively).............................. 3,074,673 4,055,052 8,974,500 Inventories............................................... 871,542 1,333,005 1,952,007 Prepaid expenses.......................................... 9,409 22,439 81,108 Deferred income taxes (Note 8)............................ 300,000 580,000 770,000 ----------- ----------- ----------- Total current assets............................... 16,855,989 21,453,282 32,991,980 PROPERTY AND EQUIPMENT, Net (Note 2)............................. 2,553,359 2,666,874 3,236,804 INTANGIBLES, Net: Capitalized software development costs.................... 481,318 263,809 326,081 Acquired software......................................... 40,199 140,425 741,745 Noncompete agreement...................................... 118,000 Other 16,500 ----------- ----------- ----------- Total intangibles, net............................. 656,017 404,234 1,067,826 ----------- ----------- ----------- TOTAL ASSETS....................................... $20,065,365 $24,524,390 $37,296,610 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable.......................................... $ 1,223,392 $ 1,301,739 $ 2,805,513 Deferred revenue.......................................... 21,079 8,664 8,774 Accrued salaries, bonuses, and employee benefits.......... 844,942 981,729 954,016 Other accrued liabilities................................. 4,596 160,294 51,778 Income taxes payable...................................... 50,000 407,748 1,142,159 Obligations under capital leases (Note 3)................. 23,647 Deferred lease incentives (Note 3)........................ 120,254 133,112 143,777 ----------- ----------- ----------- Total current liabilities.......................... 2,287,910 2,993,286 5,106,017 DEFERRED INCOME TAXES (Note 8)................................... 210,000 160,000 160,000 DEFERRED LEASE INCENTIVES (Note 3)............................... 581,210 448,098 337,596 CONTINGENCIES AND COMMITMENTS (Notes 1 and 3).............................................. SERIES A REDEEMABLE PREFERRED SHARES--par value $5.00; authorized 1,000,000; none issued and outstanding ................................................. SHAREHOLDERS' EQUITY: Undesignated preferred shares--par value $5.00; authorized 9,000,000; none issued and outstanding................. Common shares--par value $0.01; authorized 20,000,000; issued and outstanding--7,688,937, 7,753,679 and 8,033,957, respectively (Note 4)....................... 76,889 77,537 80,340 Additional paid-in capital................................ 19,425,429 19,554,211 25,978,618 Unearned compensation on stock options.................... (46,240) (Deficit) retained earnings............................... (2,469,833) 1,291,258 5,634,039 ----------- ----------- ----------- Total shareholders' equity......................... 16,986,245 20,923,006 31,692,997 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $20,065,365 $24,524,390 $37,296,610 =========== =========== ===========
See notes to financial statements. F-3 4 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) STATEMENTS OF OPERATIONS
NINE MONTHS ENDED FISCAL YEARS ENDED MARCH 31, DECEMBER 31, --------------------------------------------- ----------------------- 1993 1994 1995 1994 1995 ---- ---- ---- ---- ---- (UNAUDITED) NET REVENUE........................... $18,021,440 $21,681,158 $28,046,430 $20,996,783 $26,765,964 COST OF SALES......................... 4,811,290 4,857,763 5,685,521 4,261,815 5,346,199 ----------- ----------- ----------- ----------- ----------- Gross margin................... 13,210,150 16,823,395 22,360,909 16,734,968 21,419,765 OPERATING EXPENSES: Marketing...................... 6,665,363 7,457,434 9,665,574 6,771,762 8,693,982 Product development............ 4,612,419 5,144,914 5,477,550 3,903,923 4,867,718 General and administrative..... 2,120,702 1,970,231 2,593,337 1,686,868 2,031,150 Merger-related................. 302,000 Amortization of acquisition- related intangibles (Note 1) 137,762 206,186 134,500 134,500 ----------- ----------- ----------- ----------- ----------- Total operating expenses 13,536,246 14,778,765 17,870,961 12,497,053 15,894,850 ----------- ----------- ----------- ----------- ----------- OPERATING (LOSS) INCOME............... (326,096) 2,044,630 4,489,948 4,237,915 5,524,915 INTEREST (EXPENSE) INCOME (Notes 5 and 6)............ (165,169) (174,465) 575,189 375,199 769,366 ----------- ----------- ----------- ----------- ----------- (LOSS) INCOME BEFORE TAXES............................. (491,265) 1,870,165 5,065,137 4,613,114 6,294,281 PROVISION FOR INCOME TAXES (Note 8).................... 6,000 10,000 1,270,000 1,243,000 1,951,500 ----------- ----------- ----------- ----------- ----------- NET (LOSS) INCOME..................... $ (497,265) $ 1,860,165 $ 3,795,137 $ 3,370,114 $ 4,342,781 =========== =========== =========== =========== =========== NET (LOSS) INCOME APPLICABLE TO COMMON SHAREHOLDERS...................... $ (977,265) $ 1,388,165 $ 3,795,137 $ 3,370,114 $ 4,342,781 =========== =========== =========== =========== =========== NET (LOSS) INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Note 1).......................... $ (0.19) $ 0.26 $ 0.46 $ 0.41 $ 0.50 =========== =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 1).............. 5,193,827 5,421,434 8,224,662 8,227,976 8,636,764 =========== =========== =========== =========== ===========
See notes to financial statements. F-4 5 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31, ---------------------------------- 1993 1994 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ....................................... $(497,265) $ 1,860,165 $ 3,795,137 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation ....................................... 519,239 645,170 788,879 Amortization of: Capitalized software development costs ........... 227,352 422,102 479,123 Acquired software ................................ 9,000 68,801 341,774 Acquisition-related intangibles .................. 137,762 206,186 134,500 Tax benefit from exercise of stock options ......... 76,000 Deferred income taxes .............................. (90,000) (330,000) Compensation expense--common stock options ......... 11,560 12,440 Deferred lease incentives .......................... (143,672) (108,670) (120,254) Loss on sale of equipment .......................... 1,771 903 33,414 Cash provided (used) due to changes in: Accounts receivable .............................. (99,028) (1,037,636) (980,379) Inventories ...................................... 80,914 15,089 (461,463) Prepaid expenses ................................. 38,731 (5,461) (13,030) Accounts payable ................................. 76,303 (171,995) 78,347 Other liabilities ................................ 173,216 (63,154) 280,070 Income taxes payable ............................. 50,000 357,748 --------- ----------- ----------- Net cash provided by operating activities............................. 524,323 1,803,060 4,472,306 --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .................................... (608,738) (747,712) (952,972) Proceeds from sale of equipment ......................... 583 13,541 17,164 Capitalization of software development costs ............ (218,186) (643,748) (261,614) Acquired software ....................................... (40,000) (78,000) (442,000) --------- ----------- ----------- Net cash used in investing activities ... (866,341) (1,455,919) (1,639,422) --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable to related party ............. 975,000 490,000 Payments on note payable to related party ............... (700,000) (1,265,000) Proceeds from note payable to bank ...................... 1,890,000 Payments on note payable to bank ........................ (1,890,000) Payments on capital lease obligations ................... (94,687) (29,403) (23,647) Payment of preferred shares dividend .................... (1,552,000) Proceeds from issuance of common shares ................. 6,250 14,455,089 53,465 Payments for repurchase of common shares ................ (37,000) (9,041) (281) --------- ----------- ----------- Net cash provided (used) by financing activities ............................ 149,563 12,089,645 29,537 --------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................................ (192,455) 12,436,786 2,862,421 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................... 356,034 163,579 12,600,365 --------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 163,579 $12,600,365 $15,462,786 ========= =========== =========== Nine Months Ended December 31, ------------------ 1994 1995 ---- ---- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ....................................... $ 3,370,114 $ 4,342,781 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation ....................................... 578,945 746,505 Amortization of: Capitalized software development costs ........... 365,886 277,208 Acquired software ................................ 239,008 162,180 Acquisition-related intangibles .................. 134,500 Tax benefit from exercise of stock options ......... 782,400 Deferred income taxes .............................. (190,000) Compensation expense--common stock options ......... 8,670 Deferred lease incentives .......................... (90,203) (99,837) Loss on sale of equipment .......................... 8,101 3,028 Cash provided (used) due to changes in: Accounts receivable .............................. (2,117,730) (4,919,448) Inventories ...................................... (403,793) (619,002) Prepaid expenses ................................. (4,356) (58,669) Accounts payable ................................. 115,535 1,503,774 Other liabilities ................................ (167,438) (136,119) Income taxes payable ............................. 381,992 734,411 ----------- ----------- Net cash provided by operating activities............................. 2,419,231 2,529,212 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .................................... (831,092) (1,319,463) Proceeds from sale of equipment Capitalization of software development costs ............ (215,464) (339,480) Acquired software ....................................... (442,000) (763,500) ----------- ----------- Net cash used in investing activities ... (1,488,556) (2,422,443) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable to related party Payments on note payable to related party Proceeds from note payable to bank Payments on note payable to bank Payments on capital lease obligations ................... (23,647) Payment of preferred shares dividend Proceeds from issuance of common shares ................. 12,195 5,645,259 Payments for repurchase of common shares ................ (281) (449) ----------- ----------- Net cash provided (used) by financing activities ............................ (11,733) 5,644,810 ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................................ 918,942 5,751,579 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................... 12,600,365 15,462,786 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $13,519,307 $21,214,365 =========== ===========
See notes to financial statements. F-5 6 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
UNEARNED COMPENSA- COMMON SHARES ADDITIONAL TION ---------------------- PAID-IN ON STOCK NUMBER AMOUNT CAPITAL OPTIONS ------ ------ ---------- --------- Balance (Deficit) at March 31, 1992 ............. 4,942,875 $ 49,429 Issuance of shares on exercise of stock options ................................. 5,250 52 $ 6,198 Shares acquired ........................... (84,000) (840) (6,198) Net loss .................................. Preferred shares dividend (Note 4) ........ ----------- ----------- ----------- -------- Balance (Deficit) at March 31, 1993 ............. 4,864,125 48,641 Issuance of shares: Initial public offering, less issuance costs of $1,826,873 (Note 4) ...... 2,123,550 21,235 14,432,442 Exchange of redeemable preferred stock in conjunction with initial public offering (Note 4) .......... 701,262 7,013 4,992,987 On exercise of stock options ......... 5,471 55 1,357 Shares acquired ........................... (5,471) (55) (1,357) Common stock options granted .............. $(57,800) Common stock options vested ............... 11,560 Net income ................................ Preferred shares dividend (Note 4) ----------- ----------- ----------- -------- Balance at March 31, 1994 ....................... 7,688,937 76,889 19,425,429 (46,240) Issuance of shares on exercise of stock options, including related tax benefits . 64,848 649 128,816 Shares acquired ........................... (106) (1) (34) Common stock options vested ............... 12,440 Common stock options canceled ............. 33,800 Net income ................................ ----------- ----------- ----------- -------- Balance at March 31, 1995 ....................... 7,753,679 77,537 19,554,211 Issuance of shares-secondary public offering, less issuance costs of $640,141 (unaudited) ............................. 200,000 2,000 5,557,859 Issuance of shares on exercise of stock options, including related tax benefits (unaudited) ............................. 80,291 803 866,997 Shares acquired (unaudited) ............... (13) (449) Net income (unaudited) .................... ----------- ----------- ----------- -------- Balance at December 31, 1995 (unaudited) ........ 8,033,957 $ 80,340 $25,978,618 $ =========== =========== =========== ======== TOTAL (DEFICIT) SHAREHOLDERS' RETAINED (DEFICIENCY) EARNINGS EQUITY --------- ------------- Balance (Deficit) at March 31, 1992.................. $(2,900,942) $(2,851,513) Issuance of shares on exercise of stock options...................................... 6,250 Shares acquired................................ (29,962) (37,000) Net loss...................................... (497,265) (497,265) Preferred shares dividend (Note 4)............ (480,000) (480,000) ----------- ----------- Balance (Deficit) at March 31, 1993.................. (3,908,169) (3,859,528) Issuance of shares: Initial public offering, less issuance costs of $1,826,873 (Note 4)........... 14,453,677 Exchange of redeemable preferred stock in conjunction with initial public offering (Note 4)............... 5,000,000 On exercise of stock options.............. 1,412 Shares acquired................................ (7,629) (9,041) Common stock options granted.................. 57,800 Common stock options vested................... 11,560 Net income.................................... 1,860,165 1,860,165 Preferred shares dividend (Note 4)............ (472,000) (472,000) ----------- ----------- Balance at March 31, 1994............................ (2,469,833) 16,986,245 Issuance of shares on exercise of stock options, including related tax benefits...... 129,465 Shares acquired................................ (246) (281) Common stock options vested................... 12,440 Common stock options canceled................. (33,800) Net income.................................... 3,795,137 3,795,137 ----------- ----------- Balance at March 31, 1995............................ 1,291,258 20,923,006 Issuance of shares-secondary public offering, less issuance costs of $640,141 (unaudited).................................. 5,559,859 Issuance of shares on exercise of stock options, including related tax benefits (unaudited).................................. 867,800 Shares acquired (unaudited).................... (449) Net income (unaudited)........................ 4,342,781 4,342,781 ----------- ----------- Balance at December 31, 1995 (unaudited)............. $ 5,634,039 $31,692,997 =========== ===========
See notes to financial statements. F-6 7 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS FISCAL YEARS ENDED MARCH 31, 1993, 1994 AND 1995 AND NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Minnesota Educational Computing Corporation (MECC) (the "Company"), is a developer and publisher of educational software for the school and home markets. The Company provides educational software and related services to a diverse group of primarily domestic customers, with a concentration of revenue from school districts across the United States. School market sales accounted for 63%, 57% and 53% of total revenue in fiscal years 1993, 1994 and 1995, respectively and 55% and 40% of total revenue for the nine months ended December 31, 1994 and 1995, respectively. Sales to one customer were 10% of total sales during fiscal year 1993. Unaudited Financial Statements--The financial statements as of December 31, 1995 and for the nine months ended December 31, 1994 and 1995 are unaudited. In the opinion of management, such unaudited financial statements include all adjustments, consisting of only normal, recurring accruals, necessary for a fair presentation thereof. The results of operations for any interim period are not necessarily indicative of the results for the year. Net Revenue--Revenues from product sales are recognized when the products are shipped, because, generally, no post-shipment obligations remain outstanding. Deferred revenue is recorded for the portion of membership (including MathKeys) sales related to unshipped products. The Company currently maintains a stock-balancing policy which allows distributors and retailers to return products according to negotiated terms or pursuant to any promotional terms which may be in effect. The Company also accepts returns of defective, shelf-worn and damaged products at any time in accordance with negotiated terms. The Company does not have any other significant product return or warranty programs. The Company provides an allowance for estimated returns at the time of product shipment. The Company has a volume incentive rebate policy which it offers to certain customers. The rebate is based upon a percentage of a sales goal which is specific to each customer and is recorded at the time of product shipment. Cost of Sales--Cost of sales includes all costs associated with the manufacture and assembly of the Company's products, including packaging, warehousing and shipping, as well as royalties paid to co-developers, including amortization of prepaid royalties, and amortization of capitalized software development costs and acquired software. In the fiscal years ended March 31, 1993, 1994 and 1995 amortization of capitalized software development costs was $227,352, $422,102 and $479,123, and amortization of acquired software/prepaid royalties was $9,000, $68,801 and $341,774, respectively and for the nine months ended December 31, 1994 and 1995 capitalized software development costs were $365,886 and $277,208, respectively, and amortization of acquired software/prepaid royalties was $239,008 and $162,180, respectively. Concentrations of Credit Risks--The Company's cash and cash equivalents consist of U.S. Treasury Bills, commercial paper and cash. The majority of these investments are not specifically insured. The Company has not experienced any losses on these investments. The Company also grants credit to customers in the ordinary course of business. Concentrations of credit risk with respect to trade receivables are limited due to the number of customers and their geographic dispersion. F-7 8 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Inventories--Inventories are stated at the lower of cost or realizable value, calculated by using the average cost method (which approximates the first-in, first-out cost method) of inventory valuation. Inventories consist of software components, primarily manuals, CD-ROM and disks, ready for assembly or assembled. The Company records a provision each period for identified slow-moving or obsolete inventory items. The allowance for obsolete and overstock inventory was $141,434 and $91,000 at March 31, 1994 and 1995, respectively, and was $88,000 at December 31, 1995. Acquired Software--The Company enters into contracts to have products developed by external software developers which involve expenditures to external developers. To the extent the Company acquires completed software from external developers or makes expenditures to external developers for development on products after they have reached technological feasibility, the expenditures are capitalized and recorded as an asset under acquired software. To the extent the expenditures for development to external developers are made prior to the product reaching technological feasibility, they are expensed. Amortization of acquired software is expensed as part of cost of sales based on the revenue generated by the product. Property and Equipment--Property and equipment, which consists principally of computer and office equipment, purchased application software, furniture and office partitions, is carried at cost and is depreciated using the straight-line method over the estimated useful lives of the property. Intangible Assets--Intangible assets include capitalized software development costs, acquired software and various other intangible assets purchased at acquisition, including software, a noncompete agreement, a prepaid royalty and goodwill. Capitalized software development costs, acquired software and software purchased at acquisition are amortized on a product-by-product basis based on the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported. Amortization starts when the product is available for general release to customers. The noncompete agreement and goodwill are amortized using the straight-line method. Accumulated amortization of capitalized software development costs was $853,558, $1,332,681 and $1,609,889 at March 31, 1994 and 1995 and December 31, 1995, respectively. Accumulated amortization of acquired software was $77,801, $419,575 and $581,755 at March 31, 1994 and 1995 and December 31, 1995, respectively. Accumulated amortization of acquisition-related intangibles was $568,082 at March 31, 1994 and $702,582 at March 31, 1995, at which time acquisition-related intangibles were fully amortized. Estimated useful lives of the intangibles are as follows: Capitalized software development costs... 1--2 years Acquired software........................ 1--2 years Acquisition-related intangibles.......... 4 years F-8 9 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONTINUED) The amortization of the acquisition-related intangibles consisted of the following:
NINE MONTHS FISCAL YEARS ENDED MARCH 31, ENDED ---------------------------- DECEMBER 1993 1994 1995 31, 1994 ---- ---- ---- ----------- Amortization of acquisition-related intangibles: Noncompete agreement .................... $100,000 $157,000 $118,000 $118,000 Other ................................... 37,762 49,186 16,500 16,500 -------- -------- -------- -------- Total ............................. $137,762 $206,186 $134,500 $134,500 ======== ======== ======== ========
Management of the Company periodically reviews the carrying value of its intangible assets for potential impairment by comparing the carrying value of these assets with their related, expected future net cash flows. Should the sum of the related, expected future net cash flows be less than the carrying value, management would determine whether an impairment loss should be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. To date, management has determined that no impairment of these assets exists. Capitalized Software Development Costs and Product Development Expenses--Product development costs are capitalized as incurred in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. Total product development costs capitalized by the Company were $218,186, $643,748, and $261,614 for the years ended March 31, 1993, 1994 and 1995, respectively, and $215,464 and $339,480 for the nine months ended December 31, 1994 and 1995, respectively. Capitalization of software development costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross revenue, estimated economic life, and changes in software and hardware technologies. Income Taxes--The Company records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", which requires the use of the liability method of accounting for deferred income taxes (see Note 8). Income taxes are deferred for all temporary differences between the financial statement and tax basis of assets and liabilities. Deferred taxes are recorded using the enacted tax rates scheduled by tax law to be in effect when the temporary differences are expected to be settled or realized. Deferred tax assets are reduced by a valuation allowance to the extent that the assets may not be realizable. Cash Equivalents--The Company considers investments with original maturities of three months or less to be cash equivalents. Supplemental Cash Flow Information--The Company paid interest of $75,593, $64,972 and $727 for the years ended March 31, 1993, 1994 and 1995, respectively, and $1,000 and $0 for the nine months ended December 31, 1994 and 1995, respectively. Interest received for the years ended March 31, 1993, 1994 and 1995 was $8,046, F-9 10 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONTINUED) $10,591 and $523,369, respectively, and for the nine months ended December 31, 1994 and 1995 was $310,000 and $801,000, respectively. Income taxes paid by the Company were $2,800, $51,729 and $1,166,340 for the years ended March 31, 1993, 1994 and 1995, respectively, and $861,000 and $623,000 for the nine months ended December 31, 1994 and 1995, respectively. Net (Loss) Income Per Common and Common Equivalent Share--The net (loss) income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding during the period. Assuming the preferred shares, as discussed in Note 4, were exchanged for common shares on April 1, 1992, supplementary net (loss) income per common and common equivalent share would have been $(0.08) and $0.30 for the fiscal years ended March 31, 1993 and 1994, respectively. Reclassifications--Certain reclassifications have been made to the 1993 and 1994 financial statements in 1995. Such reclassifications had no effect on net (loss) income or shareholders' equity. 2. PROPERTY AND EQUIPMENT Property and equipment is summarized as follows:
MARCH 31, ESTIMATED ---------------------- DECEMBER 31, LIFE 1994 1995 1995 -------------- ---- ---- ------------ Computer equipment........... 5 years $2,329,917 $3,000,683 $3,783,507 Purchased software........... 3 years 30,932 30,932 65,585 Office equipment and fixtures 5-7 years 1,363,632 1,400,969 1,754,375 Automobiles.................. 3 years 13,700 Machinery and equipment...... 5 years 355,053 375,494 415,645 Leasehold improvements....... 5 years 31,707 104,391 199,800 ---------- ---------- ---------- 4,124,941 4,912,469 6,218,912 Less accumulated depreciation 1,571,582 2,245,595 2,982,108 ---------- ---------- ---------- Property and equipment, net.. $2,553,359 $2,666,874 $3,236,804 ========== ========== ==========
The net book value of equipment under capital leases was $48,679 at March 31, 1994. 3. LEASES The Company has both operating and capital leases, the latter being for office equipment that expired in fiscal year 1995. The noncancelable operating leases are for office and materials management facilities. Rent expense was $440,480, $507,032 and $533,540 for the years ended March 31, 1993, 1994 and 1995, respectively, and $393,954 and $433,364 for the nine months ended December 31, 1994 and 1995, respectively. F-10 11 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONTINUED) The Company entered into an operating lease agreement for office space on June 1, 1991 which has a term of seven years and six months. The Company received cash incentives in conjunction with this lease agreement. In addition, the Company was not required to make lease payments for the first six months under the lease agreement. These lease incentives were deferred and are being amortized on a straight-line basis over the lease term and are excluded from the minimum lease payments shown below. The Company has options for space expansion and an option to extend the term of the lease for two additional periods of three years each. In 1991, the Company entered into a lease agreement for a materials management center with a term of seven years. The agreement contains an option for space expansion and a one-time option to extend the term of the lease for three years. The agreement also provides for a right of cancellation for a fee, two years prior to lease expiration. On September 19, 1995, the Company entered into an operating lease agreement for 2,583 square feet of satellite office space in Bellevue, Washington, at a basic annual rate of $19 per square foot. The term of the lease is three years with a one-time option to extend the term for another three years and options for space expansion. At March 31, 1995, minimum lease payments under all noncancelable operating lease agreements are as follows: Fiscal 1996................. $ 729,071 Fiscal 1997................. 733,716 Fiscal 1998................. 629,702 Fiscal 1999................. 469,596 ---------- Total minimum lease payments $2,562,085 ==========
4. SHAREHOLDERS' EQUITY Secondary Public Offering--On August 21, 1995, 3,340,000 Common Shares were sold in a secondary public offering. Of the total shares, 200,000 shares were sold by the Company and 3,140,000 shares were sold by Selling Shareholders at $31.00 per share. Net proceeds to the Company were approximately $5,560,000, after deducting offering costs, including underwriting commissions, of approximately $640,000. Common Stock Split--On June 5, 1995, the Company's Board of Directors approved a 3-for-2 stock split in the form of a 50% stock dividend effective June 30, 1995. All share and per share amounts in the financial statements have been restated to reflect the split. Merger--On May 16, 1996, the Company's stockholders approved the Agreement and Plan of Merger dated as of October 30, 1995 by and among the Company, SoftKey International Inc. (SoftKey) and SchoolCo Inc., a wholly-owned subsidiary of SoftKey (SchoolCo), pursuant to which, on May 17, 1996, SchoolCo was merged with and into the Company with the Company surviving the merger as a wholly-owned subsidiary of SoftKey, and each of the Company's Common Shares was converted into the right to receive 1.14286 shares of SoftKey common stock. Initial Public Offering--On March 25, 1994, the Company sold 2,123,550 common shares at $7.67 per share in an initial public offering. Net proceeds were $14,453,677, after deducting offering costs of $1,826,873. F-11 12 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONTINUED) During 1991, the Company issued 1,000,000 Series A preferred shares $5 par value per share (10,000,000 shares authorized) to the North American Fund II, L.P. (the "Fund") for $5,000,000. The general partner and manager of the Fund is North American Business Development Company, L.C. The principals of this general partner are members of the Company's Board of Directors. In connection with the Company's initial public offering, all the redeemable preferred shares were exchanged for 701,262 common shares and all dividends in arrears were paid. Stock Option Plans--In 1991, under the MECC 1991 Restricted Stock and Nonqualified Option Plan (the "1991 Plan"), the Company granted stock purchase awards and issued 480,375 common shares for $22,875 ($0.0476 per share) to certain officers of the Company. Under the terms of the 1991 Plan, the officers become vested in the shares ratably over a service period or upon a change in control of the Company otherwise than pursuant to a public offering of the Company's common shares. The Company has also granted stock options to certain officers and employees under the 1991 Plan (as amended to be consolidated with another nonqualified stock option plan adopted by the Company in 1991) to purchase 898,508 common shares for exercise prices ranging between $.0476 to $9.50 per share. Under the terms of the 1991 Plan, the options become exercisable according to a vesting schedule, in general, over a six-year period or upon a change in control otherwise than pursuant to a public offering of the Company's common shares. The 1991 Plan expired in November, 1994. The 1995 Stock Incentive Plan (the "1995 Plan") has been approved by the Board of Directors and the Company's shareholders. The aggregate number of shares that could be issued under the 1995 Plan, as amended, is 900,000 shares of Common Stock. The 1995 Plan gives discretion to the Compensation Committee of the Board of Directors to grant unqualified stock options and incentive stock options, in accordance with such vesting schedules and other terms that the Compensation Committee deems appropriate. F-12 13 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONTINUED) The following summarizes the activity for the plans:
NUMBER OF SHARES UNDER OPTION PLANS OPTION PRICE PER SHARE --------------------- ---------------------- 1991 1995 ---- ---- Outstanding at March 31, 1992..... 522,113 $ .0476 -- $ 1.1905 Granted.................... 54,075 $1.4286 Exercised and repurchased.. (5,250) $1.1905 Canceled................... (97,020) $ .0476 -- $ 1.4286 -------- Outstanding at March 31, 1993..... 473,918 $ .0476 -- $ 1.4286 Granted.................... 185,220 $1.4286 -- $ 2.1429 Exercised and repurchased.. (5,471) $ .0476 -- $ 1.1905 Canceled................... (27,768) $ .0476 -- $ 1.4286 -------- Outstanding at March 31, 1994..... 625,899 $ .0476 -- $ 2.1429 Granted.................... 91,530 449,250 $ 7.00 -- $11.6667 Exercised.................. (64,848) $ .0476 -- $ 1.7238 Canceled................... (108,622) (37,500) $ .0476 -- $11.6667 -------- ------- ------- -------- Outstanding at March 31, 1995..... 543,959 411,750 $ .0476 -- $11.6667 Granted................... 275,657 $ 15.50 -- $ 28.75 Exercised.................. (80,291) $ .0476 -- $ 8.50 Canceled................... (14,462) (3,685) $ .0476 -- $ 28.00 -------- ------- ------- -------- Outstanding at December 31, 1995.. 449,206 683,722 $ .0476 -- $ 28.75 ======== ======= ======= ========
Options to purchase 38,037, 104,700 and 151,929 shares at March 31, 1993, 1994 and 1995, respectively, were exercisable and the weighted average option price per share for outstanding options at March 31, 1995 was $6.2246. Options to purchase 276,288 shares at December 31, 1995 were exercisable and the weighted average option price per share was $6.1205. The exercise of nonqualified stock options result in a tax deduction for the Company equivalent to taxable income recognized by the optionee. For financial reporting purposes, the tax effect of this deduction is accounted for as a credit to additional paid-in capital rather than as a reduction in income tax expense. The options exercised in fiscal 1995 and the nine months ended December 31, 1995 resulted in a tax benefit to the Company of approximately $76,000 and $782,400, respectively. 5. RELATED PARTY TRANSACTIONS Through April 1993, the Company borrowed monies from the Fund under demand notes bearing interest at prime rate plus one quarter percent per annum. Interest expense on this debt was $64,000 for fiscal year 1993. The maximum amount outstanding, the average amount outstanding, and the weighted average interest rate was $1,475,000, $1,082,877, and 6.63%, respectively, for the year ended March 31, 1993 and $775,000, $16,986, and F-13 14 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 6.5%, respectively, for the year ended March 31, 1994. In April 1993, the Company established a line of credit (see Note 6) and drew on the line to repay these demand notes. 6. LINE OF CREDIT In April 1993, the Company established a $1,500,000 bank line of credit. The bank line of credit was amended in September 1993 to increase the line of credit to $2,000,000, and again in December 1994 to decrease the line of credit to $1,000,000. The line of credit expires on October 31, 1996. Interest on the outstanding borrowings under the line is the reference rate (9.0% at March 31, 1995). The line of credit is secured by the assets of the Company, including receivables, inventory, and property. At March 31, 1994 and 1995 and December 31, 1995, the Company had no outstanding borrowings under this line of credit. The covenants of the line credit require the Company to maintain a specific capital base and maintain certain debt to net worth and current ratios. The covenants also restrict the Company from expending more than $1,100,000 per fiscal year for the purchase of fixed assets, or more than $1,700,000 for purchase or redemption of any shares of its stock (except for redemptions under the Plan (see Note 4) which may not exceed $300,000), or paying any dividends or making distribution to shareholders of any assets. The maximum amount outstanding, the average amount outstanding, and the weighted average interest rate for the year ended March 31, 1994 was $1,980,000, $1,542,247 and 7.0%, respectively. 7. EMPLOYEE BENEFIT PLANS The Company established a defined contribution savings plan in fiscal year 1992 covering substantially all employees who meet eligibility requirements. Expense under this plan is based on a percentage of each participant's compensation, and was $182,377, $221,440 and $240,248 for the years ended March 31, 1993, 1994 and 1995, respectively, and $189,760 and $221,379 for the nine months ended December 31, 1994 and 1995, respectively. Beginning April 1, 1995, the Company commenced making matching contributions in its Common Shares. The Company may also make discretionary contributions to the plan; however, no discretionary contributions have been made. The Company has employment agreements with certain officers that require the Company to pay those officers' salary and benefits for up to 12 and 18 months (24 to 36 months under certain change in control circumstances) if the Company terminates that officer's employment other than because of disability or for cause (as defined). F-14 15 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 8. INCOME TAXES Temporary differences and tax carryforwards comprising the net deferred taxes shown on the balance sheets are as follows:
MARCH 31, DECEMBER 31, ----------------------- 1994 1995 1995 ---- ---- ------------ Current Deferred Tax Asset: Allowance for doubtful accounts and returns............... $ 185,000 $ 480,000 $ 670,000 Inventory................................................. 62,000 48,000 60,000 Prepaid expenses.......................................... 12,000 52,000 40,000 Accruals for employee compensation........................ 41,000 --------- --------- --------- Total current deferred tax asset.................... $ 300,000 $ 580,000 $ 770,000 ========= ========= ========= Noncurrent Deferred Tax Liability: Accelerated depreciation for tax purposes................. $(239,000) $(240,000) $(285,000) Capitalized intangible costs.............................. 14,000 125,000 125,000 Other..................................................... 15,000 Tax loss and tax credit carryforwards..................... 720,000 275,000 Valuation allowance....................................... (720,000) (320,000) --------- --------- --------- Total noncurrent deferred tax liability............. $(210,000) $(160,000) $(160,000) ========= ========= =========
At March 31, 1995, the Company has available research and experimental credits of approximately $220,000 which expire from 2009 to 2011. The Company also has available alternative minimum tax credit carryforwards of approximately $55,000 for federal tax purposes; this federal credit can be carried forward indefinitely. F-15 16 MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) NOTES TO FINANCIAL STATEMENTS - (CONCLUDED) The provisions for income taxes consisted of the following:
NINE MONTHS ENDED FISCAL YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------------ ----------------------- 1993 1994 1995 1994 1995 ---- ---- ---- ---- ---- Current: Federal....... $ 90,000 $1,590,000 $1,234,000 $2,121,500 State......... $6,000 10,000 10,000 9,000 20,000 ------ -------- ---------- ---------- ---------- 6,000 100,000 1,600,000 1,243,000 2,141,500 Deferred: Federal....... (90,000) (330,000) (190,000) -------- ---------- ---------- $6,000 $ 10,000 $1,270,000 $1,243,000 $1,951,500 ====== ======== ========== ========== ==========
The Company's income tax expense differs from the amount computed by applying the federal income tax rate (34% for the year ended March 31, 1993 and 35% for all periods subsequent to March 31, 1993), to net (loss) income before taxes as follows:
NINE MONTHS ENDED FISCAL YEARS ENDED MARCH 31, DECEMBER 31, --------------------------------------- ------------------------ 1993 1994 1995 1994 1995 ---- ---- ---- ---- ---- Statutory rate applied to (loss) income before taxes.......... $(169,000) $ 655,000 $1,773,000 $1,615,000 $2,203,000 State income taxes, net......... (25,000) 41,000 (20,000) Tax credits..................... (389,000) (165,000) (120,000) (100,000) Valuation allowance adjustment.. 111,000 (341,000) (400,000) (330,000) (320,000) Nondeductible expenses and other........................ 89,000 44,000 82,000 78,000 168,500 --------- --------- ---------- ---------- ---------- $ 6,000 $ 10,000 $1,270,000 $1,243,000 $1,951,500 ========= ========= ========== ========== ==========
F-16 EX-99.3 4 PRO FORMA FINANCIALS 1 Exhibit 99.3 SOFTKEY INTERNATIONAL INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 (in thousands) (unaudited)
MECC Including Pro Forma Combined SoftKey Adjustments Pro Forma ------- ----------- --------- ASSETS Current Assets: Cash and cash equivalents $ 77,479 $ 21,837 $ 99,316 Accounts receivable, net 45,069 5,923 50,992 Inventories 16,683 1,749 18,432 Other current assets 19,943 888 20,831 -------- -------- ---------- 159,174 30,397 189,571 Property and equipment, net 19,657 3,206 22,863 Goodwill and other assets, net 642,009 225,612(a) 867,621 -------- -------- ---------- 820,840 259,215 1,080,055 ======== ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 51,303 $ 2,837 $ 54,140 Merger related accruals 30,180 14,800(a) 44,980 Current portion of long- term obligations 1,002 -- 1,002 Revolving line of credit 25,000 -- 25,000 Other current liabilities 265 636 901 -------- -------- ---------- 107,750 18,273 126,023 Long-term obligations 500,000 500,000 Deferred Income taxes 58,684 160 58,844 Other long-term obligations 2,351 301 2,652 -------- -------- ---------- 561,035 461 561,496 Stockholders' equity 152,055 240,481(a) 392,536 -------- -------- ---------- $820,840 $259,215 $1,080,055 ======== ======== ==========
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 2 SOFTKEY INTERNATIONAL INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
SoftKey The Learning Company Compton's tewi Pro Forma (pre-acquisition) (pre-acquisition) (pre-acquisition) Adjustments ---------- ---------------- --------------- --------------- ----------- REVENUES $ 167,042 $60,698 $23,204 $ 3,720 $ -- ----------- ------ ------- ------- ---------- COSTS AND EXPENSES: Costs of production 53,070 13,217 12,874 5,161 -- Sales, marketing and support 38,370 16,545 11,392 1,439 -- General and administrative 20,813 8,324 9,559 709 -- Amortization and merger related charges 103,172 -- 2,039 -- 321,830(b) Research and development 12,487 11,738 1,244 -- -- ----------- ------ ------- ------- ---------- 227,912 49,824 37,108 7,309 321,830 ----------- ------ ------- ------- ---------- OPERATING INCOME(LOSS) (60,870) 10,874 (13,904) (3,589) (321,830) OTHER INCOME (EXPENSE), net 705 686 (856) (54) (23,319)(c) ----------- ------ ------- ------- ---------- INCOME (LOSS) BEFORE TAXES (60,165) 11,560 (14,760) (3,643) (345,149) ----------- ------ ------- ------- ---------- PROVISION (BENEFIT) FOR INCOME TAXES 5,795 4,162 (5,134) -- (35,037) ----------- ------ ------- ------- ---------- NET INCOME (LOSS) $ (65,960) $7,398 $(9,626) $(3,643) $ (310,112) =========== ====== ======= ======= ========== NET INCOME (LOSS) PER SHARE- FULLY DILUTED $ (2.65) =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING-FULLY DILUTED 24,855,000 4,632,000(d) =========== ==========
SoftKey, The Learning MECC Pro Forma Combined Company, Compton's Adjustments Pro Forma and tewi Combined ------------------ ------ ----------- --------- REVENUES $ 254,664 $33,815 $ -- $ 288,479 ----------- ------- ---------- ----------- COSTS AND EXPENSES: Costs of production 84,322 6,769 -- 91,091 Sales, marketing and support 67,746 11,588 -- 79,334 General and administrative 39,405 2,937 -- 42,342 Amortization and merger related charges 427,041 302 112,196(b) 539,539 Research and development 25,469 6,442 -- 31,911 ----------- ------- ---------- ----------- 643,983 28,038 112,196 784,217 ----------- ------- ---------- ----------- OPERATING INCOME(LOSS) (389,319) 5,777 (112,196) (495,738) OTHER INCOME (EXPENSE), net (22,838) 969 -- (21,869) ----------- ------- ---------- ----------- INCOME (LOSS) BEFORE TAXES (412,157) 6,746 (112,196) (517,607) ----------- ------- ---------- ----------- PROVISION (BENEFIT) FOR INCOME TAXES (30,214) 1,978 -- (28,236) ----------- ------- ---------- ----------- NET INCOME (LOSS) $ (381,943) $ 4,768 $ (112,196) $ (489,371) =========== ======= ========== =========== NET INCOME (LOSS) PER SHARE- FULLY DILUTED $ (12.95) $ (12.66) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING-FULLY DILUTED 29,487,000 9,174,000(d) 38,661,000 =========== ========== ===========
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 3 SOFTKEY INTERNATIONAL INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1996 (in thousands, except share and per share data) (unaudited)
MECC Including Pro Forma Combined SOFTKEY Adjustments Pro Forma ----------- ----------- ----------- REVENUES $ 71,133 $ 6,051 $ 77,184 ----------- ---------- ----------- COSTS AND EXPENSES: Costs of production 20,455 1,632 22,087 Sales, marketing and support 15,380 3,014 18,394 General and administrative 6,862 708 7,570 Amortization and merger related charges 90,512 28,503(b) 119,015 Research and development 7,897 1,867 9,764 ----------- ---------- ----------- 141,106 35,724 176,830 ----------- ---------- ----------- OPERATING INCOME (LOSS) (69,973) (29,673) (99,646) OTHER INCOME (EXPENSE), net (6,348) 268 (6,080) ----------- ---------- ----------- INCOME (LOSS) BEFORE TAXES (76,321) (29,405) (105,726) ----------- ---------- ----------- PROVISION (BENEFIT) FOR INCOME TAXES -- (421) (421) ----------- ------- ----------- NET INCOME (LOSS) $ (76,321) $ (28,984) $ (105,305) =========== ========== =========== NET INCOME (LOSS) PER SHARE-FULLY DILUTED $ (2.32) $ (2.50) =========== ============ WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING-FULLY DILUTED 32,874,000 9,174,000(d) 42,048,000 =========== ========== ===========
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 4 SOFTKEY INTERNATIONAL INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) (unaudited) A. PRO FORMA BASIS OF PRESENTATION AND ADJUSTMENTS On May 17, 1996, pursuant to the previously announced Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and among SoftKey International Inc. ("SoftKey"), SchoolCo Inc., a wholly owned subsidiary of SoftKey ("SchoolCo"), and Minnesota Educational Computing Corporation (MECC) ("MECC"), a publisher and distributor of high quality educational software for children, SchoolCo was merged with and into MECC (the "Merger"), with MECC surviving the Merger as a wholly owned subsidiary of SoftKey. Pursuant to the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each share of common stock, par value $.01 per share, of MECC ("MECC Common Shares") outstanding immediately prior to the Effective Time, was converted into the right to receive 1.14286 shares of common stock, par value $.01 per share, of SoftKey ("SoftKey Common Stock"). The total estimated purchase price, including other consideration and costs, is approximately $260,000 (based on the market value of SoftKey Common Stock at the time the parties reached agreement regarding the framework of a plan to implement SoftKey's strategic plan with respect to the integration of the operations of MECC and other acquired businesses of SoftKey into those of SoftKey). The transaction will be accounted for as a purchase. On December 28, 1995, SoftKey purchased Compton's NewMedia, Inc. and Compton's Learning Company (collectively, "Compton's"), developers and publishers of educational multimedia titles and each a wholly owned subsidiary of Tribune Company, in exchange for a total of 5,052,697 shares of SoftKey Common Stock (which included 587,036 shares issued to settle $14,000 of intercompany debt to Tribune Company) and executed a promissory, which note was, in accordance with its terms, settled as of April 5, 1996 by the issuance of approximately 158,099 shares of Softkey Common Stock, note to Tribune Company for $3,000 for cancellation of intercompany indebtedness, which note was, in accordance with its terms, settled as of April 5, 1996 by the issuance of approximately 158,099 shares of SoftKey Common Stock. Total purchase price was $104,394, including transaction costs, deferred income taxes related to identifiable intangible assets acquired, settlement of certain intercompany debt to Tribune Company and assumption of net liabilities of Compton's. The transaction was accounted for as a purchase. On December 22, 1995, SoftKey acquired approximately a 95% interest in The Learning Company ("TLC"), a leading developer of educational software products for use at home and school, as the first step in a two-step, all cash transaction resulting in SoftKey owning, effective as of December 27, 1995, the entire equity interest of TLC. Under the terms of the merger agreement between SoftKey and TLC, SoftKey purchased all of the outstanding shares of TLC for total consideration of $684,066, including estimated transaction and other related costs, value of stock options acquired and deferred income taxes related to identifiable intangible assets acquired. These shares represent all of TLC shares outstanding, including vested stock options, as of December 27, 1995. Approximately 1.1 million 5 unvested stock options of TLC were converted into options to purchase 3,123,000 shares of SoftKey Common Stock, based on the merger consideration of $67.50 per share, and were vested on January 26, 1996. In addition, on December 28, 1995, SoftKey announced that Tribune Company had made a strategic $150,000 investment in SoftKey in connection with SoftKey's acquisition of TLC. Tribune Company's investment is in the form of $150,000 principal amount of 5 1/2% Senior Convertible/Exchangeable Notes Due 2000. The notes are either convertible into SoftKey Common Stock at a conversion price of $53 per share or exchangeable for shares of a newly designated series of preferred stock of SoftKey which is itself convertible into SoftKey Common Stock. On July 21, 1995, SoftKey acquired tewi Verlag GmbH, a distributor of CD-ROM software and computer-related books, located in Munich, Germany ("tewi"). The purchase price was settled by a combination of cash and issuance of common stock. SoftKey issued 99,045 shares of SoftKey Common Stock valued at $3,640 and may issue additional shares of SoftKey Common Stock to a former shareholder of tewi pursuant to an earn-out agreement. SoftKey paid cash consideration of $12,688 for tewi. The additional shares issuable under the earn-out agreement have been treated as contingent consideration and will be recorded as goodwill if and when certain future conditions are met. The pro forma combined condensed consolidated balance sheet includes the financial statements of SoftKey and MECC at March 31, 1996, as if the acquisition had occurred on March 31, 1996. The pro forma combined condensed consolidated statement of operations for the year ended December 31, 1995 sets forth the results of operations for the year ended December 31, 1995, as if the acquisition of MECC, Compton's, tewi and TLC by SoftKey had occurred at the beginning of such period. The pro forma combined condensed consolidated statement of operations for the quarter ended March 31, 1996 sets forth results of operations for the quarter ended March 31, 1996 as if the acquisition of MECC had occurred at the beginning of such period. The pro forma combined condensed consolidated financial statements are intended for information purposes and are not necessarily indicative of the future consolidated financial position or future results of operations of the combined entity. These combined condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in SoftKey's Current Reports on Form 8-K/A dated October 4, 1995 and January 25, 1996, SoftKey's Annual Report on Form 10-K for the year ended January 6, 1996 and SoftKey's Quarterly Report on Form 10-Q for the quarter ended April 6, 1996, MECC's financial statements for the year ended March 31, 1995 and for the nine month period ended December 31, 1995, TLC's Annual Report on Form 10-K for the year ended June 30, 1995, as amended by Form 10-K/A dated November 7, 1995, and TLC's Quarterly Report on Form 10-Q for the three month period ended September 30, 1995. 6 B. PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (a) The pro forma combined condensed consolidated balance sheet reflects the purchase of MECC, as if the transaction had occurred as of March 31, 1996. The pro forma adjustment to reflect the excess purchase price over the estimated fair value of net assets of $224,392 for MECC is reflected in goodwill and other assets. The ultimate allocation of the purchase price for each of the acquisitions to the net assets acquired, goodwill, other intangible assets and a charge for incomplete technology is subject to final determination of their respective fair values. Approximately $14,800 has been included in the purchase price related to estimated transaction related costs, including investment banking and legal fees, related out-of-pocket expenses and restructuring costs. (b) The pro forma combined condensed consolidated statement of operations for the year ended December 31, 1995 has been prepared assuming the acquisitions of MECC, Compton's, TLC and tewi were consummated at the beginning of the fiscal year ended December 31, 1995. The pro forma combined condensed consolidated statement of operations for the quarter ended March 31, 1996 has been prepared assuming the acquisition of MECC was consummated at the beginning of such quarter. Pro forma adjustments for each of the acquisitions reflect the amortization of the identifiable intangible assets acquired and goodwill related to TLC, Compton's and tewi over the estimated useful life of two years on a straight-line basis. Pro forma adjustments also include amortization of the excess purchase price over the estimated fair value of the net assets acquired of MECC over the estimated useful life of two years on a straight-line basis. Pro forma adjustments include amortization and merger related charges of $28,049 for the quarter ended March 31, 1996. Any allocation of the purchase price to the fair value of incomplete technology related to MECC could result in a material charge to operations and a corresponding reduction in the amounts to be amortized. There were no intercorporate transactions that required elimination. SoftKey has performed an evaluation of the estimated period of benefit and the estimated useful life of goodwill and other identifiable intangible assets acquired in and resulting from the acquisition of MECC, tewi, TLC and Compton's based upon the following factors. The consumer software industry has recently undergone significant change evidenced by increased competition, changes in technology platforms, the increase of on-line and Internet usage, reductions in product life cycles and a rapidly changing demand preference of its customer base. These factors limit SoftKey's ability to predict the degree of success of future performance beyond a short period of time. SoftKey also intends to implement or is in the process of a corporate restructuring of the businesses acquired that will result in closure of certain facilities, reduction in personnel and consolidation of practices. There is no guarantee that the Company will be successful in this restructuring. These uncertainties and factors are reflected in the period of time that SoftKey can reasonably estimate for the estimated useful life of goodwill and other identifiable intangible assets. Accordingly, SoftKey has determined that estimated useful life of goodwill to be two years and certain other intangible assets to be in the range of two to seven years. 7 (c) The adjustment for $27,500 represents the related interest cost associated with the issuance of the October Notes and the Tribune Notes described below. On October 23, 1995 SoftKey issued $350,000 5 1/2% Senior Convertible Notes Due 2000 (the "October Notes"). The pro forma combined consolidated statements of operations include the interest expense associated with the October Notes as if the issuance occurred at the beginning of the period indicated. Interest income associated with the proceeds from the October Notes which would substantially offset the interest expense is not included in the pro forma statements of operations. Transaction related costs of $11,625 for investment banker fees, accounting and legal fees, and other various transaction costs have been deferred and are being amortized over the term of the October Notes. On December 28, 1995, Tribune Company made a $150,000 strategic investment in SoftKey in the form of $150,000 principal amount of 5 1/2% Senior Convertible/Exchangeable Notes Due 2000 (the "Tribune Notes"). The pro forma combined condensed consolidated statements of operations include the interest expense associated with the Tribune Notes as if the issuance occurred at the beginning of the period indicated. Transaction related costs of $1,000 for accounting and legal fees, and other various transaction costs have been deferred and are being amortized over the term of the Tribune Notes. (d) The pro forma combined condensed consolidated statement of operations for the year ended December 31, 1995 includes an adjustment to add back the common stock equivalents in the fully diluted earnings per share computation as the combined entity is in a loss position, and therefore the inclusion of common stock equivalents would be antidilutive. In connection with acquisition of Compton's, SoftKey repaid $14,000 of intercompany debt to Tribune Company by issuing 587,036 additional shares of SoftKey Common Stock and executed a promissory note to Tribune Company for $3,000 related to cancellation of intercompany debt, which note was, in accordance with its terms, settled as of April 5, 1996 by the issuance of approximately 158,099 shares of SoftKey Common Stock to Tribune Company. The pro forma share adjustments include, among other things, the issuance of 4,465,661 shares of SoftKey Common Stock for the acquisition of Compton's, and approximately 9,174,000 shares for the acquisition of MECC. -----END PRIVACY-ENHANCED MESSAGE-----