-----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, HL5U6JEp/XAxeN2GUK2pi+hUgy/Wx1Kx2i3sky1Kh/S7I3XfpwzASLSulUN4JyvX 8CCmaasAc2MZwx01tKkzCQ== 0000950135-98-002363.txt : 19980414 0000950135-98-002363.hdr.sgml : 19980414 ACCESSION NUMBER: 0000950135-98-002363 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980427 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980413 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEARNING CO INC CENTRAL INDEX KEY: 0000719612 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942562108 STATE OF INCORPORATION: DE FISCAL YEAR END: 0104 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-12375 FILM NUMBER: 98592457 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: SOFTKEY INTERNATIONAL INC DATE OF NAME CHANGE: 19940210 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 THE LEARNING COMPANY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): March 27, 1998 ------------------------------ THE LEARNING COMPANY, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware - -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 1-12375 94-2562108 - ------------------------ --------------------------------- (Commission File Number) (IRS Employer Identification No.) One Athenaeum Street, Cambridge, Massachusetts 02142 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (617) 494-1200 - -------------------------------------------------------------------------------- Registrant's Telephone Number, Including Area Code Not Applicable - -------------------------------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On March 27, 1998 (the "Effective Date"), The Learning Company, Inc., a Delaware corporation (the "Company"), completed the acquisition of Mindscape, Inc., a Delaware corporation, and certain affiliated companies (collectively "Mindscape Group"), pursuant to a Stock Purchase Agreement, dated as of March 5, 1998 (as amended, the "Stock Purchase Agreement"), by and between the Company and Mindscape Holding Company, Pearson Overseas Holdings Ltd. and Pearson Netherlands, BV (collectively, the "Sellers"). Pursuant to the Stock Purchase Agreement, the Company paid $120 million in cash and issued 1,366,743 shares of its Common Stock, $.01 par value per share (the "Common Stock"), in consideration for all of the outstanding capital stock of Mindscape Group. The shares issued in the acquisition were authorized but previously unissued shares. The purchase price for the transaction was approximately $150 million. In connection with the Stock Purchase Agreement, the Company and Mindscape Holding Company entered into a Registration Rights Agreement, dated as of March 27, 1998, pursuant to which the Company has agreed to file a Registration Statement on Form S-3, within 30 days following the Effective Date, for the purpose of registering under the Securities Act of 1933, as amended, the shares of Common Stock of the Company issued to the Sellers pursuant to the Stock Purchase Agreement. Mindscape Group is a leading developer and publisher of education, productivity, reference and entertainment software. The foregoing descriptions of the Stock Purchase Agreement and the Registration Rights Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of such agreements which are filed as Exhibits 2.1 and 10.1, respectively, to this Current Report on Form 8-K and incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial Statements of Business Acquired The audited financial statements of Mindscape Group for the year ended December 31, 1997 are filed herewith as Exhibit 99.3. (b) Pro Forma Financial Information The Unaudited Pro Forma Combined Condensed Consolidated Financial Statements of the Company for the year ended December 31, 1997 are filed herewith as Exhibit 99.4. -2- 3 (c) Exhibits. See Index to Exhibits attached hereto. -3- 4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: April 13, 1998 THE LEARNING COMPANY, INC. (Registrant) By: /s/ Neal S. Winneg --------------------------------------- Neal S. Winneg Sr. Vice President and General Counsel -4- 5 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 2.1 Stock Purchase Agreement, dated as of March 5, 1998, by and between The Learning Company, Inc. and Mindscape Holding Company, Pearson Overseas Holdings Ltd. and Pearson Netherlands, BV, as amended 10.1 Registration Rights Agreement, dated as of March 27, 1998, by and between The Learning Company, Inc. and Mindscape Holding Company 99.1 Press Release issued by The Learning Company, Inc. on March 6, 1998 99.2 Press Release issued by The Learning Company, Inc. on March 27, 1998 99.3 Audited Financial Statements of Mindscape Group for the year ended December 31, 1997 99.4 The Unaudited Pro Forma Combined Condensed Consolidated Financial Statements of the Company for the year ended December 31, 1997. -5- EX-2.1 2 STOCK PURCHASE AGREEMENT 1 Exhibit 2.1 STOCK PURCHASE AGREEMENT DATED AS OF MARCH 5, 1998, BY AND BETWEEN MINDSCAPE HOLDING COMPANY PEARSON OVERSEAS HOLDINGS, LTD. AND PEARSON NETHERLANDS, BV, ON THE ONE HAND, AND THE LEARNING COMPANY, INC. ON THE OTHER HAND 2 TABLE OF CONTENTS
Page ---- ARTICLE I - PURCHASE & SALE/CLOSING......................................................................... 1 1.1 Transfer of Stock by Sellers........................................................... 1 1.2 Purchase of the Stock by Buyer/Purchase Price.......................................... 1 1.3 The Closing............................................................................ 3 1.4 Other Closing Deliveries............................................................... 3 1.5 Adjustments............................................................................ 3 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLERS...................................................... 4 2.1 Subsidiaries: Organization and Related Matters......................................... 4 2.2 Stock.................................................................................. 5 2.3 Financial Statements; Changes; Contingencies........................................... 6 2.4 Tax and Other Returns and Reports...................................................... 6 2.5 Material Contracts..................................................................... 7 2.6 Real Property.......................................................................... 8 2.7 Condition of Property.................................................................. 8 2.8 Accounts Receivable.................................................................... 8 2.9 Intellectual Property.................................................................. 9 2.10 Environmental Matters.................................................................. 9 2.11 Authorization; No Conflicts; Approvals................................................. 10 2.12 Legal Proceedings...................................................................... 11 2.13 Dividends and Other Distributions...................................................... 11 2.14 Insurance.............................................................................. 11 2.15 Compliance with Law: Permits........................................................... 11 2.16 Employee Benefits...................................................................... 12 2.17 Certain Interests...................................................................... 15 2.18 Bank Accounts, Powers, etc............................................................. 15 2.19 Minute Books........................................................................... 15 2.20 Investment............................................................................. 15 2.21 No Brokers or Finders.................................................................. 15 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF BUYER....................................................... 16 3.1 SEC Reports............................................................................ 16 3.2 Organization and Related Matters....................................................... 16 3.3 Investment............................................................................. 17 3.4 Stock.................................................................................. 17 3.5 Registration and Qualification......................................................... 18 3.6 Accountants............................................................................ 18 3.7 Financial Statements................................................................... 18 3.8 Tax and Other Returns and Reports...................................................... 19
-i- 3 3.9 Environmental Matters................................................................. 19 3.10 Authorization; No Conflicts; Approvals................................................ 19 3.11 Legal Proceedings..................................................................... 20 3.12 Insurance............................................................................. 20 3.13 Compliance with Law; Permits.......................................................... 20 3.14 Investigation......................................................................... 21 3.15 Delaware General Corporation Law Section 203.......................................... 21 3.16 No Brokers or Finders................................................................. 21 ARTICLE IV - COVENANTS WITH RESPECT TO ACTS PRIOR TO CLOSING............................................... 21 4.1 Access................................................................................ 21 4.2 Conduct of Business................................................................... 22 4.3 Permits and Approvals................................................................. 24 4.4 Preservation of Business Prior to Closing Date........................................ 24 4.5 Elimination of Intercompany and Affiliate Liabilities................................. 25 4.6 Confidentiality....................................................................... 25 4.7 Certain Payments...................................................................... 25 4.8 Pre-Closing Transactions.............................................................. 25 ARTICLE V - ADDITIONAL CONTINUING COVENANTS................................................................ 26 5.1 Filing of Tax Returns and Payment of Taxes............................................ 26 5.2 Apportionment......................................................................... 27 5.3 Tax Cooperation....................................................................... 27 5.4 Maintain Records...................................................................... 28 5.5 Plan Transfers........................................................................ 28 5.6 Buyer's Additional Employee Related Obligations....................................... 29 5.7 Directors' and Officers' Indemnification.............................................. 30 5.8 Letter of Credit Reimbursement........................................................ 31 ARTICLE VI - CONDITIONS OF PURCHASE........................................................................ 31 6.1 General Conditions.................................................................... 31 6.2 Conditions to Obligations of Buyer.................................................... 32 6.3 Conditions to Obligations of Seller................................................... 32 ARTICLE VII - TERMINATION OF OBLIGATIONS; SURVIVAL......................................................... 33 7.1 Termination of Agreement.............................................................. 33 7.2 Effect of Termination................................................................. 34 ARTICLE VIII - INDEMNIFICATION............................................................................. 34 8.1 Obligations of Sellers................................................................ 34 8.2 Obligations of Buyer.................................................................. 35 8.3 Certain Tax Matters................................................................... 35 8.4 Indemnification Procedure............................................................. 37 8.5 Limitation on Indemnity............................................................... 38
-ii- 4 8.6 Absolute Indemnity.................................................................... 38 8.7 Survival.............................................................................. 39 ARTICLE IX - GENERAL....................................................................................... 39 9.1 Amendments; Waivers................................................................... 39 9.2 Schedules; Exhibits; Integration...................................................... 39 9.3 Reasonable Best Efforts; Further Assurances........................................... 40 9.4 Governing Law......................................................................... 40 9.5 No Assignment......................................................................... 41 9.6 Headings.............................................................................. 41 9.7 Counterparts.......................................................................... 41 9.8 Publicity and Reports................................................................. 41 9.9 Parties in Interest................................................................... 41 9.10 Notices............................................................................... 42 9.11 Expenses and Attorneys Fees........................................................... 43 9.12 Specific Performance.................................................................. 43 9.13 Damages............................................................................... 43 9.14 Representation By Counsel; Interpretation............................................. 43 ARTICLE X - DEFINITIONS.................................................................................... 44 10.1 Definitions........................................................................... 44
-iii- 5 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement is entered into as of March 5, 1998, between The Learning Company, Inc., a Delaware corporation ("BUYER"), on the one hand, and Mindscape Molding Company, a Delaware corporation, Pearson Overseas Moldings Ltd., a company incorporated with limited liability under the laws of England, and Pearson Netherlands, BV, a Netherlands corporation (each a "SELLER" and collectively, the "SELLERS"), on the other hand. R E C I T A L S WHEREAS, Sellers own all the outstanding capital stock of the Companies; and WHEREAS, each Seller desires to sell, and Buyer desires to buy, all outstanding capital stock of each of the Companies (the "STOCK") for the consideration described herein. AGREEMENT In consideration of the mutual promises contained herein and intending to be legally bound the parties agree as follows: ARTICLE I PURCHASE & SALE/CLOSING 1.1 TRANSFER OF STOCK BY SELLERS. Subject to the terms and conditions of this Agreement, each Seller agrees to sell the Stock owned by such Seller and deliver the certificates evidencing the Stock to Buyer at the Closing. Such certificates will be properly endorsed for transfer to or accompanied by a duly executed stock power (or equivalent instrument in any non-US jurisdiction) in favor of Buyer or its nominee as Buyer may have directed prior to the Closing Date. 1.2 PURCHASE OF THE STOCK BY BUYER/PURCHASE PRICE. (a) Subject to the terms and conditions of this Agreement, Buyer agrees to acquire the Stock from Sellers and to (i) pay (x) $97,300,000 in cash plus (y) an amount equal to all bank cash balances held by any Company or Company Subsidiary as at the Closing, in cash (collectively, the "CASH") and (ii) issue to Sellers a number of shares of Common Stock ("Shares") equal to the quotient obtained by dividing (i) $32,300,000 by (ii) the average closing price of the Common Stock on the New York Stock Exchange during the five trading days ended two days prior to the Closing. 6 (b) Both the Cash and the Shares shall be allocated among each Seller as set forth on Schedule 1.2 (the Cash and the Shares, collectively, the "Purchase Price"). Any amounts paid to Sellers or Buyer pursuant to this Section 1.2(b) shall be deemed an increase or decrease in the cash portion of the Purchase Price. Additionally, if the net proceeds received by the Sellers from an underwritten sale of the Shares pursuant to the Registration Rights Agreement referred to in Section 6.3(c), after taking into account any discounts, commissions and other registration expenses and stock transfer taxes (but not including income taxes) (the "Net Proceeds"), is less than the Base Amount, the Buyer shall, within 10 days after the closing of such sale of the Shares, pay to Sellers an amount equal to the amount by which the Base Amount exceeds the Net Proceeds; and if the Net Proceeds are more than the Base Amount, the Sellers shall, within 10 days after the closing of such sale, pay to Buyer the amount by which the Net Proceeds exceeds the Base Amount. At any time prior to the execution and delivery by Sellers of an underwriting agreement for the sale of the Shares by Sellers pursuant to the Registration Rights Agreement, Buyer shall have the right, upon written notice to Sellers, to repurchase all or a portion of such Shares from Sellers for a pro rata portion of the Base Amount (based upon the number of Shares repurchased in relation to the total number of Shares) in cash plus an amount equal to all out- of-pocket expenses incurred by Sellers in connection with the registration and proposed sale of the Shares; if such notice is given, the closing of the purchase and sale shall take place within five days after such notice is provided to the Sellers. For the purpose hereof, the "Base Amount" shall initially be $52,300,000; provided, however, if either (i) Buyer fails for any reason to file a registration statement with respect to the Shares within 30 days of the Closing Date or (ii) a registration statement in respect of the Shares is not declared effective by the SEC within 120 days of the Closing Date, the Base Amount shall increase to the greater of (i) $52,500,000, plus interest on $52,300,000, calculated at the rate of 9% per annum from the Closing Date to the date of the sale of the Shares and (ii) the actual Net Proceeds from the Offering (if the offering has been completed at the time the Base Amount is being calculated). (c) If for any reason Sellers have not sold all of the Shares by September 15, 1998 (other than by reason of Seller's breach of its obligations under the Registration Rights Agreement; provided, that it is understood and agreed that Sellers shall have no obligations under the Registration Rights Agreement or otherwise to provide any financial statements with respect to the Companies or the Company Subsidiaries), Sellers may by written notice to the Buyer "put" the Shares to Buyer for a purchase price equal to the Base Amount plus actual out-of-pocket expenses of Sellers incurred in seeking registration or sale of the Shares less any Net Proceeds actually received by Sellers from any sale of the Shares. The closing of such put if exercised shall occur on or prior to September 30, 1998. -2- 7 1.3 THE CLOSING. The Closing will take place at the offices of O'Melveny & Myers LLP, Embarcadero Center West, 275 Battery Street, San Francisco, California. The Closing shall take place at 8:00 A.M. pacific coast time on the third business day after the satisfaction or waiver of the conditions set forth in Article VI or on such other date as Sellers and Buyer may agree. The parties acknowledge that time is of the essence and shall use their respective reasonable best efforts to effectuate the Closing by March 31, 1998. The payment of the Cash amount of the Purchase Price shall be paid to Sellers by wire transfer in immediately available funds to accounts designated by Sellers. 1.4 OTHER CLOSING DELIVERIES. At the Closing, Buyer and Pearson Netherlands, B.V. shall enter into a purchase and sale agreement as required by the laws of France with respect to the shares of Mindscape France SARL. 1.5 ADJUSTMENTS. (a) Buyer shall pay to Sellers the amounts described in clause (y) of Section 1.2(a) within ten (10) Business Days of the Closing Date accompanied by bank statements reflecting such amounts certified by Buyer's Chief Financial Officer. (b) As soon as possible after the Closing, but not later than thirty (30) days after the Closing, Buyer shall prepare and deliver to Sellers the Closing Working Capital Statement. The Closing Working Capital Statement shall be prepared by Buyer as provided in Schedule 1.5. (c) Subject to the provisions of Section 1.3(d) below, the Purchase Price shall be adjusted as follows: (1) If the Working Capital set forth on the Closing Working Capital Statement is more than $26,000,000, then the Purchase Price shall be increased by an amount equal to the difference between $26,000,000 and the Working Capital set forth in the Closing Working Capital Statement; (2) If the Working Capital set forth on the Closing Working Capital Statement is less than $20,000,000, then the Purchase Price shall be decreased by an amount equal to the difference between $20,000,000 and the Working Capital set forth in the Closing Working Capital Statement. (3) Any increase or decrease in the Purchase Price shall be paid by Buyer or Sellers in cash, as applicable, within five (3) Business Days after determination of the amount of adjustment as provided in Section 1.3(d). -3- 8 (d) DISPUTES. The Closing Working Capital Statement shall be final and binding on the parties with respect to the Working Capital of the Companies on the Closing Date, provided, however, that Sellers may dispute the calculation of the Closing Working Capital Statement in writing by Sellers within 10 days of receiving the Closing Working Capital Statement. In such case Price Waterhouse shall be entitled to audit the Closing Working Capital Statement. Such audit shall be completed within thirty (30) days of Sellers' notice of dispute and Sellers shall provide to Buyer a notice by the end of such thirty (30) day period as to amounts in dispute. If such disputes cannot be resolved within ten (10) days of such notice, such disputes shall be resolved by a "big 5" accounting firm (the "Accountant"), other than Price Waterhouse or Coopers & Lybrand as soon as reasonably practicable and such decision shall be final and binding on the parties. (e) MISCELLANEOUS. (1) Sellers and Buyer shall each be responsible for 50% of all fees and expenses of Accountant, if any, in connection with resolving any disputes related to the Closing Working Capital Statement. (2) Any payment required to be made pursuant to this Section 1.5 shall bear interest at the rate of 9% per annum calculated from the date of delivery of the Closing Working Capital Statement by Buyer through the date of payment. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS Sellers have invited Buyer to perform and Buyer has performed certain due diligence and business investigations with respect to the Companies, with the intention that Buyer form its own conclusions regarding the condition and value of the Business pursuant to the parties' express intention that the sale of the Stock and related Business be without representation or warranty by Sellers, express or implied, except as set forth in this Article II and the Seller Disclosure Schedule. Except as otherwise indicated on the Sellers Disclosure Schedule dated as of the date hereof and delivered to Buyer, Sellers represent, warrant and agree as follows: 2.1 SUBSIDIARIES: ORGANIZATION AND RELATED MATTERS. Section 2.1 of the Seller Disclosure Schedule lists all Subsidiaries of the Companies and correctly sets forth the capitalization or share capital, as the case may be, of each Subsidiary and each Company's ownership interest therein, the jurisdiction in which each Company and each subsidiary was organized and each, in the case of Companies organized under US law, jurisdiction in which each Company and each subsidiary is qualified or licensed to do business as a foreign person, to the -4- 9 extent applicable. Such subsidiaries are herein referred to as "COMPANY SUBSIDIARIES". Each Seller, each Company, and each Company Subsidiary is a corporation duly incorporated, validly existing and, in the case of Companies organized under the laws of a state of the United States, in good standing under the respective laws of the jurisdiction of their incorporation. Each Seller, each Company, and each Company Subsidiary is authorized to do business, duly qualified and, in the case of Companies organized under the Laws of a state of the United States, in good standing in each of the jurisdictions in which the nature of their respective businesses requires such authorization or qualification, except where the failure to be so qualified or authorized would not have a Material Adverse Effect. Each Seller has all necessary corporate power and authority to execute, deliver and perform this Agreement and any related agreements to which it is a party. Each Company and each Company Subsidiary has all necessary corporate power and authority to own their respective properties and assets and to carry on their respective businesses as now conducted. Section 2.1 of the Seller Disclosure Schedule correctly lists the current directors and executive officers or, managing directors and "Prokuriste", as applicable, of each Company and of each Company Subsidiary. True, correct and complete copies of the respective charter documents (or equivalent constitutional documents) of the Companies and each Company Subsidiary as in effect on the date hereof have been made available to Buyer. 2.2 STOCK. Each Seller owns all of the outstanding shares of capital stock and other Equity Securities of the Companies as set forth on Section 2.2 of the Seller Disclosure Schedule. Except as described in Section 2.2 of the Seller Disclosure Schedule, each Company owns all of the outstanding shares of capital stock and Equity Securities of each of its Subsidiaries, beneficially and, to the extent applicable, of record. All of such Equity Securities of the Companies and the Company Subsidiaries are owned free and clear of any Encumbrance. At the Closing, Buyer will acquire good and marketable title to and complete ownership of the Stock, free of any Encumbrance. The authorized capital stock of each Company is as set forth on Section 2.2 of the Seller Disclosure Schedule. There are no outstanding Contracts or other rights to subscribe for or purchase, or Contracts or other obligations to issue or grant any rights to acquire, any Equity Securities of any Company or any Company Subsidiary, or to restructure or recapitalize any Company or any Company Subsidiary. There are no outstanding Contracts of any Seller, any Company, or any Company Subsidiary to repurchase, redeem or otherwise acquire any Equity Securities of any of such entities. All Equity Securities of each Company and each Company Subsidiary are duly authorized, validly issued and outstanding, fully paid, and in the case of Companies organized under the Laws of a state of the United States, are nonassessable. Except as set forth in Section 2.3 of the Seller Disclosure Schedule, there are no preemptive rights in respect of any Equity Securities of any Company or any Company Subsidiary other than any set out in the respective foreign statutes or Laws applicable -5- 10 to a non-US company. Any Equity Securities of any Company or any Company Subsidiary which were issued and reacquired by any of such entities were so reacquired (and, if reissued, so reissued) in compliance with all applicable Laws, and neither any Company nor any Company Subsidiary has any outstanding obligation or liability with respect thereto. 2.3 FINANCIAL STATEMENTS; CHANGES; CONTINGENCIES. (a) FINANCIAL STATEMENTS. Section 2.3 of Seller Disclosure Schedule sets forth the audited consolidated statements of income and cash flow and balance sheet of the Companies and Company Subsidiaries as at and for the year ended December 31, 1997 (the foregoing statements are referred to herein collectively as the "Financial Statements" and the related balance sheet included therein is referred to herein as the "Balance Sheet"). Except as set forth in Section 2.3 of Seller Disclosure Schedule, the Financial Statements were prepared from the books and records of the Companies in accordance with US generally accepted accounting principles, and fairly present in all material respects, the operating results and financial condition of the Business as of and for the year ended on December 31, 1997. (b) NO MATERIAL ADVERSE CHANGES. Since the Balance Sheet Date whether or not in the ordinary course of business, there has not been, occurred or arisen: (1) any change in or event affecting the Companies, the Business or the Stock that has had or would reasonably be expected to have a Material Adverse Effect, or (2) any agreement, condition, action or omission which would be proscribed by (or require consent under) Section 4.2 had it existed, occurred or arisen after the date of this Agreement other than as set forth in the Seller Disclosure Schedule or in the ordinary course of business. 2.4 TAX AND OTHER RETURNS AND REPORTS. Each Company and each Company Subsidiary has timely filed all material Tax Returns required to be filed by them and have paid all Taxes shown as due on such returns. Neither any Company nor any Company Subsidiary has elected to be treated as a consenting corporation under Section 341(f) of the Code. All such Tax Returns, including amendments to date, have been prepared in good faith without willful misrepresentation and to Sellers' knowledge and belief are complete and accurate in all material respects. Except as set forth in Section 2.4 of the Seller Disclosure Schedule, no Governmental Entity has, during the past three years, examined or is in the process of examining any Tax Returns of any Company or any Company Subsidiary. Except as set forth in the Seller Disclosure Schedule, no -6- 11 Governmental Entity has proposed against any Company or any Company Subsidiary any deficiency, assessment, or claim for Taxes. The unpaid Taxes of each of the Companies and the Company Subsidiaries or the Taxes for which they could be liable to any Person with respect to all Pre-Closing Periods will not exceed the reserve for Taxes (excluding any reserves for deferred Taxes) set forth or. included on the Balance Sheet. The Sellers are eligible to make an election under Section 338(h)(10) of the Code (and any comparable election under state, local or foreign Tax law) with respect to the Companies and the Company Subsidiaries. No Person has made an election under Treasury Reg. Section 1.1502.20(g) with respect to the Companies or any Company Subsidiary. Mindscape and its US Company Subsidiaries have a federal net operating loss in the aggregate of at least $ 100,000,000 2.5 MATERIAL CONTRACTS. (a) Section 2.5 of the Seller Disclosure Schedule lists each Contract to which any Company or any Company Subsidiary is a party or to which any Company, any Company Subsidiary or any of their respective properties is subject or by which any thereof is bound that is deemed a Material Contract under this Agreement. The following Contracts shall be deemed to be "Material Contracts": any Contract that (a) after the Balance Sheet Date obligates any Company to pay an amount of $500,000 or more, or (b)provides for an extension of credit, or (c) limits or restricts the ability of any Company or any Company Subsidiary to compete or otherwise to conduct its business in any manner or place, or (d) provides for a guaranty by any Company or any Company Subsidiary, or (e) grants, other than in the ordinary course of business, a power of attorney, agency or similar authority to another person or entity, or (f) grants to a third party a right of first refusal, or (g) grants a right to, or obligation of, any Seller or Affiliate, officer, director or any Associate of any Seller, any Company or any Company Subsidiary, or (i) was not made in the ordinary course of business, or (j) any agreement establishing a partnership or joint venture, or (k) any license agreement pursuant to which any Company or any Company Subsidiary has licensed Intellectual Property Rights from third parties covering or related to the leading 25 software products (by revenue) of the Companies for the year ended December 31, 1997 (other than license agreements for Intellectual Property Rights which are generally available at minimal cost), or (I) any agreements granting to any Company or any Company Subsidiary the right to distribute products of third parties under the brand names of such third parties (other than agreements for products which accounted for less than $250,000 of revenue to the Company in the year ended December 31, 1997), or (m) any agreement pursuant to which any Company or any Company Subsidiary has licensed to any third party any of its Intellectual Property Rights other than licenses granted in the ordinary course of business and other than licenses terminable by such Company or Company Subsidiary at any time upon not more than 60 days' notice. -7- 12 (b) Subject to such exceptions as are not, individually or in the aggregate, material to the Business, each Material Contract is valid and subsisting; the applicable Company or Company Subsidiary has duly performed all its material obligations thereunder to the extent that such obligations to perform have accrued; and no breach or default, alleged breach or default, or event which would (with the passage of time, notice or both) constitute a breach or default thereunder by such Company or such Company Subsidiary, as the case may be, or, to Sellers' knowledge, any other party or obligor with respect thereto, has occurred or as a result of this Agreement or performance will occur. True copies of the agreements appearing in Section 2.3 of the Seller Disclosure Schedule, including all amendments and supplements, have been made available to Buyer. 2.6 REAL PROPERTY. Each Company and each Company Subsidiary has the right to use, free of Encumbrances, all items of real property, including leaseholds and all other interests in real property, and such other assets and properties that are material to the Business, except for Permitted Encumbrances. Except as disclosed in Section 2.6 of the Seller Disclosure Schedule, all material leasehold properties held by any Company or any Company Subsidiary as lessee are held under valid, binding and enforceable leases, and each such Company and Company Subsidiary is in compliance, in all material respects, with the terms of all such leases to which it is a party. 2.7 CONDITION OF PROPERTY. The Companies and the Company Subsidiaries have good and marketable title to all of their respective assets, free of Encumbrances, except for Permitted Encumbrances. All of the assets of the Companies are in good operating condition and repair as required for their use in the Business, except (i) for ordinary wear and tear and (ii) as is consistent with reasonable business practices. Except as set forth in Section 2.7 of the Seller Disclosure Schedule, the assets of the Companies include all assets necessary to conduct the Business as currently conducted. 2.8 ACCOUNTS RECEIVABLE. Except as set forth in Section 2.8 of the Seller Disclosure Schedule or as specifically provided for in the Balance Sheet, the accounts receivable reflected on the Balance Sheet and all accounts receivable of the Business arising between the Balance Sheet Date and the date hereof, arose from transactions in the ordinary course of business, have been collected or are less than six months past due as of the date hereof (other than individual receivables in amount of less than $100,000) and no further goods or services are required to be provided in order to entitle the Companies or the Company Subsidiaries or their respective assignees to collect the -8- 13 accounts receivable in full. No such receivable has been pledged or assigned to any other Person and no defense or set off to any such receivable has been asserted in writing by the receivable obligor, or, to the knowledge of Seller, exists. 2.9 INTELLECTUAL PROPERTY. The Companies and/or the Company Subsidiaries own, or have validly licensed or otherwise have the right to use, all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights, copyrights and other proprietary intellectual property rights and computer programs, software and data (collectively, "Intellectual Property Rights") which are used (and the Companies and/or the Company Subsidiaries own, or have validly licensed or otherwise have the right to license, all Intellectual Property Rights which are licensed) in the conduct of the Business in the manner in which each such Intellectual Property Right is currently being used or licensed or which is being held for use or license by the Companies and/or the Company Subsidiaries, except for Intellectual Property Rights, the loss of which is not reasonably likely to have a Material Adverse Effect; PROVIDED that no representations and warranties are made as to noninfringement of the patents and patent rights of third parties. Section 2.9 of the Seller Disclosure Schedule sets forth a description of all patents and applications therefor, registration of trademarks and service marks and applications therefor, and registrations of copyrights and applications therefor that are material to the conduct of the business of the Companies and the Company Subsidiaries taken as a whole. Except as set forth in Section 2.9 of the Seller Disclosure Schedule, there are no claims pending or, to the best of Sellers' knowledge, threatened against any Company or any Company Subsidiary, or any product or services thereof, or any advertisement or publicity in connection therewith, with respect to the violation or infringement of any copyright, trademark, trade name, patent, of any rights of privacy or publicity or any other proprietary right of any person anywhere in the world except for claims which are not reasonably likely to have a Material Adverse Effect. Except as set forth in Section 2.9 of the Seller Disclosure Schedule, to Sellers' knowledge, neither any Company nor any Company Subsidiary is infringing any Intellectual Property Rights of any third party. Any Intellectual Property Rights of the Companies or Company Subsidiaries transferred to Headland Digital Media, Inc. have been transferred back to either a Company or a Company Subsidiary. 2.10 ENVIRONMENTAL MATTERS. (i) Neither Company nor any Company Subsidiaries has generated, used, transported, treated, stored, released or disposed of, or has suffered or permitted anyone else to generate, use, transport, treat, store, release or dispose of any Hazardous Substance in violation of any laws; (ii) there has not been any generation, -9- 14 use, transportation, treatment, storage, release or disposal of any Hazardous Substance in connection with the conduct of the Business of any Company or any Company Subsidiary or the use of any property or facility of any Company of any Company Subsidiary or, to Sellers' knowledge, any nearby or adjacent properties or facilities, which has created or might reasonably be expected to create, any liability under any laws or which would require reporting to or notification of any Governmental Entity; (iii) any Hazardous Substance handled or dealt with in any way in connection with the Business, has been and is being handled or dealt with in all material respects in compliance with applicable laws; and (iv) since January 1, 1995, neither any Company nor any Company Subsidiary has received any written notice (A) from a Governmental Entity that any Company or any Company Subsidiary is in violation of any statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity relating to any matter of pollution, protection of the environment, environmental regulation or control or regarding Hazardous Substances on or under any of the properties of any Company or any Company Subsidiary, or (B) requiring the response to or remediation of a release or threatened release of Hazardous Substances. 2.11 AUTHORIZATION; NO CONFLICTS; APPROVALS. The execution, delivery and performance of this Agreement by each Seller has been duly and validly authorized by all necessary corporate action on the part of such Seller. This Agreement constitutes the legally valid and binding obligation of each Seller, enforceable against such Seller in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws and equitable principles relating to or limiting creditors rights generally. Except as set forth on Section 2.11 of the Seller Disclosure Schedule, the execution, delivery and performance of this Agreement by each Seller will not violate, constitute a breach or default (whether upon lapse of time and/or the occurrence of any act or event or otherwise) under, the charter documents or by-laws (or equivalent constitutional documents) of any of such entities, or give rise to any right of termination, cancellation or acceleration of any obligation or to a loss of benefit under any Material Contract or result in the imposition of any material Encumbrance against any material asset or properties of any Company or any Company Subsidiary, which in any case, could reasonably be expected to have a Material Adverse Effect. Except as set forth on Section 2.11 of the Seller Disclosure Schedule, the execution and delivery of this Agreement by each Seller and the performance of this Agreement and any related or contemplated transactions by any Seller, any Company, or any Company Subsidiary will not violate any law, except violations which would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect or impair the ability of the Sellers to perform their obligations under this Agreement. Except as set forth in Schedule 2.11 of the Seller Disclosure Schedule, no consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by any Seller, -10- 15 Company or any Company Subsidiary in connection with the execution and delivery of this Agreement or the consummation by any such entity of the transactions contemplated by this Agreement. 2.12 LEGAL PROCEEDINGS. Except as set forth in Section 2.12 of the Seller Disclosure Schedule, there is no Order or Action pending, or, to Sellers' knowledge, threatened, against or affecting any Company or any Company Subsidiary or any of their respective properties or assets that individually or when aggregated with one or more other Orders or Actions has or, if determined adversely to the Companies would reasonably be expected to have, a Material Adverse Effect, or materially and adversely affects any Seller's ability to perform this Agreement. Section 2.12 of the Seller Disclosure Schedule lists each Order and each Action that involves a claim or reasonably potential claim of aggregate liability in excess of $250,000 against, or that enjoins or seeks to enjoin any activity by, any Company or any Company Subsidiary. 2.13 DIVIDENDS AND OTHER DISTRIBUTIONS. Except as set forth in Section 2.13 of the Seller Disclosure Schedule, since the Balance Sheet Date, there has been no dividend or other distribution of assets or securities whether consisting of money, property or any other thing of value, declared, issued or paid to or for the benefit of any Seller, by any Company or any Company Subsidiary. 2.14 INSURANCE. Section 2.14 of the Seller Disclosure Schedule lists all insurance policies and bonds of, or which insure, the Companies or the Company Subsidiaries that are material to the Business. All such policies are in full force and effect and are in reasonable amounts given all the facts and circumstances of the Business. No Seller, Company, nor Company Subsidiary is in default under any such policy or bond. 2.15 COMPLIANCE WITH LAW: PERMITS. Except in so far as Mindscape International Limited is required to equalize male and female Guaranteed Minimum Pension benefits relating to contracting-out of the UK State Earnings related Pension Scheme in respect of UK Employees participating in the Pearson Group Pension Plan, each Company and each Company Subsidiary has conducted their respective businesses in accordance with applicable Laws (including, without limitation, the receipt of all Permits that are required to conduct the Business), the violation of which would, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The forms, procedures and practices of each Company and each Company Subsidiary are in -11- 16 compliance with all such Laws, to the extent applicable, the violation of which might reasonably be expected to have a Material Adverse Effect. To Sellers' knowledge, no suspension, cancellation or termination of any Permits required by any Governmental Entity to permit the Business to be conducted is threatened or imminent, that would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 2.16 EMPLOYEE BENEFITS. (a) EMPLOYEE BENEFIT PLANS, COLLECTIVE BARGAINING AND EMPLOYEE AGREEMENTS, AND SIMILAR ARRANGEMENTS. (1) Section 2.16(a) of the Seller Disclosure Schedule lists all United States employee benefit, compensation and fringe benefit plans and arrangements, including without limitation, any United States "employee benefit plan" (within the meaning of Section 3(3) of ERISA) to which Mindscape or any US Company Subsidiary is a party or by which any of them is bound, legally or otherwise and all other employment, consulting or indemnification agreements, in each case having executory payment obligations of any Company or Company Subsidiary in excess of $50,000, and any pension benefit, profit sharing, retirement, deferred compensation, welfare, insurance disability, bonus, vacation pay, severance or other similar plan providing for benefits or compensation to any current or former employees to which any Company or Company Subsidiary is a party or is otherwise bound. To Sellers' knowledge, except under the Pearson Group Pension Plan, the UK state scheme and as disclosed in Section 2. 16(a)'of the Seller Disclosure Schedule, Mindscape International Limited and its UK Subsidiaries have no legal obligation to provide or contribute to the provision of pension or lump sum benefits for or in respect of any of the UK Employees payable on their retirement or death nor have they announced any proposal to establish or continue any arrangement providing such benefits. (2) Sellers have made available to Buyer true and complete copies of all documents and summary plan descriptions with respect to such US plans, agreements and arrangements, or summary descriptions of any such plans, agreements or arrangements not otherwise in writing. With regard to the Pearson Group Pension Plan, Sellers have made available to Buyer true and complete copies of the trust deed and the documents described on Schedule 2.16(a) governing the plan together with the rules of the Sections of that plan in which certain UK. Employees participate together with a summary of the benefits provided to those UK Employees. Section 2.16(a) of the Seller Disclosure Schedule also contains a list of all of the UK Employees who are contributing members of the Pearson Group Pension Plan as at January 1, 1998. -12- 17 (3) Mindscape International Limited has materially complied with its obligations under the Pearson Group Pension Plan (except, so far as is required by law, in respect of equalization of male and female Guaranteed Minimum Pension benefits relating to contracting-out of the UK State Earnings related Pension Scheme). Mindscape and its Subsidiaries and each trade or business (whether or not incorporated) that is a member of a group of which Mindscape, Inc. is a member and which is under common control within the meaning of Section 414(b) and (c) of the Code ("ERISA Affiliate") are in compliance with the applicable provisions of ERISA and other laws applicable with respect to such plans, agreements and arrangements and to all group health plans of any ERISA Affiliate. Company and its Subsidiaries and ERISA Affiliates have performed their obligations under such plans, agreements and arrangements. With respect to employees and former employees, of Mindscape there are no Actions (other than routine claims for benefits) pending or to Seller's knowledge threatened against such plans or their assets, or arising out of such plans, agreements or arrangements, and, no facts exist which could give rise to any such Actions. The Company and any Company Subsidiaries have paid or accrued on their Balance Sheet all liabilities, including without limitation, contributions, premiums or other payments, with respect to any plans, agreements or arrangements for any US Employee or former employee, or with respect to any benefits for UK Employees or former employees or with respect to benefits for any other employee or former employee, for the period ending with the Balance Sheet Date. (4) The Pearson Group Pension Plan is approved as an exempt approved Plan (within the meaning of Chapter 1 of Part XIV ICTA 1988) and nothing has been done or omitted to be done, so far as the Seller is aware, which will result in that plan ceasing to be an exempt approved plan. (5) All plans, agreements or arrangements which are now or previously have been maintained to provide benefits to employees or former employees of the Company or any Subsidiary outside the US have been maintained in compliance with applicable law in all material respects except in respect of, so far as required, Guaranteed Minimum Pension benefits in the Pearson Group Pension Plan. The UK Employees who are active members of the Pearson Group Pension Plan are contracted out of the UK State Earnings Related Pension Scheme and Mindscape International Limited has been or is named in a contracting-out certificate (within the meaning of Pension Schemes Act (1993). -13- 18 (b) US QUALIFIED STOCK, PENSION AND PROFIT-SHARING PLANS. (1) Section 2.16(a) of the Seller Disclosure Schedule indicates all US "employee pension benefit plans" (within the meaning of Section 3(2) of ERISA) in Section 2.16(a) of the Seller Disclosure Schedule which are also stock bonus, pension or profit-sharing plans within the meaning of Section 401(a) of the Code to which Mindscape or any US Company Subsidiary is a party. (2) Each such US plan is qualified in form and operation under Section 401(a) of the Code and each trust under each such plan is exempt from tax under Section 501(a) of the Code. To Sellers' knowledge, no event has occurred that could subject any such plans to tax under Section 511 of the Code. No prohibited transaction (within the meaning of Section 4975 of the Code) or party-in-interest transaction (within the meaning of Section 406 of ERISA) has occurred with respect to such plans. (3) Sellers have made available to Buyer for each such US plan copies of the following documents: (i) the form 5500 with all attachments filed in each of the most recent two plan years, (ii) the most recent determination letter from the IRS, and (iii) the consolidated statement of assets and liabilities of such plan as of its most recent valuation date. (4) The Company and the Company Subsidiaries have not, within the last five years, maintained or contributed to any plan which is subject to (i) Section 412 of the Code or Part 3 of Title 1 of ERISA or (ii) Title IV of ERISA, or a multiemployer plan as defined in ERISA. (c) RETIREE AND OTHER BENEFITS. (1) Except as set forth in Schedule 2.16(c), no US Employee or US former employee of Mindscape or any US Subsidiary of Mindscape is entitled to retiree benefits other than those provided under any plan described in Section 2.16(b) or in connection with the requirements of Section 4980B of the Code. (2) Except as required by ERISA, no US employee benefit plan contains any provisions, and no commitments or agreements exist, which in any way would limit or prohibit the Buyer from amending or terminating any such plans, agreements or arrangements, including, without limitation, amending any such plan, agreement or arrangement to reduce or eliminate retiree benefits. -14- 19 (3) No Employee or former employee of the Company or any Company Subsidiary of Mindscape is entitled to any benefit which will be subject to Section 280G of the Code. 2.17 CERTAIN INTERESTS. Except as set forth in Section 2.17 of the Seller Disclosure Schedule, neither any Seller nor any Affiliate of any Seller, any Company, or any Company Subsidiary (other than the Companies and the Company Subsidiaries) nor any officer or director of any thereof, nor Associate of any such individual, has any material interest in any property used in or pertaining to the Business nor is any such Person doing business with any Company or any Company Subsidiary. 2.18 BANK ACCOUNTS, POWERS, ETC. Section 2.18 of the Seller Disclosure Schedule lists each bank, trust company, savings institution, brokerage firm, mutual fund or other financial institution with which any Company or any Company Subsidiary has an account or safe deposit box and the names and identification of all Persons authorized to draw thereon or to have access thereto. 2.19 MINUTE BOOKS. Except as set forth in Section 2.19 of the Seller Disclosure Schedule, the minute books of each Company and each Company Subsidiary accurately reflect all material actions and proceedings taken to date by the respective Stockholders, boards of directors, and committees of such Company and such Company Subsidiary, such minute books contain true and complete copies of the charter documents (or equivalent constitutional documents for any non-US entity) of each Company and each Company Subsidiary and all related amendments, and, to the extent applicable, the stock record books of Company and each Company Subsidiary reflect accurately all transactions in their respective capital stock of all classes. 2.20 INVESTMENT. Each Seller is acquiring the Shares from Buyer for such Seller's own account, for investment purposes only and not with a view to or for sale in connection with the distribution thereof, except as contemplated by the Registration Rights Agreement. 2.21 NO BROKERS OR FINDERS. No agent, broker, finder, or investment or commercial banker, or other Person or firm engaged by or acting on behalf of Sellers, the Companies or the Company -15- 20 Subsidiaries or any of their respective Affiliates in connection with the negotiation, execution or performance of this Agreement or the transactions contemplated by this Agreement, is or will be entitled to any brokerage or finder's or similar fee or other commission as a result of this Agreement or such transactions except BT Alex Brown, as to which Sellers shall have full responsibility and liability and neither Buyer, the Companies or the Company Subsidiaries shall have any responsibility nor liability. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Except as otherwise indicated on Buyer's Disclosure Schedule dated the date hereof and delivered to Sellers (the "BUYER DISCLOSURE SCHEDULE"), Buyer represents, warrants and agrees as follows: 3.1 SEC REPORTS. Buyer has filed all documents required to be filed since January 1, 1995 with the Securities and Exchange Commission (the "COMMISSION") (the "SEC REPORTS"). As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act of 1933, as amended (including the rules and regulations promulgated thereunder, the "SECURITIES ACT"), and the Securities Exchange Act of 1934, as amended (including the rules and regulations promulgated thereunder, the "EXCHANGE ACT"), as the case may be, and none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein, in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 3.2 ORGANIZATION AND RELATED MATTERS. Section 3.2 of Buyer Disclosure Schedule lists all Significant Subsidiaries (as defined in Rule- 1.02 of Regulation S-X of the SEC) of Buyer. Such Subsidiaries are herein referred to as "BUYER SUBSIDIARIES". Buyer and each Buyer Subsidiary is a corporation duly incorporated, validly existing and in good standing under the respective laws of the jurisdiction of their incorporation. Buyer and each Buyer Subsidiary is authorized to do business, duly qualified and in good standing in each of the jurisdictions in which the nature of its respective businesses requires such authorization or qualification, except where the failure to be so qualified or authorized would not have a Buyer Material Adverse Effect. Buyer has all necessary corporate power and authority to execute, deliver and perform this Agreement and any related agreements to which it is a party. Buyer and each Buyer Subsidiary has all necessary corporate power and authority to own their respective properties and assets and to carry on their respective businesses as now conducted. -16- 21 3.3 INVESTMENT. Buyer is acquiring the Stock from Sellers for Buyer's own account, for investment purposes only and not with a view to or for sale in connection with the distribution thereof. 3.4 STOCK. (a) All of the outstanding shares of Common Stock are duly and validly authorized and issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and were not issued and are not now in violation of or subject to any preemptive rights. All issued and outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable. Buyer had, as of October 4, 1997, an authorized and outstanding capitalization as set forth in the Third Quarter 10-Q. Except as described in Section 3.4 of the Buyer Disclosure Schedule, Buyer owns all of the outstanding shares of capital stock and Equity Securities of each Buyer Subsidiary, beneficially and of record. All of such Equity Securities of each Buyer Subsidiary are owned free and clear of any Encumbrance. Except as described in Section 3.4 of the Buyer Disclosure Schedule, there are no outstanding Contracts of Buyer or any Buyer Subsidiary to repurchase, redeem or otherwise acquire any Equity Securities of any of such entities. All Equity Securities of each Buyer Subsidiary are duly authorized, validly issued and outstanding and are fully paid and nonassessable. Except as described in Section 3.4 of the Buyer Disclosure Schedule, there are no preemptive rights in respect of any Equity Securities of Buyer or any of its Subsidiaries. Any Equity Securities of Buyer or any Buyer Subsidiary which were issued and reacquired by any of such entities were so reacquired (and, if reissued, so reissued) in compliance with all applicable Laws, and neither any Buyer nor any Buyer Subsidiary has any outstanding obligation or liability with respect thereto. (b) (i) The Shares have been duly and validly authorized by Buyer and the Shares, when issued, and delivered in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable. No preemptive rights or other rights to subscribe for or purchase securities exist with respect to the issuance of the Shares by Buyer pursuant to this Agreement. (ii) No security holder of Buyer has any right to participate in the offering contemplated by the Registration Rights Agreement. (iii) Approval of Buyer's stockholders is not required in connection with the issuance of the Shares to Sellers. -17- 22 3.5 REGISTRATION AND QUALIFICATION. Assuming the accuracy of the representations and warranties made by each of the Sellers as set forth in Article 11 hereof, it is not necessary in connection with the offer, sale and delivery of the Shares to the Sellers in the manner contemplated by this Agreement to register the Shares under the Securities Act. 3.6 ACCOUNTANTS. Coopers & Lybrand L.L.P., who have expressed their respective opinions with respect to the financial statements and schedules included in the SEC Reports, are independent accountants as required by the Securities Act. 3.7 FINANCIAL STATEMENTS. (a) The annual audited financial statements of Buyer included in the relevant Report on Form 10-K for the period ended January 4, 1997 (the "10-K") present fairly in all material respects the financial position of Buyer and the Buyer Subsidiaries, as of the date of such financial statements, and the results of operations and changes in cash flows of Buyer and the Buyer Subsidiaries for the periods covered thereby. Such statements and related notes have been prepared in accordance with US generally accepted accounting principles applied on a consistent basis, in each case, as certified by the independent accountants. (b) The unaudited interim financial statements of Buyer included in Buyer's Quarterly Report on Form 10-Q for the period ended October 4, 1997 (the "THIRD QUARTER 1O.Q") present fairly in all material respects the financial position of Buyer and the Buyer Subsidiaries, as of the date of such financial statements, and the results of operations and changes in cash flows of Buyer and the Buyer Subsidiaries for the periods covered thereby. Such statements and related notes have been prepared in accordance with US generally accepted accounting principles applied on a consistent basis except for normal year-end adjustments and the omission of certain footnote disclosure. (c) Since the date of the balance sheet presented except as set forth in Section 3.7 of the Buyer Disclosure Schedule, in the Third Quarter 10-Q whether or not in the ordinary course of business, there has not been, occurred or arisen: (1) any change in or event affecting Buyer, the business of Buyer and the Buyer Subsidiaries or the Shares that has had or would reasonably be expected to have a Buyer Material Adverse Effect, or (2) any incurrence or undertaking of any liability or obligation, direct or contingent, except for (i) liabilities or obligations which are reflected -18- 23 in the Third Quarter 10-Q, (ii) the transactions contemplated by this Agreement, (iii) liabilities incurred in the ordinary course of business, (iv) other liabilities that would not have a Buyer Material Adverse Effect and (v) liabilities or obligations relating to transactions publicly disclosed by Buyer since October 4, 1997 in the SEC Reports. 3.8 TAX AND OTHER RETURNS AND REPORTS. Buyer and each Buyer Subsidiary have timely filed all material Tax Returns required to be filed by them and have paid all Taxes shown as due on such returns. Neither Buyer nor any Buyer Subsidiary has elected to be treated as a consenting corporation under Section 341(f) of the Code. All such Tax Returns, including amendments to date, have been prepared in good faith without willful misrepresentation and to Buyer's knowledge are complete and accurate in all material respects. Except as set forth in Section 3.8 of the Buyer Disclosure Schedule, no Governmental Entity has, during the past three years, examined or is in the process of examining any Tax Returns of Buyer or any Buyer Subsidiary. Except as set forth in the Buyer Disclosure Schedule, no Governmental Entity has proposed against Buyer or any Buyer Subsidiary any material deficiency, assessment, or claim for Taxes. 3.9 ENVIRONMENTAL MATTERS. (i) Neither Buyer nor any Buyer Subsidiary has generated, used, transported, treated, stored, released or disposed of, or has suffered or permitted anyone else to generate, use, transport, treat, store, release or dispose of any Hazardous Substance in violation of any Laws; (ii) there has not been any generation, use, transportation, treatment, storage, release or disposal of any Hazardous Substance in connection with the conduct of the business of Buyer or any Buyer Subsidiary or the use of any property or facility of Buyer or any Buyer Subsidiary or, to Buyer's knowledge, any nearby or adjacent properties or facilities, which has created or might reasonably be expected to create, any liability under any Laws or which would require reporting to or notification of any Governmental Entity; and (iii) any Hazardous Substance handled or dealt with in any way in connection with the business of Buyer and the Buyer Subsidiaries, has been and is being handled or dealt with in all material respects in compliance with applicable Laws. 3.10 AUTHORIZATION; NO CONFLICTS; APPROVALS. The execution, delivery and performance of this Agreement and any related agreements by Buyer has been duly and validly authorized by all necessary corporate action on the part of Buyer. This Agreement and any related agreements constitutes the legally valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms except as such enforceability may be limited by -19- 24 bankruptcy, insolvency, reorganization, moratorium and other similar laws and equitable principles relating to or limiting creditors rights generally. The execution, delivery and performance of this Agreement by Buyer and the execution, delivery and performance of any related agreements or contemplated transactions by Buyer will not violate, or constitute a breach or default (whether upon lapse of time and/or the occurrence of any act or event or otherwise) under, the charter documents or by-laws of Buyer or any Contract to which Buyer or any Buyer Subsidiary is a party that is material to the financial condition, results of operations or conduct of the business of Buyer and its Subsidiaries taken as a whole or result in the imposition of any material Encumbrance against any material asset or properties of Buyer or any of its Subsidiaries, which in any case, could reasonably be expected to have a Buyer Material Adverse Effect. The execution and delivery of this Agreement by Buyer and the perforce of this Agreement and any related or contemplated transactions by Buyer will not violate any Law, except violations which would not, individually or in the aggregate, be reasonably expected to have a Buyer Material Adverse Effect. 3.11 LEGAL PROCEEDINGS. Except as set forth in Section 3.11 of the Buyer Disclosure Schedule, there is no Order or Action pending, or, to Buyer's knowledge, threatened, against or affecting Buyer or any Buyer Subsidiary or any of their respective properties or assets that individually or when aggregated with one or more other Orders or Actions has or, if determined adversely to Buyer or such Buyer Subsidiary would reasonably be expected to have, a Buyer Material Adverse Effect, or materially adversely affect Buyer's ability to perform this Agreement. 3.12 INSURANCE. Buyer and the Buyer Subsidiaries maintain insurance of the types and in the amounts generally deemed adequate for their respective businesses against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. 3.13 COMPLIANCE WITH LAW; PERMITS. Buyer and each Buyer Subsidiary has conducted its respective businesses in accordance with applicable Laws (including, without limitation, the receipt of all Permits that are required to conduct their respective Businesses), the violation of which would, either individually or in the aggregate, reasonably be expected to have a Buyer Material Adverse Effect. The forms, procedures and practices of Buyer and each Buyer Subsidiary are in compliance with all such Laws, to the extent applicable, the violation of which might reasonably be expected to have a Buyer Material Adverse Effect. To Buyer's knowledge, no suspension, cancellation or termination OF any Permits required by any Governmental Entity to permit the Business to be -20- 25 conducted is threatened or imminent, that would, individually or in the aggregate, reasonably be expected to have a Buyer Material Adverse Effect. 3.14 INVESTIGATION. Buyer acknowledges and agrees that it has made its own inquiry and investigation into, and based thereon has formed an independent judgment concerning, the Stock, the Companies, the Company Subsidiaries, and the Business. Buyer agrees that it has not relied on the accuracy of, and shall have no claim against, Sellers, the Companies, or any of their officers, employees, agents, stockholders, Affiliates, consultants, investment bankers, legal advisers, or representatives arising out of any inaccuracy in or omission from (except insofar as such inaccuracy or omission constitutes a breach of any express representation or warranty of Sellers contained in Article II hereof) information which has been furnished by the Companies concerning the Companies, the Company Subsidiaries, and the Business. In connection with Buyer's investigation of the Business, Buyer has received from the Companies and Sellers certain projections and other forecasts for the Business. Buyer has not relied on the accuracy of, and Sellers make no representation or warranty with respect to, any projections or forecasts. 3.15 DELAWARE GENERAL CORPORATION LAW SECTION 203. Section 203 of the Delaware General Corporation Law will not, prior to the termination of this Agreement, apply to this Agreement or the transactions contemplated hereby. 3.16 NO BROKERS OR FINDERS. No agent, broker, finder or investment or commercial banker, or other Person or firms engaged by or acting on behalf of Buyer or its Affiliates in connection with the negotiation, execution or performance of this Agreement or the transactions contemplated by this Agreement, is or will be entitled to any broker's or finder's or similar fees or other commissions as a result of this Agreement or such transactions, except for the fees and expenses of Piper Jaffrey as to which Sellers shall have no responsibility or liability and Buyer shall have full responsibility and liability. ARTICLE IV COVENANTS WITH RESPECT TO ACTS PRIOR TO CLOSING 4.1 ACCESS. Subject to applicable Laws and fiduciary and privacy obligations, each party will give the other party and their respective counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours and -21- 26 on reasonable notice to the officers, properties, books and records of and relating to the Companies and the Company Subsidiaries or Buyer and Buyer Subsidiaries, as the case may be, will furnish to the other party and their respective counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information with respect to the Companies and the Company Subsidiaries or Buyer and the Buyer Subsidiaries, as the case may be, as such Persons may reasonably request and will instruct its employees, counsel and financial advisors to cooperate with the other party in its investigation of the Company or Buyer and the Buyer Subsidiaries, as the case may be. Any information provided, or caused to be provided, by the parties pursuant to this Section 4.1 shall be subject to the terms of the Confidentiality Agreement dated as of January 22, 1998 among Pearson Inc., Mindscape, Inc. and Buyer (the "Confidentiality Agreement"). 4.2 CONDUCT OF BUSINESS. Between the date of this Agreement and the Closing Date, except with respect to the items described in Section 4.8, Sellers covenant that no Company and no Company Subsidiary shall, without the prior Consent in writing of Buyer, which may not be Unreasonably withheld: (a) Conduct the Business in any manner except in the ordinary Course substantially as now Conducted; or (b) Except as required by their terms, amend, terminate or enter into any Material Contract; or (c) terminate, amend or fail to renew any existing insurance Coverage; or (d) terminate or fail to renew or preserve any Permits; or (e) incur or agree to incur any obligation or liability (absolute or Contingent) that individually calls for payment by Company or any Company Subsidiary of more than $250,000; or (f) make any loan, guaranty or other extension of credit, or enter into any Commitment to make any loan, guaranty or other extension of credit, to or for the benefit of any director, officer, employee, Stockholder or any of their respective Associates; or (g) sell, transfer, mortgage, encumber or otherwise dispose of any assets or any liabilities, except (i) for dispositions of property not material in amount, or (ii) for dispositions contemplated by this Agreement; or -22- 27 (h) issue, sell, redeem or acquire for value, or agree to do so, any debt obligations or Equity Securities of any Company or any Company Subsidiary; or (i) declare, issue, make or pay any dividend or other distribution of assets, whether consisting of money, other personal property, real property or other thing of value, to its shareholders, or split, Combine, dividend, distribute or reclassify any shares of its Equity Securities; provided, however, that the Companies and the Company Subsidiaries may pay as dividends on other distributions to Sellers or Seller's Affiliates any and all cash on hand at the Companies and the Company Subsidiaries prior to the Closing; or (j) change or amend its charter documents or bylaws (or equivalent documents); or (k) make special or extraordinary payments to any person; or (l) make any material investment, by purchase, Contributions to capital, property transfers, or otherwise, in any other Person; or (m) Compromise or otherwise settle any claims in excess of $250,000; or (n) enter into or adopt any employee benefit plan or any employment, severance or bonus agreement or arrangement, or, except for normal increases in the ordinary Course of business, increase in any manner the Compensation or fringe benefits of, or materially modify the employment terms of, the directors, officers or employees of the Company and Company Subsidiaries, or pay any employee benefits not required by the terms in effect on the date hereof of any existing employee benefit plan; or (o) sell, assign, transfer or license any Intellectual Property Rights, other than in the ordinary course of business; or (p) make or commit to make any Capital expenditure in excess of $250,000 per item; or (q) purchase any inventory in excess of $500,000; or (r) enter into any sales contract or other arrangement to deliver products or licenses or an amount in excess of $500,000; or (s) terminate any vendor relationships with 12 month purchases greater than $250,000; or -23- 28 (t) terminate any employee earning over $100,000 per year, other than for cause; or (u) enter into any cooperative, advertising or marketing programs costing more than $500,000; or (v) make any payment or transfer of assets to any Seller or Affiliate thereof; or (w) make or terminate any material tax election; or (x) accelerate the payment of any accounts receivable outside the ordinary course or defer the payment of any accounts payable outside the ordinary course; or (y) agree to or make any commitment to take any actions prohibited by this Section 4.2. 4.3 PERMITS AND APPROVALS. Sellers and Buyer each agree to cooperate and use their reasonable best efforts to obtain, and will immediately prepare all registrations, filings (including but not limited to all filings required by the Hart-Scott-Rodino Act and post closing notification to the German Bundeskartellant and applications, requests and notices preliminary to, all Approvals and Permits that may be necessary or which may be reasonably requested by Buyer to consummate, the transactions contemplated by this Agreement, including requesting early termination of any applicable waiting periods. To that end, Sellers and Buyer agree to file notification as required by the Hart-Scott-Rodino Act within three business days of the date of this Agreement. To the extent that the Approval of a third party with respect to any Material Contract is required in Connection with the transactions contemplated by this Agreement, each Seller shall use its reasonable efforts to obtain such Approval prior to the Closing Date to the extent requested by Buyer. 4.4 PRESERVATION OF BUSINESS PRIOR TO CLOSING DATE. During the period beginning on the date hereof and ending on the Closing Date, (a) Sellers will use their reasonable best efforts to preserve the businesses of the Companies as Company Subsidiaries and to preserve the goodwill of customers, suppliers and others having business relations with the Companies and the Company Subsidiaries, and (b) Sellers and Buyer will consult with each other concerning, and Sellers will cooperate in all reasonable respects to keep available to Buyer, the services of the officers and employees of the Companies and the Company Subsidiaries that Buyer may wish to have the Companies and the Company -24- 29 Subsidiaries retain, and Sellers will provide reasonable access of Buyer to such employees. 4.5 ELIMINATION OF INTERCOMPANY AND AFFILIATE LIABILITIES. Except as set forth in Section 4.5 of the Disclosure Schedule, prior to the Closing Date, Sellers shall cause to be eliminated through dividends, capital contributions, or otherwise, to the extent they relate to the Business: (a) any and all loans made or guaranteed by any Seller or any Affiliate of any Seller (other than the Companies or their respective Subsidiaries) to or for the benefit of any Company or any Company Subsidiary of any Company; (b) any and all loans or guarantees made to or for the benefit of any Seller any Affiliate of any Seller (other than the Companies or their respective Subsidiaries) by any Company or any Company Subsidiary of any Company; and (c) other intercompany accounts between the Sellers and any Company or Company Subsidiary. 4.6 CONFIDENTIALITY. Subject to Section 9.8, all non-public information disclosed by any party (or its representatives), whether before or after the date hereof, in connection with the transactions contemplated by or the discussions and negotiations preceding this Agreement shall be covered by the Confidentiality Agreement. 4.7 CERTAIN PAYMENTS. Prior to the Closing, Sellers shall pay, or cause the Companies to pay, all 1997 employee bonuses and earn out obligations with respect to Micrologic. 4.8 PRE-CLOSING TRANSACTIONS. Notwithstanding any other provision of this Agreement (including without limitation the Seller Disclosure Schedule): (a) Prior to the Closing, Mindscape shall be entitled to sell to any Seller or Affiliate of any Seller all of the capital stock of Headland Digital Media, Inc. for a purchase price of approximately $270,000. (b) Prior to the Closing, Sellers or Affiliates of Sellers will charge $7,500,000 to Mindscape for the Red Storm distribution contract described on Section 2.5 of the Seller Disclosure Schedule. For the avoidance of doubt, this will not be included in Working Capital on the Closing Working Capital Statement. Sellers shall be responsible for any adverse tax consequences to Mindscape on account of the $7,500,000 charge described above (without regard to any limitation contained in Section 8.5). -25- 30 (c) Prior to the Closing, it is agreed that the relevant Companies and the relevant Company Subsidiaries may transfer and assign to any Seller or any Affiliate of any Seller in perpetuity all its or their rights in "Peter Rabbit's Math Garden," "The Adventures of Peter Rabbit and Benjamin Bunny" and "The Tale of Tom Kitten and Jemima Puddleduck") (collectively the "Potter Programs") (including but not limited to the copyright in the program, program engine, user interface, all source and object code, and associated program documentation as well as any additional content and collateral materials contained in the Potter Programs and any foreign language versions thereof), and deliver any materials relating thereto, to such Seller or Affiliate, provided always that (i) Mindscape shall retain the exclusive right (subject to approval of packaging and any special sales including without limitation OEM deals) to distribute the Potter Programs in the US and Canada for a period not exceeding one year from the date of this Agreement on the basis that Mindscape shall not be obliged to pay any royalty or other fee on such sales, (ii) Mindscape shall continue to administer and support (but not vary, extend or renew) the Potter Programs sub-licenses existing at the date hereof, (iii) the Seller and/or any Affiliate of the Seller shall not be obliged to make any payments whatsoever to Mindscape in respect of the Potter Programs or any future exploitation thereof, and (iv) this assignment and the terms of this paragraph shall supersede and replace all current arrangements and agreements regarding Potter Programs between Mindscape and any Seller or any Affiliate of a Seller which shall no longer have any force or effect. ARTICLE V ADDITIONAL CONTINUING COVENANTS 5.1 FILING OF TAX RETURNS AND PAYMENT OF TAXES. (a) Sellers shall cause to be prepared and filed (or provide the Companies for execution and filing, as appropriate) all Tax Returns of or including any Company that pertain to or include any Pre-Closing Period, except for any Tax Returns which include any Pre-Closing Straddle Period; and Sellers shall pay or cause to be paid all Tax reported, or required to be reported, on such Returns. Buyer shall provide Sellers with any assistance reasonably requested by Sellers in connection with the filing of any Tax Returns described above. (b) Buyer shall prepare and file, or shall cause the Companies and the Company Subsidiaries to prepare and file, all Tax Returns of or including any Company other than those described in Section 5.1(a) above and Buyer or the Companies shall pay all taxes shown thereon. Sellers will pay to Buyer an amount equal to any Tax, or portion thereof, payable by Buyer that Buyer reasonably determines is attributable to any Pre-Closing Straddle Period, at least fifteen (15) business days prior to the due date of any such payment. Sellers will have the right to review and comment on any Tax Return relating to the Pre-Closing Straddle Period. -26- 31 (c) All transfer, documentary, sales, use, registration and other such Taxes (including, but not limited to, all applicable real estate transfer or gains taxes and stock transfer Taxes), any penalties, interest and additions to Tax and fees incurred in Connection with this Agreement and the transactions, contemplated hereby shall be paid by Buyer. Each party to this Agreement shall cooperate in the timely making of all filings, returns, reports and forms as may be required in connection therewith. (d) Without Sellers' written consent, Buyer shall not file or permit to be filed, any Tax Return or amended Tax Return related to any Company or Company Subsidiary with respect to any Pre-Closing Period. (e) The parties shall comply with their respective obligations in relation to UK Tax matters as set out in Schedule 5.1 (UK Tax Covenant). To the extent the provisions of this Agreement, including, but not limited to, this Section 5.1 and Section 8.3 are inconsistent with the provisions of Schedule 5.1 with respect to any UK Company or Company Subsidiary, the provisions of Schedule 5.1 shall govern. (f) No Person will make an election under Treasury Reg. Section 1. 5.2 APPORTIONMENT. Sellers and Buyer agree to treat the Companies and the Company Subsidiaries as if they ceased to be a part of each consolidated or combined group for federal, state, local or foreign Tax purposes in which the Seller is also currently a member as of 11:59 p.m. on the Closing Date and to treat the Closing Date as the last day of any Taxable Period where such treatment is required or permitted. For purposes of apportioning a Tax relating to a Straddle Period for which such treatment is not required or permitted between the Pre-Closing Straddle Period and the Post-Closing Straddle Period, the parties hereto shall treat the Closing Date as the last day of the Pre-Closing Straddle Period (I.E., the parties shall "close the books" on such date). 5.3 TAX COOPERATION. After the Closing, the parties shall, and shall cause their respective Affiliates to, reasonably cooperate with Sellers, Buyer and the Companies in the preparation of all Tax Returns and shall provide, or cause to be provided to Sellers, Buyer and the Companies, any records and other information requested by such parties in connection therewith as well as access to, and the cooperation of, the accountants and auditors of Sellers, the Companies and their Affiliates. Each party shall, and shall cause its Affiliates to, cooperate fully with Sellers, Buyer, the Companies and the Company Subsidiaries, as the case may be, in connection with any Tax investigation, audit or other proceeding. Any information obtained pursuant to this Section 5.3 or -27- 32 pursuant to any other Section hereof providing for the sharing of information or the review of any Tax Return or other Schedule relating to Taxes shall be subject to Section 4.6. 5.4 MAINTAIN RECORDS. For a period of five years after the Closing (or until the running of the applicable statute of limitations for the return in question), the Companies, Buyer and Sellers shall maintain all tax records, working papers, and other supporting financial records and documents relating to the Tax Returns filed by, on behalf of, or relating to the Companies or any Company Subsidiary or to any Taxes for the last closed year and for all open years and for their taxable years in which the Closing Date occurs. All such documents that relate primarily to the Companies and the Company Subsidiaries will be delivered to and maintained by Buyer during the period set forth above, and Buyer will make the same available to Sellers or their agents at reasonable times for inspection and copying. All such remaining documents shall be retained by Sellers during the period set forth above, and Sellers will make the same available to Buyer or its agents at reasonable times for inspection and copying. At the end of the period set forth above, Sellers or Buyer, as the case may be, may dispose of such documents, provided that notice of such disposition must be given to the other parties at least 60 days in advance of such disposition. Upon receipt of such notice, any Seller or Buyer, as the case may be, may request (at the requesting party's expense) that such documents be delivered to them in lieu of disposing of such documents. 5.5 PLAN TRANSFERS. Buyer and Sellers agree to cooperate in making all appropriate filings and taking all appropriate actions required to implement the provisions of this Section. (a) Following the Closing, Buyer shall sponsor, or cause one or more of its Affiliates to sponsor, a plan or plans (the "SUCCESSOR PLAN") that is qualified under Section 401 of the Code, under which there is established a trust (the "SUCCESSOR TRUST") that is exempt under Section 501 of the Code, to which the following transfers shall be made. As promptly as practicable after the Closing Date, the Sellers shall cause Pearson Inc. to take all actions necessary to vest the US Employees of the Companies in their account balances held in the Pearson Inc. Savings and Investment Plan as of the Closing Date and to transfer such account balances (including any loans and qualified domestic relations orders pertaining thereto) to the Successor Trust in cash (and promissory notes for the participant loans). The transfer of the account balances referred to above shall take place upon receipt by such Seller of either (x) a copy of a favorable determination letter or letters from the IRS that the Successor Plan is qualified under Section 401 of the Code and the Successor Trust is exempt from taxation under Section 501 of the Code, or (y) an -28- 33 opinion of counsel to Buyer, reasonably satisfactory to such Seller, that the Successor Plan is qualified under Section 401 of the Code and the Successor Trust is exempt from taxation under Section 501 of the Code. (b) The parties shall comply with their respective obligations in relation to UK pensions as set out in Schedule 5.5 (UK Pensions) and with pension arrangements provided or contributed by any Company or Company Subsidiary in respect of their employees governed by any jurisdiction other than the US or the UK so far as is required by law in such other jurisdiction. 5.6 BUYER'S ADDITIONAL EMPLOYEE RELATED OBLIGATIONS. (a) Buyer agrees that, after the Closing and until December 31, 1999, employees of each Company and the Company Subsidiaries will, to the extent permitted by law, be provided with benefits (including welfare, compensation, bonus and incentive benefits) which in the aggregate are no less favorable than those currently provided by such Company or Company Subsidiary, or the existing benefit plans, programs and arrangements of the Companies and the Company Subsidiaries will be continued, unless otherwise provided in this Agreement. Buyer further agrees that the employees of the Companies shall be credited for eligibility and vesting after the Closing Date under any applicable benefit plan, program or arrangement of Buyer with their Service with any Company before the Closing Date to the same extent such service was credited under the comparable plan of such Company. After December 31, 1999, Buyer agrees to provide all employees of the Companies and the Company Subsidiaries as of the Closing Date with benefits to the same extent and on the same terms and conditions as employees of Buyer or its Affiliates, as in effect from time to time. Buyer further agrees (i) for a period of not less than two years after the Closing, to maintain for the benefit of all employees of the Companies and the Company Subsidiaries as of the Closing Date a severance pay plan no less favorable than that provided by the Companies, the Company Subsidiaries and their Affiliates immediately before the Closing; (ii) to use reasonable efforts to waive any limitations regarding preexisting conditions under any welfare or other employee benefit plan maintained by Buyer (and/or any of its Affiliates) for the benefit of continuing employees or in which continuing employees participate after the Closing; and (iii) for all purposes under all compensation, life insurance, disability insurance, medical and severance pay plans and policies applicable to employees of Buyer and its Affiliates, including those referred to in this Section, to treat all service by continuing employees with the Companies, the Company Subsidiaries or of their Affiliates before the Closing as service with Buyer and its Affiliates. (b) Buyer agrees that after the Closing, all severance agreements and other arrangements of the Companies and the Company Subsidiaries for the benefit of employees or former employees that are described in Section 5.6 of the Seller Disclosure Schedule and that are in effect on the date hereof, will be paid by Buyer -29- 34 or, if such amounts have previously been paid by Sellers, will be paid to Sellers; provided, however, that Sellers, and not Buyer, will be responsible for all payments to employees who, at the Closing, are entitled to a payment based upon the "change in control" under the Companies' long Term Incentive Plan as in effect on the date hereof. Buyer agrees that (i) the purchase of the Stock shall Constitute a "change in control" for purposes of said severance agreements and other agreements, (ii) each Company and each Company Subsidiary shall, and Buyer shall cause the Companies and the Company Subsidiaries to, honor and comply with the terms and conditions of all such severance agreements and other arrangements and (iii) the Companies and the Company Subsidiaries will not amend any of the terms of said severance agreements and other arrangements. (c) Buyer shall indemnify and shall hold Sellers and their Affiliates harmless from and against all liabilities with respect to all employees and employee benefit plans, including, but not limited to, 401(k) Plans, relating to causes of action arising after the Closing Date. 5.7 DIRECTORS' AND OFFICERS' INDEMNIFICATION. (a) The Certificates of Incorporation and Bylaws (or equivalent documents) of the Companies and the company Subsidiaries shall contain provisions no less favorable with respect to indemnification of directors and officers of the Company and the Company Subsidiaries than are set forth in the current certificates of incorporation and bylaws (or equivalent documents) of the Company and the Company Subsidiaries and such provisions shall not be amended, repealed or otherwise modified for a period of seven years after the Closing in any manner that would adversely affect the rights thereunder of individuals who prior to the Closing were directors or officers of any Company or any Company Subsidiary, unless such modification is required by law. (b) After the Closing, Buyer shall, to the fullest extent permitted under applicable Law, indemnify and hold harmless, each present and former director or officer of each Company or any Company Subsidiary (collectively, the "Indemnitees") against any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of, relating to or in connection with any action or omission occurring prior to the Closing (including acts or omissions in connection with such persons' serving as an officer, director or other fiduciary in any entity if such service was at the request or for the benefit of Company or any Company Subsidiary) or arising out of or pertaining to the transactions contemplated by this Agreement for a period of seven years after the date hereof. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Closing), (i) Buyer shall pay the reasonable fees and expenses of a single -30- 35 counsel selected by the Indemnitees, which counsel shall be reasonably satisfactory to Buyer, within a reasonable time after statements therefor are received, (ii) Buyer will have the right to control and, in any event, will cooperate in, the defense and settlement of any such matter, and (iii) any determination required to be made with respect to whether an Indemnitee's conduct complies with the standards set forth under applicable law or the applicable charter documents shall be made by independent counsel mutually acceptable to Buyer and the Indemnitee; provided, however, that Buyer shall not be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld); and provided further that, in the event that any proceeding indemnification is asserted or made within such seven-year period, all rights to indemnification in respect of any such proceeding shall continue until the disposition of all such proceedings. (c) In the event Buyer, any Company or any Company Subsidiary or any of their successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then and in each such case, proper provisions shall be made so that the successors and assigns of Buyer, any Company or any Company Subsidiary, as the case may be, shall assume the obligations set forth in this Section 5.7(c). (d) Buyer shall maintain or cause to be maintained in effect for seven years after the Closing the current policies of the directors' and officers' liability insurance maintained by each Company and each Company Subsidiary (provided that Buyer may substitute or cause to be substituted therefor policies of at least the same coverage containing terms and conditions which are no less advantageous to the beneficiaries thereof) with respect to matters occurring prior to the Closing. 5.8 LETTER OF CREDIT REIMBURSEMENT. To the extent any letters of credit listed on Section 2.5 of Seller Disclosure Schedule issued or guaranteed by any Seller or any Affiliate of Seller is drawn down upon, Buyer will reimburse Sellers for any amounts so drawn within five (5) Business Days of notification thereof. ARTICLE VI CONDITIONS OF PURCHASE 6.1 GENERAL CONDITIONS. The obligations of the parties to effect the Closing shall be subject to the following conditions unless waived by all parties: -31- 36 (a) NO ORDERS; LEGAL PROCEEDINGS. No law or Order which prohibits, enjoins or otherwise restrains the consummation of the transactions contemplated hereby shall have been enacted, entered, issued, promulgated or enforced by any Governmental Entity; provided, that the parties shall use commercially reasonable efforts to cause any such Law or Order to be vacated or lifted. (b) HART-SCOTT-RODINO ACT. Any applicable waiting period under the Hart-Scott-Rodino Act shall have expired or been terminated. (c) OTHER APPROVALS. Any other required regulatory approvals shall have been obtained. 6.2 CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of Buyer to effect the Closing shall be subject to the following conditions except to the extent waived in writing by Buyer: (a) REPRESENTATIONS AND WARRANTIES AND COVENANTS OF SELLERS. The representations and warranties of Sellers herein contained that are qualified by materiality shall be true and correct, and the representations and warranties of Sellers herein contained that are not so qualified shall be true in all material respects, at the Closing Date with the same effect as though made at such time, other than those that speak as of a specific date, which in the case of those qualified by materiality shall be true and correct and in the case of those not so qualified, shall be true and correct in all material respects as of such date, and except (i) as affected by any transactions contemplated by this Agreement which are inconsistent with such representations or warranties or (ii) as contemplated or permitted by this Agreement; each Seller shall have in all material respects performed all obligations and complied with all covenants and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing Date, and each Seller shall have delivered to Buyer a certificate of each Seller in form and substance satisfactory to Buyer, dated the Closing Date and signed by its chief executive officer and chief financial officer (or equivalent officers) to such effect. (b) NO MATERIAL ADVERSE CHANGE. There shall not have been any Material Adverse Effect subsequent to the date of this Agreement. 6.3 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Sellers to effect the Closing shall be subject to the following conditions, except to the extent waived in writing by Sellers: (a) REPRESENTATIONS AND WARRANTIES AND COVENANTS OF BUYER. The representations and warranties of Buyer herein contained that are qualified by -32- 37 materiality shall be true and correct, and the representations and warranties of Buyer herein contained that are not so qualified shall be true in all material respects, at the Closing Date with the same effect as though made at such time, other than those that speak as of a specific date, which in the case of those qualified by materiality shall be true and correct and in the case of those not so qualified, shall be true in all material respects at and as of such date; Buyer shall have in all material respects performed all obligations and complied with all covenants and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing Date, and Buyer shall have delivered to Seller a certificate of Buyer in form and substance satisfactory to Sellers, dated the Closing Date and signed by its Chief Executive Officer and Chief Financial Officer, to such effect. (b) NO MATERIAL ADVERSE CHANGE. There shall not have been any Buyer Material Adverse Effect subsequent to the date of this Agreement. (c) REGISTRATION RIGHTS AGREEMENT. Buyer shall have entered into a Registration Rights Agreement with Sellers, in the form attached as Exhibit B. ARTICLE VII TERMINATION OF OBLIGATIONS; SURVIVAL 7.1 TERMINATION OF AGREEMENT. Anything herein to the Contrary notwithstanding, this Agreement and the transactions contemplated by this Agreement shall terminate if the Closing does not occur on or before the close of business on June 1, 1998, unless extended by mutual agreement in writing of Buyer and Sellers and otherwise may be terminated at any time before the Closing as follows and in no other manner: (a) MUTUAL CONSENT. By mutual consent in writing of Buyer and Sellers. (b) CERTAIN CONDITIONS NOT MET BY EARLIER DATE. By Buyer, or Sellers, as applicable, if any conditions of such other party, as set forth in Article VI, shall not have been satisfied or waived by June 1, 1998. (c) ILLEGALITY. By either Buyer or Sellers if there shall be a final, non-appealable order of a Governmental Entity of competent jurisdiction in effect preventing the Closing. (d) CONDITIONS TO BUYER'S PERFORMANCE NOT MET. By Buyer by written notice to Sellers if any event occurs or condition exists which would render impossible the satisfaction of one or more conditions to the obligations of Buyer to -33- 38 consummate the transactions contemplated by this Agreement as set forth in Section 6.1 or 6.3. (e) CONDITIONS TO SELLER'S PERFORMANCE NOT MET. By Sellers by Written notice to Buyer if any event occurs or condition exists which would render impossible the satisfaction of one or more conditions to the obligation of Sellers to consummate the transactions contemplated by this Agreement as set forth in Section 6.1 or 6.2. (f) MATERIAL BREACH. By Buyer or Sellers if there has been a material misrepresentation or other material breach by the other party in its representations, warranties and covenants set forth herein; provided, however, that if such breach is susceptible to cure, the breaching party shall have 10 business days after receipt of notice from the other party of its intention to terminate this Agreement if such breach continues, in which to cure such breach. 7.2 EFFECT OF TERMINATION. Subject to the immediately following sentence, if this Agreement shall be terminated pursuant to Section 7.1, all further obligations of the parties under this Agreement shall terminate without further liability of any party to another; provided that the obligations of the parties contained in Section 4.6 (Confidentiality) and Section 9.11 (Expenses and Attorney's fees) shall survive any such termination. A termination under Section 7.1 shall not relieve any party of any liability for a breach of, or for any misrepresentation under, this Agreement, or be deemed to constitute a waiver of any available remedy (including specific performance if available) for any such breach or misrepresentation. ARTICLE VIII INDEMNIFICATION 8.1 OBLIGATIONS OF SELLERS. Sellers agree to indemnify and hold harmless Buyer, and its directors, officers, employees, Affiliates, agents and assigns from and against any and all Lasses of Buyer or Company, directly or indirectly, as a result of, or based upon or arising from any breach of any representation, warranty or covenant of Seller made in this Agreement. In addition, Seller shall indemnify Buyer with respect to any liability arising under ERISA or any other Laws with respect to the Company or any Company Subsidiary as a result of the Company or such Company Subsidiary having been an ERISA Affiliate of (i) any Seller, or, (ii) any Seller's ERISA Affiliates. -34- 39 8.2 OBLIGATIONS OF BUYER. Buyer agrees to indemnify and hold harmless each Seller and its respective directors, officers, employees, Affiliates, agents and assigns from and against any and all losses, directly or indirectly as a result of, or based upon or arising from, any breach of any representation, warranty or covenant of Buyer made in this Agreement. 8.3 CERTAIN TAX MATTERS. (a) SELLERS INDEMNITY. Sellers agree to indemnify, defend and hold harmless Buyer against (i) any Tax payable by or on behalf of any Company or any Company Subsidiary for any Pre-Closing Period (other than sales tax, but including the California sales tax matter identified Section 2.4 of the Seller Disclosure Schedule), (ii) any deficiencies in any Tax payable by or on behalf of any Company or any Company Subsidiary arising from any audit by any taxing agency or authority with respect to any Pre-Closing Period, (iii) Taxes of any member of a consolidated or combined tax group of which any Seller was, or were at any time, a member, for which any Company, or any Company Subsidiary and/or any Seller is jointly or severally liable as a result of its inclusion in such group, and (iv) any claim or demand for reimbursement or indemnification resulting from any transfer by Seller prior to the Closing of any Tax benefits or credits to any other person. (b) AUDIT MATTERS. Sellers shall have the responsibility for, and the right to control, at Seller's expense, the audit (and disposition thereof) of any Tax Return relating to periods ending on or prior to the Closing Date and to participate in the disposition of the audit of any Tax Return relating to the periods ending after the Closing Date if such audit or disposition thereof could give rise to a claim for indemnification hereunder. Buyer shall have the right, directly or through its designated representatives, to review in advance, comment upon, and approve all submissions made in the course of audits or appeals thereof to any Governmental Entity relating to periods ending on or prior to the Closing Date and to approve the disposition of any audit adjustment with respect to such periods if such submission or disposition will or might reasonably be expected to result in an increase in Taxes of Buyer or Company for any period beginning at or after the Closing. (c) SECTION 338(h)(10) ELECTION/RELATED PAYMENTS. (1) At Buyer's request, Sellers will join with Buyer in making an election under Section 338(h)(10) of the Code and/or any similar state law provision in any state or States as Buyer shall designate, with respect to the sale of the Stock to Buyer hereunder. Any such request must be delivered to such Seller in writing not later than 90 days following the Closing Date. If the Section 338(h)(10) election is made, the parties will allocate the '.deemed selling price as computed under Treasury Regulations Section 1.338(h)(10)-1(f) -35- 40 for tax purposes in accordance with Buyer's reasonable determination of their fair market values, which determination shall be delivered to Seller no later than 90 days following the Closing Date. (2) In the event that an election is made under Section 338(h)(10) of the Code and any similar state law provision with respect to the sale of the Stock to Buyer hereunder, Buyer shall pay to such Seller, as an addition to the purchase price, such amount, which after deduction for all federal income and state income or franchise taxes thereon (i.e., the payment required hereunder is grossed up for Taxes) equals the excess of (A) the federal and state income taxes payable by such Seller (and its Affiliates) with respect to the sale of the Stock hereunder (other than on this payment) over (B) the federal and state income taxes that would have been payable by such Seller (and its Affiliates) with respect to the sale of the Stock hereunder if an election under Section 338(h)(10) and any similar state law provision had not been made; The amount payable pursuant to the preceding sentence shall be calculated (i) on the basis of the highest marginal rates applicable to the type of income and the company (or companies) with respect to which the calculation is being made, and (ii) without taking into account any losses, credits, or other tax attributes attributable to or available to any Member of Seller's US consolidated group other than Mindscape and its US Subsidiaries, whether from the sale of Stock hereunder, or otherwise. (3) No later than March 15 1999, Sellers shall prepare and submit to Buyer a calculation of the amount or amounts payable by Buyer to Seller pursuant to Section 8.3(c)(2). In this regard, Sellers will provide Buyer and its designated representatives with such assistance and such documents reasonably requested by them that are relevant to their ability to confirm or determine the amount of any payment or payments to be made hereunder. In the event of a dispute between Buyer and Sellers as to the proper calculation of such payment or payments, the parties shall cooperate with each other to mutually resolve such dispute in a reasonable manner; PROVIDED, HOWEVER, that in the event the parties still disagree in good faith, after 45 days after the date Sellers have submitted such calculation, upon 10 days notice by Buyer or Sellers, the disputed matter shall be submitted to a mutually agreed upon nationally recognized accounting firm (that does not have a relationship with either party) for final determination. Buyer shall pay any amounts due under Section 8.3(c)(2) no later than five (5) business days after Buyer and Sellers have agreed upon the amount due or the amount due has been finally determined by arbitration. -36- 41 8.4 INDEMNIFICATION PROCEDURE. (a) NOTICE. Any party seeking indemnification with respect to any Loss (the "INDEMNIFIED PARTY") shall give prompt notice to the party required to provide indemnity hereunder (the "INDEMNIFYING PARTY"). (b) THIRD-PARTY CLAIMS If any claim, demand or liability is asserted by any third party against any Indemnified Party (a "THIRD-PARTY CLAIM"), the Indemnified Party shall (upon notice of said claim or demand) promptly notify the Indemnifying Party and the Indemnifying Party shall defend and/or settle any actions or proceedings brought against the Indemnified Party in respect of matters embraced by the indemnity with counsel reasonably satisfactory to the Indemnified Party. If the Indemnifying Party does not promptly defend or settle any such claims, the Indemnified Party shall have the right to control any defense or settlement, at the expense of the Indemnifying Party. No claim shall be settled or compromised without the prior written consent of each party to be affected by such settlement or compromise, with such consent not being unreasonably withheld. The Indemnified Party shall at all times also have the right to fully participate in the defense at its own expense. The parties shall cooperate in the defense of all third party claims which may give rise to Indemnifiable Claims hereunder. In Connection with the defense of any claim, each party shall make available to the party controlling such defense, any books, records or other documents within its control that are reasonably requested in the course of such defense. (c) CLAIMS BETWEEN THE PARTIES AND THEIR AFFILIATES. If the Indemnified Party has a claim against the Indemnifying Party that does not involve a Third-Party Claim (an "INTER-PARTY CLAIM"), the Indemnified Party will notify the Indemnifying Party with reasonable promptness of such claim, specifying the nature, estimated amount and the specific basis for such claim. The Indemnifying Party shall respond within 45 days of receipt of such notice of an Inter-Party Claim. If the Indemnifying Party fails to so respond the estimated amount of such claim specified by the Indemnified Party shall be conclusively deemed a liability of the Indemnifying Party. If the Indemnifying Party timely disputes such claim, the Indemnified and the Indemnifying Party shall negotiate in' good faith to resolve such dispute, and if not so resolved, either party may pursue whatever remedies it may have. (d) INSURANCE MATTERS. If any Loss is Covered by insurance, whether by the insurance policies disclosed on any Seller Disclosure Schedule or otherwise, Buyer shall use good faith efforts to exhaust claims against such policies. The provisions of this Article VIII are subject to the rights of any Indemnified Party's insurer which may be defending any such claim. (e) SUBROGATION. If the Indemnifying Party makes any payment hereunder of a Loss, the Indemnifying Party shall be subrogated, to the extent of -37- 42 such payment, to the rights of the Indemnified Party against any insurer or third party with respect to such Loss. (f) ADJUSTMENTS FOR INSURANCE PROCEEDS. Nothing in this Section 8.4 shall be deemed to obligate any person to maintain any insurance or to pursue any claim against any insurer or third party. 8.5 LIMITATION ON INDEMNITY. (a) Notwithstanding the foregoing, Sellers shall not be obligated to indemnify Buyer or its officers, directors, employees, agents or assigns pursuant to Section 8.1 unless and until the aggregate amount of the Indemnifiable Claims thereunder exceeds $1,000,000, it being understood that after such amount exceeds $1,000,000, the Sellers shall be liable only for all amounts in excess of $ 1,000,000 of Indemnifiable Claims (subject to the following sentence), it being further understood that to the extent Losses relate to or arise out of any single breach of a representation, warranty or Covenant, such Losses shall not result in an Indemnifiable Claim hereunder unless such Losses exceed $50,000. Further, the maximum amount for which Sellers shall be liable to Buyer or its officers, directors, employees, agents or assigns, excluding amounts relating to Section 2.2 (Stock), pursuant to this Article shall be $30,000,000. (b) Notwithstanding the foregoing, Buyer shall not be obligated to indemnify Sellers or their respective officers, directors, employees, agents or assigns pursuant to Sections 8.2 unless and until the aggregate amount of the Indemnifiable Claims thereunder exceeds $ 1,000,000, it being understood that after such amount exceeds $1,000,000, Buyer shall be liable only for all amounts in excess of $1,000,000 of Indemnifiable Claims (subject to the following sentence), it being further understood that to the extent Losses relate to or arise out of any single breach of a representation, warranty or covenant, such Losses shall not result in an Indemnifiable 'Claim hereunder unless such Losses exceed $50,000. Further, the maximum amount for which Buyer shall be liable to Sellers or their respective officers, directors, employees, agents or assigns, excluding amounts relating to Section 3.2 (Stock), pursuant to this Article shall be $10,100,000. 8.6 ABSOLUTE INDEMNITY. The indemnification provided in this Article VIII shall constitute the exclusive remedy of the parties hereto and their respective directors, officers, employees, Affiliates, agents and assigns from and against any and all Losses asserted against, resulting to, imposed upon or incurred or suffered by, any of them, directly or indirectly, as a result of, or based upon or arising from the breach of any representation or warranty or the nonfulfillment of any agreement or covenant in or -38- 43 pursuant to this Agreement or any other agreement, document, or instrument required hereunder, except in the case of fraud. 8.7 SURVIVAL. The representations and warranties contained in or made pursuant to this Agreement shall survive the Closing and expire on the one year anniversary of the Closing, except that (i) the representations and warranties contained in Sections 2.1 (Subsidiaries; Organization and Related Matters), 2.2. (Stock), 2.4. (Tax and Other Returns and Reports), 2.11 (Authorization; No Conflicts; Approvals), 2.16 (Employee Benefits), 2.21 (No Brokers or Finders), 3.2 (Organization and Related Matters), 3.4 (Stock), 3.8 (Tax and Other Returns or Reports), 3.11 (Authorization; No Conflicts; Approvals) and 3.17 (No Brokers or Finders) shall survive the Closing and shall continue until the expiration of the applicable statute of limitations as the same may be extended, (ii) the agreements made in Article V and this Article VIII snail t)e continuing, and (iii) if a claim or notice is given under this Article VIII with respect to any representation or warranty prior to the applicable expiration date, such representation or warranty shall continue indefinitely until such claim is finally resolved or the statute of limitations with respect to such claim has expired. ARTICLE IX GENERAL 9.1 AMENDMENTS; WAIVERS. This Agreement and any schedule or exhibit attached hereto may be amended only by agreement in writing of all parties. No waiver of any provision nor consent to any exception to the terms of this Agreement or any agreement contemplated hereby shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided. 9.2 SCHEDULES; EXHIBITS; INTEGRATION. Each schedule and exhibit delivered pursuant to the terms of this Agreement shall be in writing and shall constitute a part of this Agreement, although schedules need not be attached to each copy of this Agreement. This Agreement, together with such schedules and exhibits, constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection therewith, including, but not limited to, the information contained in the Descriptive Memorandum provided to Buyer by Sellers' agent and the confidentiality agreement executed by Buyer in connection with receiving said Descriptive Memorandum. -39- 44 9.3 REASONABLE BEST EFFORTS; FURTHER ASSURANCES. (a) STANDARD. Each party will use its reasonable best efforts to cause all conditions to its obligations hereunder to be timely satisfied and to perform and fulfill all obligations on its part to be performed and fulfilled under this Agreement, to the end that the transactions contemplated by this Agreement shall be effected substantially 'in accordance with its terms as soon as reasonably practicable. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement the transactions contemplated hereby or to evidence such events or matters. (b) CERTAIN FILINGS. Each of Sellers and Buyer shall prepare and file any filings (including but not limited to all filings related to the Hart-Scott-Rodino Act, which shall be made is provided in Section 4.3) required to be filed by them for consummation of the transactions contemplated by this Agreement.. Sellers and Buyer shall cooperate with each other and provide to each other all information necessary in order to prepare the filings. The information provided by Sellers and Buyer for use in the filings shall at all times prior to the Closing Date be true and correct in all material respects and shall not omit to state any material fact required to be stated therein or necessary in order to make such information not false or misleading. Each such filing shall, when filed, comply in all material respects with applicable Law. (c) MINUTES BOOKS, ETC. Sellers will use reasonable efforts, both before and after the Closing, to locate and/or generate such corporate records (i.e., minute books, articles, bylaws, and analogous foreign documents) as Buyer may reasonably request. (d) MINDSCAPE, NZ STOCK. Sellers will use their best efforts to cause to be transferred to Buyer or its designee, to the extent legally permissible, the 1 % ownership of Ray Mortimer in Mindscape, International (NZ) Ltd. (e) LIMITATION. As used in this Agreement, the term "reasonable best efforts" shall not mean efforts which require the performing party to do any act that is unreasonable under the circumstances, to make any capital contribution or to expend any funds other than reasonable out-of-pocket expenses incurred in satisfying its obligations hereunder, including but not limited to the fees, expenses and disbursements of its accountants, actuaries, counsel and other professionals. 9.4 GOVERNING LAW. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of California applicable to -40- 45 contracts made and performed in such State and without regard to conflicts of law doctrines except to the extent that certain matters are preempted by federal law or are governed by the law of the jurisdiction of organization of the respective parties. 9.5 NO ASSIGNMENT. Neither this Agreement nor any rights or obligations under it are assignable except that Buyer may assign its rights hereunder (including but not limited to its rights under Article VIII) to any wholly-owned subsidiary of Buyer or to any post-Closing purchaser of the Stock or of substantially all of the assets of the Companies; PROVIDED, HOWEVER, that Buyer shall remain liable to Sellers for the payment of the Purchase Price and all other obligations of Buyer hereunder notwithstanding a permitted assignment. 9.6 HEADINGS. The descriptive headings of the Articles, Sections and subSections of this Agreement are for convenience only and do not constitute a part of this Agreement. 9.7 COUNTERPARTS. This Agreement and any amendment hereto or any other agreement (or document) delivered pursuant hereto may be executed in one or more counterparts and by different parties in separate counterparts. All of such counterparts shall constitute one and the same agreement (or other document) and shall become effective (unless otherwise provided therein) when one or more counterparts have been signed by each party and delivered to the other party (including delivery by facsimile with assurances that the original signature will be subsequently delivered). 9.8 PUBLICITY AND REPORTS. Sellers and Buyer shall coordinate all publicity relating to the transactions contemplated by this Agreement and no party shall issue any press release, publicity statement or other public notice relating to this Agreement, or the transactions contemplated by this Agreement, without obtaining the prior consent of the other party except if such announcement is required by recognized stock exchange rules or to the extent that a particular action is required by applicable law. 9.9 PARTIES IN INTEREST. This Agreement shall be binding upon and inure to the benefit of each party, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. Nothing in this Agreement is intended to relieve or discharge the -41- 46 obligation of any third person to (or to confer any right of subrogation or action over against) any party to this Agreement. 9.10 NOTICES. Any notice or other communication hereunder must be given in writing and (a) delivered in person, (b) transmitted by telex, telefax or telecommunications mechanism provided that any notice so given is also mailed as provided in clause (c) or (c) mailed by certified or registered mail, postage prepaid, receipt requested as follows: IF TO BUYER, ADDRESSED TO: The Learning Company One Athenaeum Street Cambridge, Massachusetts 02142 Attention: General Counsel WITH A COPY TO: Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 Attention: Mark G. Borden, Esq. IF TO ANY SELLER OR TO ALL SELLERS, ADDRESSED TO: Pearson Inc. 30 Rockefeller Plaza, 50th Floor New York, New York 10112 Fax: 212-641-2500 Attention: Chief Financial Officer WITH A COPY TO: O'Melveny & Myers LLP 1999 Avenue of the Stars, Suite 700 Los Angeles, California 90067 Fax: 310-246-6779 Attention: Robert D. Haymer, Esq. or to such other address or to such other person as either party shall have last designated by such notice to the other party. Each such notice or other communication shall be effective (i) if given by telecommunication, when transmitted -42- 47 to the applicable number so specified in (or pursuant to) this Section 9.10 and an appropriate answerback is received, (ii) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when actually delivered at such address. 9.11 EXPENSES AND ATTORNEYS FEES. Sellers and Buyer shall each pay their own expenses incident to the negotiation, preparation and performance of this Agreement and the transactions contemplated hereby, including but not limited to the fees, expenses and disbursements of their respective investment bankers, accountants and counsel. Expenses of the Companies and Company Subsidiaries relating to negotiation and closing of this transaction shall be paid by the Sellers, except as provided in the Registration Rights Agreement. Each party shall bear their own costs for the filing fee and other costs imposed on such party as a result of its Hart-Scott-Rodino filing and any other required anti-trust related filings. In the event of any Action for the breach of this Agreement or misrepresentation by any party, the prevailing party shall be entitled to reasonable attorney's fees, costs and expenses incurred in such Action. 9.12 SPECIFIC PERFORMANCE. Sellers and Buyer each acknowledge that, in view of the uniqueness of the Business and the transactions contemplated by this Agreement, each party would not have an adequate remedy at law for money damages in the event that this Agreement has not been performed in accordance with its terms, and therefore agrees that the other party shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which it may be entitled, at law or in equity. 9.13 DAMAGES. Notwithstanding anything to the contrary elsewhere in this Agreement, no party shall, in any event, be liable to any other party for any consequential damages, including, but not limited to, loss of revenue or income, cost of capital, or loss of business reputation or opportunity, relating to the breach or alleged breach of this Agreement. Each party agrees that it will not seek punitive damages as to any matter under, relating to, or arising out of this Agreement. 9.14 REPRESENTATION BY COUNSEL; INTERPRETATION. The Companies, Buyer and Sellers acknowledge that they have been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of law, including but not -43- 48 limited to Section 1654 of the California Civil Code, or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the patty that drafted it, has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of Buyer, Sellers and the Companies. ARTICLE X DEFINITIONS 10.1 DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article X have the meanings assigned to them in this Article X and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned under US generally accepted accounting principles, (c) all references in this Agreement to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of the body of this Agreement, (d) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, and (e) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. As used in this Agreement and the Exhibits and Schedules delivered pursuant to this Agreement, the following definitions shall apply: "ACCOUNTANT" has the meaning given to such term in Section 1.5. "ACTION" means any action, complaint, petition, investigation, suit or other proceeding, whether civil or criminal, in law or in equity, or before ANY arbitrator or Governmental Entity. "AFFILIATE" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person. -44- 49 "AGREEMENT" means this Agreement by and among Buyer, on the one hand, and Sellers, on the other hand, as amended or supplemented. together with all Exhibits and Schedules attached or incorporated by reference. "APPROVAL" means any approval, authorization, consent, qualification or registration, or any waiver of any of the foregoing, required to be obtained from, or any notice, statement or other communication required to be filed with or delivered to, any Governmental Entity or any other Person. "ASSOCIATE" of a Person means (i) a corporation or organization (other than the Companies or a party to this Agreement) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar capacity; and (iii) any relative or spouse of such person or any relative of such spouse who has the same home as such person or who is a director or officer of any of the Companies or any of the Affiliates. "BALANCE SHEET" has the meaning set forth in Section 2.3. "BALANCE SHEET DATE" MEANS the date of the Balance Sheet. "BUSINESS" means the business of the Companies and the Company Subsidiaries, taken as a whole. "BUYER" has the meaning set forth in the Recitals. "BUYER SUBSIDIARIES" has the meaning set forth in Section 3.2. "BUYER MATERIAL ADVERSE EFFECT" means any change in or effect on the business of Buyer and the Buyer Subsidiaries or any part thereof that would be materially adverse to the results of operations or financial condition of Buyer and the Buyer Subsidiaries taken as a whole, provided that none of the following shall constitute a Buyer Material Adverse Effect: (i) occurrences due to a disruption of Buyer or the Buyer Subsidiaries' businesses as a result of the announcement of the execution of this Agreement, (ii) general economic conditions or (iii) any changes generally affecting the industries in which Buyer and the Buyer Subsidiaries operate, including changes due to seasonality. -45- 50 "CASH" has the meaning set forth in Section 1.2. "CLOSING" means the consummation of the purchase and sale of the Stock under this Agreement. "CLOSING DATE" means the date of the Closing. "CLOSING WORKING CAPITAL STATEMENT" is the statement to be prepared according to Section 1.5, as described in Schedule 1.5. "CODE" means the Internal Revenue Code of 1986, as amended, or as hereafter amended. "COMMISSION" has the meaning set forth in Section 3.1. "COMMON STOCK" means the common stock of Buyer, .01 par value-per share. "COMPANIES" means Mindscape, Inc., a Delaware corporation ("Mindscape"), Mindscape International Ltd., a United Kingdom corporation and Mindscape France SARL, a French corporation and "COMPANY" shall mean each of the aforementioned Companies. "COMPANY SUBSIDIARIES" has the meaning set forth in Section 2.1. For the purpose of this Agreement, neither Headland Media, which will be spun out from the Companies prior to the Closing Date, nor any of its Subsidiaries, will be considered a Company Subsidiary. "CONTRACT" means any agreement, arrangement, bond, commitment, franchise, indemnity, indenture, instrument, lease, license or understanding, whether or not in writing. "DISCLOSURE SCHEDULE" means the Disclosure Schedule dated the date of this Agreement and delivered by Sellers to Buyer (the "Seller Disclosure Schedule"), or Buyer to Sellers (the "Buyer Disclosure Schedule"), as the case may be. The Sections of the respective Disclosure Schedules shall be numbered to correspond to the applicable Section of this Agreement and, together with all matters under such heading, shall be deemed to qualify only that section; PROVIDED, HOWEVER, that any information set forth in any Section of the respective Disclosure Schedules shall be deemed to be set forth in every other Section OF such Disclosure Schedule to the extent the applicability of such information to such other Sections OF the Disclosure Schedule is apparent from the entry in the Disclosure Schedule. "ENCUMBRANCE" means any claim, charge, easement, encumbrance, lease, covenant, security interest, lien, option, pledge, rights of others, or restriction -46- 51 (whether on voting, sale, transfer, disposition or otherwise), whether imposed by agreement, understanding, law, equity or otherwise, except for any restrictions on transfer generally arising under any applicable federal or state securities law. "EQUITY SECURITIES" means any capital stock or other equity interest or any securities convertible into or exchangeable for capital stock or any other rights, warrants or options to acquire any of the foregoing securities. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the related regulations and published interpretations. "EXCHANGE ACT" has the meaning set forth in Section 3.1. "FINANCIAL STATEMENTS" has the meaning given to such term in Section 2.3. "GOVERNMENTAL ENTITY" means any government or any agency, district, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, State or local, domestic or foreign. "HART-SCOTT-RODINO ACT" means the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the related regulations and published "HAZARDOUS SUBSTANCE" means (but shall not be limited to) substances that are defined or listed in, or otherwise classified pursuant to, any applicable Laws as "hazardous substances," "hazardous materials," "hazardous wastes" or "toxic substances," or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitibility, corrosivity, reactivity, radioactivity, carcinogenicity, reproductive toxicity or "EP toxicity," and petroleum and drilling fluids, produced waters and other wastes associated with the exploration, development, or production of crude oil, natural gas or geothermal energy. "INDEMNIFIABLE CLAIM" means any Loss for or against which any party is entitled to indemnification under this Agreement. "INDEMNIFIED PARTY" has the meaning given to such term in Section 8.4. "INDEMNIFYING PARTY" has the meaning given to such term in Section 8.4. "INTANGIBLE PROPERTY" means any trade secret, secret process or other confidential information or know-how and any and all Marks. "INTELLECTUAL PROPERTY RIGHTS" has the meaning set forth in Section 2.9. -47- 52 "INTER-PARTY CLAIM" has the meaning given to such term in Section 8.4. "IRS" means the internal Revenue Service or any successor entity. "KNOWLEDGE" with respect to Sellers means the knowledge of David Veit, John Moore, Cynthia Hudson, James Prather, Gordon Landies, Ian Rose and Chuck Kregal and with respect to Buyer means the knowledge of the present CEO, President and CFO of Buyer. "LAW" means any constitutional provision, statute or other law, rule, regulation, or interpretation of any Governmental Entity and any Order. "LOSS" means any action, cost, damage, disbursement, expense, liability, loss, deficiency, diminution in value, obligation, penalty or settlement OF any kind or nature, including but not limited to, interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses incurred in the investigation, collection, prosecution and defense of claims and amounts paid in settlement, that MAY be imposed on or otherwise incurred or suffered by the specified person. "MARK" means any brand name, copyright, patent, service mark, trademark, trade name, and all registrations or application for registration of any of the foregoing. "MATERIAL ADVERSE EFFECT" means any change in or effect on the Business or any part thereof that would be materially adverse to the results of operations or financial condition of the Companies and the Company Subsidiaries taken as a whole, provided that none of the following shall constitute a Material Adverse Effect: (i) occurrences due to a disruption of the Companies' or the Company Subsidiaries' businesses as a result of the announcement of the execution of this Agreement, (ii) general economic conditions or (iii) any changes generally affecting the industries in which the Companies and the Company Subsidiaries operate, including changes due to seasonality. "MATERIAL CONTRACT" has the meaning given to such term in Section 2.5. "ORDER" means any decree, injunction, judgment, order, ruling, assessment or writ. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. -48- 53 "PERMIT" means any license, permit, franchise, certificate of authority, or order, or any waiver of the foregoing, required to be issued by any Governmental Entity. "PERMITTED ENCUMBRANCES" means (a) statutory Encumbrances not yet delinquent; (b) Encumbrances, with respect to the properties or assets of a Person and its Subsidiaries taken as a whole, that do not individually or in the aggregate, materially impair or materially interfere with the present use of the properties or assets or otherwise materially impair present business operations at such properties; (c) Encumbrances for Taxes not yet delinquent or the validity of which are being contested in good faith by appropriate actions and (d) Encumbrances reflected on the financial statements or on the Disclosure Schedule of such Person. "PERSON" means an association, a corporation, an individual, a partnership, a trust or any other entity or organization, including a Governmental Entity. "POST-CLOSING STRADDLE PERIOD" means the portion of any Straddle Period that begins on the day after the Closing Date. "PRE-CLOSING PERIOD" means any Taxable Period, or portion thereof, that ends on or before the Closing Date, including any pre-Closing Straddle Period. "PRE-CLOSING STRADDLE PERIOD" means the portion of any Straddle Period that ends on the Closing Date. "PURCHASE PRICE" has the meaning set forth in Section 1.2. "REGISTRATION RIGHTS AGREEMENT" means the agreement referenced in Section 6.3(a). "SEC REPORTS" has the meaning set forth in Section 3.1. "SECURITIES ACT" has the meaning set forth in Section 3.1. "SELLER" has the meaning set forth in the Recitals. "SELLERS" has the meaning set forth in the Recitals. "SHARES" has the meaning set forth in Section 1.2. "STOCK" means all of the outstanding capital stock of the Companies. "STRADDLE PERIOD" means any Taxable Period that begins before the Closing Date and ends after the Closing Date. -49- 54 "SUBSIDIARY" means any Person in which any Company has a direct or indirect equity or ownership interest in excess of 25 %. "SUCCESSOR PLAN" has the meaning given to such term in Section 5.3. "SUCCESSOR TRUST" has the meaning given to such term in Section 5.3. "TAXABLE PERIOD" means any taxable year or any other period that is treated as a taxable year with respect to which any Tax may be imposed under any applicable statute, rule or regulation. "TAX" means any foreign, federal, state, county or local income, sales, use, excise, franchise, ad valorem, real and personal property, transfer, gross receipt, stamp, premium, profits, customs, duties, windfall profits, capital stock, production, business and occupation, disability, employment, payroll, severance or withholding taxes, fees, assessments or charges of any kind whatever imposed by any Governmental Entity, any interest and penalties (civil or criminal), additions to tax, payments in lieu of taxes or additional amounts related thereto or to the nonpayment thereof, and any loss in connection with the determination, settlement or litigation of any Tax liability. "TAX RETURN" means a declaration, statement, report, return or other document or information required to be filed or supplied with respect to Taxes including, where permitted or required, combined or consolidated returns for any group of entities that includes any Company or any Company Subsidiary. "THIRD-PARTY CLAIM" has the meaning given to such term in Section 8.4. "UK" means the United Kingdom. "UK EMPLOYEES" means those individuals employed by Mindscape International Limited or its Subsidiaries formed under the UK Laws at the Closing Date. "US" means the United States of America. "US EMPLOYEES" means those individuals employed by Mindscape, Inc. or its United States Subsidiaries at the Closing Date. "WORKING CAPITAL" means the "working capital" of Sellers, as calculated pursuant to Schedule 1.5. [Remainder of page intentionally left blank] -50- 55 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officers as of the day and year first above written. BUYER THE LEARNING COMPANY, INC. By: /s/ R. Scott Murray --------------------------------------- Name: Scott Murray ------------------------------------- Title: Executive Vice President and Chief Financial Officer ------------------------------------- SELLERS MINDSCAPE HOLDING COMPANY By: /s/ John Davis --------------------------------------- Name: John Davis ------------------------------------- Title: ------------------------------------- PEARSON OVERSEAS HOLDINGS LTD. By: /s/ John Davis --------------------------------------- Name: John Davis ------------------------------------- Title: ------------------------------------- PEARSON NETHERLANDS, BV By: /s/ John Davis --------------------------------------- Name: John Davis ------------------------------------- Title: ------------------------------------- S-1 56 March 26, 1998 The Learning Company, Inc. One Athenaeum Street Cambridge, MA 02142 Re: Stock Purchase Agreement dated as of March 5, 1998 by and between The Learning Company, Inc., Mindscape Holding Company, Pearson Overseas Holdings, Ltd. and Pearson Netherlands, BV (the "Purchase Agreement") ------------------------------------------------------ Gentlemen: This letter should confirm that The Learning Company, Inc. ("TLC") and the undersigned have agreed as follows: 1. Section 1.2(a) of the Purchase Agreement is hereby amended to read in its entirety as follows: "Subject to the terms and conditions of this Agreement, Buyer agrees to acquire the Stock from Sellers and to (i) pay (x) $120,000,000 in cash plus (y) an amount equal to all bank cash balances held by any Company or Company Subsidiary as of the Closing, in cash (collectively, the "Cash") and (ii) issue to Sellers a number of shares of Common Stock ("Shares") equal to the quotient obtained by dividing (i) $30,000,000 by (ii) the average closing price of the Common Stock on the New York Stock Exchange during the five trading days ended two days prior to the Closing." 2. Section 1.2 of the Purchase Agreement is hereby amended by changing "$52,500,000" to "$30,000,000" in all places. 3. The phrase "an underwritten sale of Shares" in the third sentence of Section 1.2(b) of the Purchase Agreement is hereby amended to read "a sale of Shares". 4. The following paragraph is added at the end of Section 2(a) of the Registration Rights Agreement appended as Exhibit A to the Purchase Agreement: "Notwithstanding the foregoing provisions, the Shares covered by the Registration Statement may be sold by the Holder pursuant to one or more block trades effected through a broker-dealer selected by the Company and approved by the Holder (which approval shall not be unreasonably withheld), provided no such block trade shall 57 be made on terms that are not approved by the Company and provided further that the Holder shall not be required to seek any such block trades." Sincerely, MINDSCAPE HOLDING COMPANY By: /s/ David Veit ------------------------------------ PEARSON OVERSEAS HOLDINGS, LTD. By:/s/ David Veit ------------------------------------ PEARSON NETHERLANDS, BV By:/s/ David Veit ------------------------------------ Accepted: THE LEARNING COMPANY, INC. By: /s/ R. Scott Murray ------------------------------- EX-10.1 3 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10.1 REGISTRATION RIGHTS AGREEMENT Dated as of March 27, 1998 by and among The Learning Company, Inc. and Mindscape Holding Company 2 This Registration Rights Agreement (this "Agreement") is made and entered into as of March 27, 1998 by and among The Learning Company, Inc., a Delaware corporation (the "Company"), and Mindscape Holding Company (the "Holder"). This Agreement is made pursuant to the Stock Purchase Agreement, dated March 27, 1998 (the "Purchase Agreement"), by and among the Company and the Holder. The parties hereby agree as follows: 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: Act: The Securities Act of 1933, as amended. Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York, New York or Boston, Massachusetts are authorized or obligated by law or executive order to close. Common Stock: Common Stock, $.01 par value per share, of the Company. Commission: The Securities and Exchange Commission. Exchange Act: The Securities Exchange Act of 1934, as amended. Person: Any individual or entity. Questionnaire: Means a Selling Securityholder Questionnaire, in the form attached, containing the information specified in Item 507 or 508 of Regulation S-K, as applicable, of the Act and such other information with respect to a Holder and the intended distribution of the Shares as may be required in connection with the Registration Statement. Prospectus: The prospectus included in the Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, all material incorporated by reference 3 into such Prospectus and any information previously omitted in reliance upon Rule 430A of the Act. Special Counsel: Special counsel to the Holder. Shares: The shares of Common Stock issued to the Holder pursuant to the Purchase Agreement. 2. REGISTRATION (a) REGISTRATION. No later than 30 days after the date hereof, the Company shall file with the Commission a registration statement on Form S-3 (the "Registration Statement") covering the resale of the Shares, and shall use its reasonable best efforts to cause such Registration Statement to become effective as soon as possible thereafter. Any sale of Shares pursuant to the Registration Statement shall be made only pursuant to an underwritten offering (an "Underwritten Offering"), and, if necessary, the Company shall file such amendments to the Registration Statement, and such supplements to the Prospectus, as may be necessary to reflect the terms of the Underwritten Offering. The Company may elect to include shares of Common Stock for its own account in the Underwritten Offering, PROVIDED, that if the managing underwriter determines that the number of shares to be included therein should be limited, the shares to be offered for the account of the Company shall be excluded before any Shares are excluded. The Company shall have the right to select the managing underwriter(s) for the Underwritten Offering, subject to the approval of the Holder, which approval will not be unreasonably withheld. The Company shall use its reasonable best efforts to keep the Registration Statement continuously effective, supplemented and amended as required by and subject to the provisions of Section 3 hereof to the extent necessary to ensure that it is available for sales of Shares by the Holder, and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of one year following the date on which such Registration Statement first became effective under the Act, or such shorter period as will terminate when all Shares covered by such Registration Statement have been sold pursuant thereto. Notwithstanding the foregoing provisions, the Shares covered by the Registration Statement may be sold by the Holder pursuant to one or more block trades effected through a broker-dealer selected by the Company and approved by the Holder (which approval shall not be unreasonably withheld), provided no such block trade shall be made on terms that are not approved by the Company and provided further that the Holder shall not be required to seek any such block trades. -2- 4 (b) PROVISION BY THE HOLDER OF CERTAIN INFORMATION IN CONNECTION WITH THE REGISTRATION STATEMENT. The Holder may not include any of its Shares in the Registration Statement pursuant to this Agreement unless and until the Holder furnishes to the Company a Questionnaire within 25 days after the Closing. The Holder agrees to furnish in a reasonable period of time such additional information as may be reasonably requested in writing by the Company in connection with the Registration Statement. 3. REGISTRATION PROCEDURES In connection with the Registration Statement and Underwritten Offering, the Company shall: (i) upon the occurrence of any event that would cause the Registration Statement or any Prospectus contained therein (A) to contain a material misstatement or omission or (B) not to be effective and usable for resale of Shares during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement curing such defect, and, if Commission review is required, use its reasonable best efforts to cause such amendment to be declared effective as soon as practicable; (ii) advise the Holder or its Special Counsel and underwriters promptly and, if requested by such Persons, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement relating to the Holder or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements relating to the Holder to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading; or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (iii) if at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the -3- 5 qualification or exemption from qualification of the Shares under state securities or Blue Sky laws, the Company shall use its reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) make available at reasonable times for inspection by a representative of the Holder, and any attorney or accountant retained by the Holder, or underwriters, all relevant financial and other records and pertinent corporate documents of the Company and cause the Company's officers, directors and employees to supply all information reasonably requested by any the Holder, underwriters, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness, in each case as is customary for similar due diligence investigations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holder, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; and provided further that the foregoing inspection and information gathering shall, to the greatest extent possible, be coordinated on behalf of the Holder by one Special Counsel designated by and on behalf of the Holder; (v) if requested by the Holder, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as the Holder, may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Shares; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment, provided that the Company shall not be required to take any actions under this clause that are not, in the opinion of its counsel, in compliance with applicable law; (vi) furnish to the Holder, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, and upon reasonable request of such selling Holder or underwriter, all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (vii) deliver to the Holder, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company hereby consents to the use (in accordance with law) of the Prospectus and any amendment -4- 6 or supplement thereto by the Holder in connection with the offering and the sale of the Shares covered by the Prospectus or any amendment or supplement thereto; (viii) enter into such agreements (including underwriting agreements) and make such representations and warranties and take all such other actions in connection therewith, in each case as is customary in underwritten public offerings, in order to expedite or facilitate the disposition of the Shares pursuant to the Underwritten Offering contemplated by this Agreement; (ix) cooperate with the Holder, underwriters and their respective counsel in connection with the registration and qualification of the Shares under the securities or Blue Sky laws of such jurisdictions as such Persons may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Shares covered by the Registration Statement; provided, however, that the Company shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation in any jurisdiction where it is not now so subject; (x) list all Shares covered by such Registration Statement on any securities exchange on which the Common Stock is then listed; (xi) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to the Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); and (xii) take all such action as may reasonably be necessary to effect the sale of the Shares pursuant to the Underwritten Offering. 4. REGISTRATION EXPENSES All expenses incident to the Company's performance of or compliance with this Agreement will be borne by the Company, regardless of whether the Registration Statement required by this Agreement becomes effective, including without limitation: (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the Common Stock and printing of Prospectuses); (iv) all fees and disbursements of counsel for the Company and a single counsel for the Holder; (v) all application and filing fees in connection with listing the Common Stock on a national securities exchange pursuant to the -5- 7 requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance); PROVIDED, that the Holder shall be responsible for underwriting discounts and commissions in connection with the sale of the Shares (subject to the "gross-up" provisions of Section 1.2 of the Purchase Agreement). 5. INDEMNIFICATION (a) The Company agrees to indemnify and hold harmless the Holder, its directors, its officers and each Person, if any, who controls the Holder (within the meaning of Section 15 of the Act and Section 20 of the Exchange Act)(each such person being sometimes referred to herein as an "Indemnified Holder"), from and against any and all losses, claims, damages, liabilities, judgments, (including without limitation, any reasonable legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary Prospectus or Prospectus (or any amendment or supplement thereto) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holder furnished in writing to the Company by any of the Holder, provided, however, that the indemnification contained in this paragraph (a) with respect to the preliminary Prospectus shall not inure to the benefit of any Indemnified Holder (or to the benefit of any person controlling such Indemnified Holder) on account of any such loss, claim, damage, judgment, liability or expense arising from the sale of the Shares by such Indemnified Holder to any person if the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in the preliminary Prospectus was corrected in the Prospectus and, due to the wrongful actions or wrongful inaction of the Indemnified Holder, the Indemnified Holder did not send or give in a timely manner, a copy of the Prospectus to such person (as then amended or supplemented) if the Company has previously furnished sufficient copies thereof to the Indemnified Holder on a timely basis. (b) The Holder agrees, severally and not jointly, to indemnify and hold harmless the Company and its directors and officers, and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company, to the same extent as the foregoing indemnity from the Company to the Indemnified Holder, but only with reference to information relating to such Indemnified Holder furnished in writing to the Company by such Indemnified Holder expressly for use in the Registration Statement (or any amendment thereto) or -6- 8 Prospectus (or any supplement thereto). In no event shall any Indemnified Holder be liable or responsible for any amount in excess of the amount by which the total amount received by such Indemnified Holder with respect to its sale of Shares pursuant to the Registration Statement exceeds (i) the amount paid by such Indemnified Holder for such Shares and (ii) the amount of any damages that such Indemnified Holder has otherwise been required to pay to the Company pursuant to this Section 5(b) by reason of such untrue or alleged untrue statement or omission or alleged omission. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 5(a) or 5(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying person") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all reasonable fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 5(a) and 5(b), an Indemnified Holder shall not be required to assume the defense of such action pursuant to this Section 5(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Indemnified Holder). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Indemnified Holder, in the case of the parties indemnified pursuant to Section 5(a), and by the Company, in the case of parties indemnified pursuant to Section 5(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into -7- 9 more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the reasonable fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent that the indemnification provided for in this Section 5 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Holder, on the other hand, from their sale of Shares or (ii) if the allocation provided by clause 5(d)(i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 5(d)(i) above but also the relative fault of the Company on the one hand, and of the Indemnified Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnified Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or by the Indemnified Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and judgments referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 5(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and the Holder, agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation (even if the Holder was treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations -8- 10 referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any matter, including any action that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 5, no Holder or its related Indemnified Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by the Holder with respect to the sale of its Shares pursuant to the Registration Statement exceeds the sum of (A) the amount paid by the Holder for such Shares plus (B) the amount of any damages which the Holder has otherwise been required to pay to the Company pursuant to this Section 5 by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 6. MISCELLANEOUS (a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to the provisions hereof may not be given unless the Company has obtained the written consent of the Holder. (b) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to the Holder: Mindscape Holding Company c/o Pearson Inc. 30 Rockefeller Plaza 50th Floor New York, NY 10112 Attention: Chief Financial Officer Telecopier No: (212) 641-2500 With a copy to: O'Melveny & Myers LLP -9- 11 1999 Avenue of the Stars, Suite 700 Los Angeles, CA 90067 Telecopier No.: (310) 246-6779 Attention: Robert D. Haymer, Esq. (ii) if to the Company: The Learning Company, Inc. One Athenaeum Street Cambridge, MA 02142 Telecopier No.: (617) 494-5660 Attention: General Counsel With a copy to: Hale and Dorr LLP 60 State Street Boston, MA 02109 Telecopier No.: (617) 526-5000 Attention: Mark G. Borden, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. (c) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (d) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (e) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (f) SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. -10- 12 (g) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final expression of their agreement and intended (together with the Purchase Agreement) to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Shares. This Agreement (together with the Purchase Agreement) supersedes all prior agreements and understandings between the parties with respect to such subject matter. For the avoidance of doubt, the parties acknowledge that the payment obligations in the Purchase Agreement are to be read in conjunction with, and in no way limited by, this Agreement. -11- 13 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. THE LEARNING COMPANY, INC. By: /s/ R. Scott Murray -------------------------------------- Name: R. Scott Murray Title: Executive Vice President and Chief Financial Officer HOLDER: MINDSCAPE HOLDING COMPANY By: /s/ David Veit ------------------------------- Name: David Veit Title: President -12- EX-99.1 4 PRESS RELEASE DATED MARCH 6, 1998 1 Exhibit 99.1 ------------ For Immediate Release --------------------- THE LEARNING COMPANY, INC. AND PEARSON PLC REACH AGREEMENT ON MINDSCAPE, INC. March 6, 1998 CAMBRIDGE, Mass., THE LEARNING COMPANY, INC. (NYSE:TLC), announced today that it has entered into an agreement with certain affiliates of Pearson plc to acquire all of the stock of Mindscape, Inc., a leading publisher of education, productivity and entertainment software. Mindscape, Inc. is the publisher of many award winning titles such as Mavis Beacon Teaches Typing, The Complete National Geographic Collection, Print Master Platinum, Chessmaster 5500 and The Princeton Review: Inside the SAT & ACT and other home productivity, reference and educational titles. Mindscape had revenues of approximately $130 million in its most recent year ended December 31, 1997. The Learning Company has agreed to purchase Mindscape for a purchase price of $150 million, payable primarily in cash and the remainder through the issuance of shares of common stock. The closing of the transaction is subject to certain conditions, including expiration of applicable waiting periods under pre-merger notification regulations. Michael Perik, Chairman and Chief Executive Officer of The Learning Company, Inc., said, "We are very impressed with the achievements and the sales momentum that Mindscape has been able to achieve over the past twelve months. We believe the company has built one of the best portfolios of branded content available in the marketplace today. Mindscape's product strategy will complement that of The Learning Company and allow us to provide an even broader array of products to our customers. In addition, we expect that this acquisition will be accretive to fiscal 1998 earnings by at least $.05 per share for the Learning Company." Kevin O'Leary, President of The Learning Company said, "Mindscape brings several premium franchises into the Learning Company's portfolio of leading educational and reference brands. These include Mavis Beacon Teaches Typing, The Complete National Geographic Collection, Print Master Platinum, The Princeton Review: Inside the ACT & SAT and Chessmaster 5500. Print Master Platinum achieved leadership in its home graphics category in January 1998, according to PC Data. We expect to even further accelerate Print Master Platinum's momentum by expanding its distribution through our school and direct response channels. Furthermore, The Learning Company and Mindscape together are number-one in dollar market share in U.S. retail in the month of January 1998, according to PC Data." 2 Marjorie Scardino, Chief Executive Officer of Pearson plc said, "We are selling Mindscape because we believe it is always going to be worth more to a company such as The Learning Company than it would be to Pearson. It was important to us to find a new owner for the business who we believe values the talent, drive and commitment of the people at Mindscape and will build on what has been achieved over the past year." This release contains information forecasting the results of the company after the acquisition of Mindscape which are "forward-looking statements" under the federal securities laws. Actual results could differ materially from those forecasts and there can be no assurance that results will be achieved. Important factors that could cause actual results to differ materially from those present or estimated include: the company's ability to predict the revenues and profit it will generate from the sale of Mindscape's product line; the effects of general economic conditions; and the ability to achieve economies of scale and revenue growth from the acquisition. For additional information contact: John Suske Investor Relations The Learning Company, Inc. (617) 494-5816 jsuske@learningco.com Evelyn Dubocq Public Relations The Learning Company, Inc. (510) 792-2101 corpcomm@learningco.com Susan Getgood Director of Corporate Communications The Learning Company, Inc. (617) 494-1200 sgetgood@learningco.com EX-99.2 5 PRESS RELEASE DATED MARCH 27, 1998 1 Exhibit 99.2 ------------ For Immediate Release --------------------- THE LEARNING COMPANY, INC. COMPLETES ACQUISITION OF MINDSCAPE, INC. March 27, 1998 CAMBRIDGE, Mass., THE LEARNING COMPANY, INC. (NYSE:TLC), announced today that it has completed the previously-announced acquisition of Mindscape, Inc., a leading publisher of education, productivity and entertainment software, from certain affiliates of Pearson plc. The Learning Company purchased Mindscape for a purchase price of $150 million. Mindscape, Inc., based in Novato, Calif., is the publisher of many award winning productivity, reference and educational titles including Mavis Beacon Teaches Typing, The Complete National Geographic Collection, Print Master Platinum, Chessmaster 5500 and The Princeton Review: Inside the SAT & ACT. Mindscape had revenues of approximately $130 million in its most recent year ended December 31, 1997. The Learning Company, Inc. (NYSE:TLC) develops, publishes and markets a family of premium software brands that educate across every age, from young children to adults. The company's products are sold in more than 23,000 retail stores in North America and through multiple distribution channels including school sales, online, direct marketing and OEM. The company also develops, publishes and distributes products internationally through subsidiaries in France, Germany, the United Kingdom, Holland and Japan, and with distributors throughout Europe, Latin America and the Pacific Rim. The company's corporate headquarters are located at One Athenaeum Street, Cambridge, Mass. 02142; telephone (617) 494-1200; fax (617) 494-1219. The corporate Web site is located at www.learningco.com, and Customer Service can be reached at (617) 494-5700. NOTE: All trademarks and registered trademarks are properties of their respective holders. For additional information contact: John Suske Investor Relations The Learning Company, Inc. (617) 494-5816 jsuske@learningco.com R. Scott Murray Executive Vice President and Chief Financial Officer The Learning Company, Inc. (617) 494-5861 smurray@learningco.com Susan Getgood Director of Corporate Communications The Learning Company, Inc. (617) 494-1200 sgetgood@learningco.com EX-99.3 6 AUDITED FINANCIAL STATEMENTS 1 Exhibit 99.3 ------------ MINDSCAPE GROUP (Indirect wholly-owned subsidiaries of Pearson plc) Combined Financial Statements December 31, 1997 2 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) INDEX TO COMBINED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants.............................................2 Combined Balance Sheet........................................................3 Combined Statement of Operations..............................................4 Combined Statement of Shareholder's Equity....................................5 Combined Statement of Cash Flows..............................................6 Notes to Combined Financial Statements........................................7 3 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Mindscape Group In our opinion, the accompanying combined balance sheet and the related combined statements of operations, of shareholder's equity and of cash flows present fairly, in all material respects, the financial position of the Mindscape Group at December 31, 1997, and the results of their operations and their cash flows for the year, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the management of the Group companies; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP San Jose, California March 2, 1998 2 4 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) COMBINED BALANCE SHEET (amounts in thousands, except share and per share data)
DECEMBER 31, 1997 ------------ ASSETS Current assets: Cash and cash equivalents $ 3,331 Accounts receivable, net 33,071 Inventories 9,391 Royalty advances 5,851 Other current assets 1,030 --------- Total current assets 52,674 Property and equipment, net 3,479 Intangible assets, net 2,080 Other assets 1,538 --------- $ 59,771 ========= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable $ 11,848 Accrued royalties 6,734 Accrued expenses 15,512 Short-term borrowings - related party 300 --------- Total current liabilities 34,394 --------- Commitments and contingencies (Note 9) Shareholder's equity: Preferred Stock, $1.64 par value (aggregate liquidation amount $9,020), 5,500,000 shares authorized, issued and outstanding 9,020 Common Stock, various par values, 8,230,282 shares authorized, 8,229,282 shares issued and outstanding 13,646 Additional paid-in capital 573,092 Accumulated deficit (569,346) Cumulative translation adjustment (1,035) --------- Total shareholder's equity 25,377 --------- $ 59,771 =========
The accompanying notes are in integral part of these combined financial statements. 3 5 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) COMBINED STATEMENT OF OPERATIONS (amounts in thousands) YEAR ENDED DECEMBER 31, 1997 ------------ Net revenues $ 138,520 Cost of net revenues 54,515 --------- Gross margin 84,005 --------- Costs and expenses: Selling and marketing 43,771 Research and development 22,853 General and administrative 8,035 Amortization of intangible assets 3,727 Restructuring costs 11,898 --------- Total costs and expenses 90,284 --------- Loss from operations (6,279) Interest expense - related party (531) --------- Net loss $ (6,810) ========= The accompanying notes are in integral part of these combined financial statements. 4 6 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) COMBINED STATEMENT OF SHAREHOLDER'S EQUITY (amounts in thousands except share data)
PREFERRED STOCK COMMON STOCK ------------------ ------------------ ADDITIONAL CUMULATIVE TOTAL PAID-IN ACCUMULATED TRANSLATION SHAREHOLDER'S SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY --------- ------ --------- ------- ---------- ----------- ----------- ------------- Balance at December 31, 1996 - $ - 8,229,282 $13,646 $503,061 $(562,536) $ (13) $(45,842) Issuance of Preferred Stock to Shareholder 5,500,000 9,020 - - - - - 9,020 Capital contribution from Shareholder - - - - 70,031 - - 70,031 Currency translation adjustment - - - - - - (1,022) (1,022) Net loss - - - - - (6,810) - (6,810) --------- ------ --------- ------- -------- --------- ------- -------- Balance at December 31, 1997 5,500,000 $9,020 8,229,282 $13,646 $573,092 $(569,346) $(1,035) $ 25,377 --------- ------ --------- ------- -------- --------- ------- --------
The accompanying notes are in integral part of these combined financial statements. 5 7 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) COMBINED STATEMENT OF CASH FLOWS (amounts in thousands) YEAR ENDED DECEMBER 31, 1997 ------------ Cash flows from operating activities: Net loss $ (6,810) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 3,392 Provision for returns and price protection 29,300 Provision for doubtful accounts 1,315 Amortization of intangible assets 3,727 Provision for restructuring costs 6,697 Acquired in-process technology 975 Changes in assets and liabilities: Accounts receivable, net (40,408) Inventories (3,186) Royalty advances 354 Other current assets (261) Other assets (836) Accounts payable 1,977 Accrued royalties (2,616) Accrued expenses 3,068 -------- Net cash used in operating activities (3,312) -------- Cash flows from investing activities: Property and equipment purchases (1,705) Cash paid for acquired businesses (2,181) -------- Net cash used in investing activities (3,886) -------- Cash flows from financing activities: Short-term borrowings - related party 510 Repayment of short-term borrowings - related party (64) Issuance of Preferred Stock to Shareholder 9,020 Contribution from Shareholder 331 -------- Net cash provided by financing activities 9,797 -------- Effect of exchange rates on cash (560) -------- Net increase in cash and cash equivalents 2,039 Cash and cash equivalents at beginning of year 1,292 -------- Cash and cash equivalents at end of year $ 3,331 ======== Supplemental disclosure of cash flow information: Cash paid for interest - related party $ 1,631 ======== Supplemental disclosure of noncash financing activity: Conversion of short-term borrowing - related party to capital $ 69,700 ======== The accompanying notes are in integral part of these combined financial statements. 6 8 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) NOTE 1 - THE COMPANY: Mindscape Group (the "Group") develops, markets and distributes consumer software in the educational, home and entertainment markets. The Group sells its products in the retail channel through mass merchants, consumer electronic stores, price clubs, office supply stores, distributors, to original equipment manufacturers ("OEMs") and to end users through direct response methods. The Group's principal market is in the United States. The Group has international operations in the United Kingdom, Germany, France, Australia and Japan. NOTE 2 - BASIS OF PRESENTATION: The current Mindscape, Inc. entity was incorporated originally as the Software Toolworks ("Toolworks") in Delaware on February 2, 1988. Another entity, the original Mindscape Inc., was acquired by Toolworks in 1989 when it was merged with GD Acquisition, Inc., a wholly-owned subsidiary of Toolworks. In April 1994, the outstanding capital stock of Toolworks was acquired by Pearson, Inc., the wholly-owned United States subsidiary of Pearson plc for total consideration of $475,678. On October 24, 1994, the original Mindscape Inc. entity was merged with and into Toolworks, which simultaneously changed its name to Mindscape, Inc. The Toolworks acquisition by Pearson, Inc. was accounted for using the purchase method. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. A portion of the purchase price was allocated to acquired in-process technology, which represents the estimated fair value, using a risk-adjusted income approach, of specifically identified technologies which had not yet reached technological feasibility and had no alternative future use. Prior to 1997, Group management assessed the carrying value of goodwill for possible impairment based on a number of factors, including turnover of the acquired workforce and the undiscounted value of expected future operating cash flows in relation to the net carrying amount of goodwill. As a result of this assessment, Group management determined that the entire net carrying amount of goodwill associated with the Pearson, Inc. acquisition was impaired and charged the amount to operations. 7 9 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) The accompanying combined financial statements include the accounts of the following entities, which are under the common ownership of the ultimate parent, Pearson plc (collectively the Mindscape Group): MINDSCAPE, INC. ("MINDSCAPE US") - Mindscape US is headquartered in Novato, California and is responsible for worldwide product development, publishing, management and North American sales and marketing. MINDSCAPE INTERNATIONAL LIMITED ("MINDSCAPE UK") - Mindscape UK is headquartered in West Sussex, England and operates as the Group's primary European sales and marketing entity. MINDSCAPE INTERNATIONAL SOFTWAREVERTRIEB GMBH ("MINDSCAPE GERMANY") - Mindscape Germany is headquartered in Muelheim, Germany and operates as the Group's German sales and marketing entity. MINDSCAPE INTERNATIONAL PTY LIMITED ("MINDSCAPE AUSTRALIA") - Mindscape Australia is headquartered in Castle Hill, New South Wales, Australia and operates as the Group's primary Australian and Asia Pacific sales and marketing entity. MINDSCAPE INTERNATIONAL JAPAN, LNC. ("MINDSCAPE JAPAN") - Mindscape Japan is a dormant entity with insignificant activity. MINDSCAPE FRANCE SARL ("MINDSCAPE FRANCE") - Mindscape France is headquartered in Rennes, France and operates as the Group's primary French sales and marketing entity. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF COMBINATION The accompanying combined financial statements include the accounts of the Mindscape Group. All significant intercompany balances and transactions have been eliminated. 8 10 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Revenues are primarily derived from the sale of software products and from software licensing to OEMs. Revenues from the sale of software products are recognized upon shipment, provided that no significant obligations remain outstanding and collection of the related receivable is considered probable. Costs related to insignificant post-shipment technical support and other obligations are accrued when revenue is recognized for the sale of related products. Allowances for estimated returns and doubtful accounts are provided at the time of sale. The Group evaluates the adequacy of allowances for returns and doubtful accounts based upon its historical experience with customers and various distributions channels. The amounts provided for returns and allowances are estimates and are based upon information available at the reporting date. To the extent the future market, sell-through experience, channels of distribution and general economic conditions change, the provisions required for estimated returns and allowances may also change. Revenues from software licensing to OEMs are recognized on a sell-through basis upon cash receipt and completion of any significant obligations. CASH AND CASH EQUIVALENTS Cash and cash equivalents include short-term highly liquid investments with original maturities of three months or less when purchased. 9 11 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) INVENTORIES Inventories consist of raw materials for packaging and finished goods and are stated at the lower of cost, determined on a first-in, first-out basis, or market value. ROYALTY ADVANCES Royalty advances represent prepayments made to independent software developers under development agreements and are expensed at the contractual royalty rate as cost of sales based on actual net product sales. Management evaluates the future realization of royalty advances at each reporting period, and charges to research and development expense any amounts that are unlikely to be amortized at the contract royalty rate through product sales. During the year ended December 31, 1997, the Group recorded charges to restructuring costs of $6,312 for development efforts abandoned prior to achieving technological feasibility. PROPERTY AND EQUIPMENT Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of three years for all assets. INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of net assets acquired in acquisitions of various third party software companies. Management estimates that such goodwill is primarily associated with the acquired product, workforce and technological know how. As a result of the rapid technological changes occurring in the consumer software industry and the intense competition for qualified software professionals, recorded goodwill is amortized on a straight-line basis over the estimated periods of benefit, generally three years. In the event that facts and circumstances indicate that the carrying value of recorded goodwill may be impaired, the estimated future undiscounted cash flows associated with the goodwill are compared to the goodwill's carrying amount. If the carrying amount of the goodwill is greater than the undiscounted cash flows, then the cash flows are discounted and the carrying amount is written down to its 10 12 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) discounted cash flow value. During the year ended December 31, 1997, the Group's analysis did not identify any material goodwill impairment. Costs of in-process technology acquired prior to the achievement of technological feasibility, determined using the working model approach, are expensed in the period incurred. During the year ended December 31, 1997, the Group charged $975 to research and development expense associated with the acquisition of certain technology assets. INCOME TAXES Income taxes are accounted for on a separate return basis using an asset and liability approach which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Group's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. As discussed in Note 7, through December 31, 1997, the Group companies operated as reporting units of Pearson plc and were included in the consolidated tax returns of Pearson plc and its subsidiaries. Certain net operating losses generated by the Group have been utilized by Pearson plc or its subsidiaries. Accordingly, the consolidated income tax benefits realized by Pearson plc have been reflected as capital contributions in the accompanying combined financial statements. SOFTWARE DEVELOPMENT COSTS Financial accounting standards provide for the capitalization of certain software development costs after technological feasibility of the software is attained. The capitalized software costs are then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. No costs were capitalized during the year ended December 31, 1997, as the impact on the combined financial statements was not considered significant. 11 13 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) FOREIGN CURRENCY TRANSLATION The functional currency of the Group's foreign operations is the local currency of each respective Group company. Assets and liabilities of each foreign operation are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average exchange rates during the period. Cumulative translation adjustments are recorded in shareholder's equity. At December 31, 1997, the carrying amount of cash and cash equivalents was denominated entirely in foreign currencies. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with high credit quality financial institutions. The Group's revenues are derived from transactions with customers in the United States, United Kingdom, Germany, Australia and France. Concentrations of credit risk with respect to trade receivables are mitigated, to some extent, by the fact that the Group's customer base is highly diversified. At December 31, 1997, two customers each accounted for 10 percent of gross accounts receivable. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The adoption of both statements is required for fiscal years beginning after December 15, 1997. Under SFAS No. 130, companies are required to report in the financial statements, in addition to net income, comprehensive income including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. SFAS No. 131 requires that companies report separately, in the financial statements, certain financial and descriptive information about operating segments, if applicable. The Group does not expect the adoption of SFAS No. 130 or SFAS No. 131 to have a material impact on its combined financial statements. 12 14 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) In October 1997, the AICPA issued SoP 97-2, "Software Revenue Recognition," which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SoP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. Earlier application is encouraged as of the beginning of fiscal years or interim periods for which financial statements or information have not been issued. Retroactive application of the provisions of this SoP is prohibited. The Group has assessed the provisions of SoP 97-2 and does not expect that adoption will have a material impact on its combined financial statements. In March 1998, the AICPA issued SoP 98-1, "Software for Internal Use," which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SoP 98-1 applies to all nongovernmental entities and is effective for financial statements for fiscal years beginning after December 15, 1998. The Group does not expect the adoption of SoP 98-1 to have a material impact on its combined financial statements. NOTE 4 - TRANSACTIONS WITH RELATED PARTIES: SHORT-TERM BORROWINGS To maintain its cash flow requirements, the Group periodically enters into short-term borrowing arrangements with various wholly-owned Pearson plc subsidiaries. Amounts outstanding at December 31, 1997 totaled $300 with interest rates ranging from 4.0 to 6.5 percent. During 1997, $69,700 of short-term borrowings from a Pearson plc affiliate was converted to permanent capital. ALLOCATION OF CORPORATE OVERHEAD COSTS Pearson plc and its affiliates provide the Group with certain services, including insurance, legal, finance and other corporate functions. During 1997, the Group was not charged for these services as the aggregate amount was insignificant. The Group is periodically charged a pro rata share of expenses paid by Pearson plc on its behalf for such items as insurance premiums, audit fees and other administrative costs. The total costs allocated from Pearson plc in 1997 totaled $173. Management believes that 13 15 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) the methodologies used to allocate these charges are reasonable and included these charges in general and administrative expense. During 1997, Mindscape US charged Headland Digital Media ("Headland"), a wholly-owned subsidiary of Pearson plc, $1,096 for rent, utilities, depreciation, telephone and other costs in connection with the sharing of the Novato, California facility. In addition, Mindscape US provided Headland with certain general and administrative services in 1997, including accounting, human resources, legal, information systems and other services. The allocated costs for these services totaled $2,046 and are excluded from the accompanying combined financial statements. Management believes that the methodologies used to allocate these charges are reasonable. EMPLOYEE BENEFIT PLANS Pearson plc has a 401(k) plan covering substantially all of the Mindscape US employees. Mindscape US contributes 25 percent for every dollar contributed by Plan participants subject to certain limitations on individual contributions. Beginning in 1997, the amount Mindscape US contributes each year will increase from 25 percent to 50 percent for every dollar contributed if Mindscape US reaches certain specified corporate earnings targets and upon the discretion of Mindscape US management. Mindscape US's costs of the Plan was $372 in 1997. Pearson plc has a defined contribution plan covering substantially all Mindscape UK employees. Employees contribute either 2.5 percent or 5 percent of base salary and Pearson plc provides a 200 percent matching of the amounts contributed. There is no charge to Mindscape UK under this plan. Amounts contributed by Pearson plc were not significant during 1997. Mindscape UK has a defined contribution plan covering several employees not covered by the Pearson plc plan. Mindscape UK contributed 5 percent of base salary for all non-director employees and 10 percent of base salary for all directors. Mindscape UK's cost of this plan was $35 in 1997. Mindscape Australia has defined contribution plans covering all employees. Employer contributions are required at the statutory rate of 6 percent of base salary. Mindscape Australia's cost of the Plan was $13 in 1997. 14 16 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) NOTE 5 - RESTRUCTURING COSTS: During 1997, the Group recorded charges of $11,898, in connection with the termination of 57 research and development employees, the abandonment of certain development efforts and the partial closure of certain research and development operations. These costs included accruals for abandoned research and development projects, severance, office lease termination and other items. As of December 31, 1997, $3,899 of the charge has not yet been utilized and relates primarily to long-term real property lease commitments. NOTE 6 - BALANCE SHEET COMPONENTS: DECEMBER 31, 1997 ------------ ACCOUNTS RECEIVABLE, NET: Accounts receivable $ 60,878 Less: Allowance for returns and price protection (21,786) Less: Allowance for doubtful accounts (6,021) -------- $ 33,071 ======== INVENTORIES: Raw materials $ 3,437 Finished goods 5,954 -------- $ 9,391 ======== PROPERTY AND EQUIPMENT, NET: Machinery and equipment $ 15,054 Leasehold improvements 803 Furniture and fixtures 1,348 -------- 17,205 Less: Accumulated depreciation (13,726) -------- $ 3,479 ======== 15 17 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) INTANGIBLE ASSETS, NET: Goodwill $ 387,718 Less: Accumulated amortization (385,638) --------- $ 2,080 ========= ACCRUED EXPENSES: Compensation, benefits and other accruals $ 11,613 Restructuring costs 3,899 --------- $ 15,512 ========= NOTE 7 - INCOME TAXES: Through December 31, 1997, the Group companies operated as reporting units of Pearson plc and were included in the consolidated tax returns of Pearson plc and its subsidiaries. For purposes of preparing these combined financial statements in accordance with generally accepted accounting principles, the provisions for income taxes has been computed using the separate return method as if the Group represented separate taxable entities for all periods presented. Certain net operating losses generated by the Group have been utilized by Pearson plc and its subsidiaries. Accordingly, Pearson plc has allocated the income tax benefit received to the Group companies and has historically reflected these amounts as capital contributions. No provision for federal, foreign and state taxes has been recorded as the Group has incurred net operating losses through December 31, 1997. At December 31, 1997, the Group has federal and state net operating loss carryforwards of approximately $105,000 and $16,000, respectively, which will expire in varying amounts through 2012. Such carryforwards may be limited in certain circumstances including, but not limited to, cumulative stock ownership changes of more than 50 percent over a three-year period. Pretax loss was subject to tax in the following jurisdictions: 16 18 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) YEAR ENDED DECEMBER 31, 1997 ------------ United States $ 274 Foreign (7,084) ------- $(6,810) ======= Deferred tax assets may be recognized for temporary differences that will result in deductible amounts in future periods, net operating loss carryforwards and other future tax benefits. A valuation allowance is recognized if, on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. At December 31, 1997, the deferred tax asset valuation allowance is established at 100% of the deferred tax asset of the Group's U.S. entities, which has a history of operating losses. Included in other current assets are deferred tax assets and related valuation allowances as follows: YEAR ENDED DECEMBER 31, 1997 ------------ Net operating loss carryforwards $ 32,000 Allowance for doubtful accounts 1,000 Allowance for sales returns and price protection 5,500 Accruals 3,000 Other 500 -------- Gross deferred tax assets 42,000 Valuation allowance (42,000) -------- $ - ======== 17 19 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) NOTE 8 - SHAREHOLDER'S EQUITY: The holder of Preferred Stock is entitled to one vote per share on all matters to be voted upon by the shareholders and entitled to receive ratably dividends declared, if any, out of funds legally available. In the event of a liquidation, dissolution or winding up of the Group, the holder of Preferred Stock is entitled to receive $1.64 per share prior, and in preference, to the holders of Common Stock and is entitled to share ratably in any proceeds remaining after the Common Stockholder receives its amount paid in for such shares. The holder of Common Stock is entitled to one vote per share on all matters to be voted upon by the shareholders and entitled to receive ratably dividends declared, if any, out of funds legally available. In the event of a liquidation, dissolution or winding up of the Group, the holder of Common Stock is entitled to share ratably in all assets remaining after the payment of liabilities then outstanding and the distribution of amounts to the Preferred Stockholder. 18 20 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) SHARES SHARES ISSUED AND AUTHORIZED OUTSTANDING PAR VALUE AMOUNT ---------- ----------- --------- ------- Preferred Stock: Mindscape UK 5,500,000 5,500,000 $ 1.64 $ 9,020 --------- --------- ------- Common Stock: Mindscape US 2,000 1,000 $ 1.00 $ 1 Mindscape UK 8,208,282 8,208,282 $ 1.62 13,297 Mindscape France 20,000 20,000 $17.40 348 --------- --------- ------- 8,230,282 8,229,282 $13,646 ========= ========= ======= NOTE 9 - COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Group leases office space and equipment under noncancelable operating leases, which expire from January 1998 through September 2011. The accompanying combined financial statements reflect rent expense on a straight-line basis over the terms of the respective lease agreements. Total rent expense under noncancelable operating leases was $2,398 for the year ended December 31, 1997. Future minimum payments under noncancelable operating leases at December 31, 1997, are as follows: 19 21 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) YEAR ENDING DECEMBER 31, - ------------ 1998 $ 2,609 1999 2,042 2000 2,097 2001 2,109 2002 2,090 Thereafter 7,352 ======= $18,299 ------- ROYALTY COMMITMENTS The Group enters into noncancelable development and royalty agreements with various independent software developers. Commitments are tied to specific performance milestones and future minimum payments under noncancelable development and royalty agreements totaled $14,123 at December 31, 1997. LEGAL PROCEEDINGS Various claims arising in the ordinary course of business, seeking monetary damages and other relief, are pending. The amount of liability, if any, from such claims can not be determined with certainty; however, in the opinion of management, the ultimate liability for such claims will not have a material adverse effect on the Group's financial position, results of operations or cash flows. NOTE 10 - INDUSTRY SEGMENT AND FOREIGN OPERATIONS: The Group operates in one primary industry segment. Financial information by geographic area is as follows: 20 22 MINDSCAPE GROUP (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC) NOTES TO COMBINED FINANCIAL STATEMENTS (amounts in thousands, except share data) (CONTINUED) YEAR ENDED DECEMBER 31, 1997 ------------ Net revenues: United States $115,107 Europe 19,866 Other 3,547 -------- Combined net revenues $138,520 ======== Income (loss) from operations: United States $ (2,900) Europe (4,437) Other 1,058 -------- Combined loss from operations $ (6,279) ======== DECEMBER 31, 1997 ------------ Identifiable assets: United States $45,782 Europe 11,621 Other 2,368 ------- Combined identifiable assets $59,771 ======= Combined loss from operations excludes other income and expenses. Foreign operations generally operate as autonomous units and there are no general corporate allocations other than interest income and expense. 21 EX-99.4 7 PRO FORMA COMBINED FINANCIAL STATEMENTS 1 Exhibit 99.4 ------------ THE LEARNING COMPANY, INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 (IN THOUSANDS) (UNAUDITED)
The Learning Pro Forma Combined Company Mindscape Adjustments Pro Forma ------------ --------- ---------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 95,137 $ 3,331 $ - $ 98,468 Accounts receivable, net 99,677 33,071 - 132,748 Inventories 29,600 9,391 - 38,991 Other current assets 32,590 6,881 - 39,471 --------- ------- -------- -------- 257,004 52,674 - 309,678 Fixed assets and other, net 32,306 5,017 - 37,323 Goodwill and other intangible assets, net 127,481 2,080 140,000 (a) 269,561 --------- ------- -------- -------- $ 416,791 $59,771 $140,000 $616,562 ========= ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses $ 94,060 $34,094 $ - $128,154 Line of credit 35,150 300 - 35,450 Merger related accruals 12,533 - 2,000 (a) 14,533 Current portion of long-term obligations 10,717 - - 10,717 Purchase price payable 7,896 - 3,000 (a) $ 10,896 --------- ------- -------- -------- 160,356 34,394 5,000 199,750 LONG-TERM OBLIGATIONS: Long-term debt 294,356 - - 294,356 Accrued and deferred income taxes 59,746 - - 59,746 Other 6,119 - - 6,119 --------- ------- -------- -------- 360,221 - - 360,221 STOCKHOLDERS' EQUITY (DEFICIT): Stockholders' equity (deficit) (103,786) 25,377 135,000 (a) 56,591 --------- ------- -------- -------- $ 416,791 $59,771 $140,000 $616,562 ========= ======= ======== ========
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 2 THE LEARNING COMPANY, INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (In thousands, except share and per share amounts) (Unaudited)
The Learning Pro Forma Combined Company Mindscape Adjustments Pro Forma ------------ --------- ----------- ----------- REVENUES $ 392,438 $138,520 $ -- $ 530,958 COSTS AND EXPENSES: Costs of production 111,703 54,515 -- 166,218 Sales and marketing 86,621 43,771 -- 130,392 General and administrative 31,135 8,035 -- 39,170 Development and software costs 41,018 22,853 -- 63,871 Amortization, merger and other charges 515,016 15,625 14,000 (b) 544,641 ----------- -------- ---------- ----------- Total operating expenses 785,493 144,799 14,000 944,292 OPERATING LOSS (393,055) (6,279) (14,000) (413,334) ----------- -------- ---------- ----------- INTEREST INCOME (EXPENSE): Interest income 1,104 -- -- 1,104 Interest expense (22,482) (531) -- (23,013) ----------- -------- ---------- ----------- Total interest expense (21,378) (531) -- (21,909) LOSS BEFORE TAXES (414,433) (6,810) (14,000) (435,243) PROVISION FOR INCOME TAXES 61,234 -- -- 61,234 ----------- -------- ---------- ----------- NET LOSS $ (475,667) $ (6,810) $ (14,000) $ (496,477) ----------- -------- ---------- ----------- NET LOSS PER SHARE: Basic and Diluted $ (9.59) $ (8.45) WEIGHT AVERAGE NUMBER OF SHARES OUTSTANDING Basic and Diluted 49,613,000 9,117,600 (c) 58,730,600
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 3 THE LEARNING COMPANY, INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) A. PRO FORMA BASIS OF PRESENTATION AND ADJUSTMENTS On March 27, 1998, pursuant to a Stock Purchase Agreement, dated as of March 5, 1998 (the "Agreement"), by and between The Learning Company, Inc. ("TLC"), on the one hand, and Mindscape Holding Company, Pearson Overseas Holdings Ltd. and Pearson Netherlands, BV (collectively, the "Sellers"), on the other hand, TLC acquired from the Sellers all of the outstanding capital stock of Mindscape, Inc., Mindscape International Ltd. and Mindscape France SARL (collectively, "Mindscape"). The total estimated purchase price is approximately $155,000, and includes cash, other consideration consisting of common stock, and transaction related costs. The common stock and special warrants issued in connection with the acquisition represent, in the aggregate, approximately 9,117,600 shares of common stock. TLC is accounting for the acquisition using the purchase method. TLC's fiscal year is the 52 or 53 weeks ending on or after December 31. For clarity of presentation herein, with regard to TLC, all references to December 31, 1997 relate to balances as of January 3, 1998, and the period from January 5, 1997 to January 3, 1998 is referred to as the Year Ended December 31, 1997. The pro forma combined condensed consolidated balance sheet sets forth the financial position of TLC and Mindscape at December 31, 1997, as if the acquisition of Mindscape by TLC had occurred on December 31, 1997. The pro forma combined condensed consolidated statement of operations sets forth the results of operations of TLC and Mindscape for the Year Ended December 31, 1997, as if the acquisition of Mindscape by TLC had occurred at the beginning of that year. The pro forma combined condensed consolidated financial statements are unaudited, are intended for informational purposes, and are not necessarily indicative of the future consolidated financial position or future results of operations of the combined entity. These pro forma combined condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in TLC's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 and Mindscape Group's combined financial statements for the year ended December 31, 1997. 4 THE LEARNING COMPANY, INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) B. PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (a) The pro forma combined condensed consolidated balance sheet sets forth the financial position of TLC and Mindscape at December 31, 1997, as if the acquisition of Mindscape by TLC had occurred on December 31, 1997. The pro forma adjustment to reflect the excess purchase price over the preliminary estimate of the fair value of Mindscape's net assets, in the amount of approximately $15,000, is reflected in goodwill and other intangible assets. The ultimate allocation of the purchase price for the acquisition to the net assets, goodwill and other intangible assets acquired, and to a charge for in-process research and development, is subject to the final determination of their respective fair values. Approximately $2,000 has been included in the purchase price as merger related accruals in connection with the preliminary estimate of the fair value of transaction related costs, including valuation and legal fees, and related out-of-pocket expenses. Purchase price payable in the amount of $3,000 reflects the preliminary estimate of bank cash balances due to the Sellers in conjunction with the acquisition of Mindscape. (b) The pro forma combined condensed consolidated statement of operations sets forth the results of operations of TLC and Mindscape for the Year Ended December 31, 1997, as if the acquisition of Mindscape by TLC had occurred at the beginning of that year. The pro forma adjustment in the amount of $14,000 reflects amortization of the excess purchase price over the preliminary estimate of the fair value of the net assets acquired of Mindscape over the preliminary estimated useful life of ten years on a straight-line basis. Any allocation of the purchase price to the fair value of in-process research and development related to Mindscape could result in a material charge to operations and a reduction in the amounts of intangible assets to be amortized. There were no intercorporate transactions that required elimination. TLC has performed a preliminary evaluation of the estimated period of benefit and the estimated useful life of the excess purchase price over the preliminary estimate of the fair value of the net assets acquired in and resulting from the acquisition of Mindscape based upon the nature of the brands and related rights acquired. TLC has preliminarily determined that the estimated period of benefit and the estimated useful life of the excess purchase price over the preliminary estimate of the fair value of the net assets acquired in and resulting from the acquisition of Mindscape is approximately ten years. 5 THE LEARNING COMPANY, INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) (c) The pro forma adjustment reflects the issuance of common stock and special warrants, which represent in the aggregate approximately 9,117,600 shares of TLC's common stock, in connection with the acquisition of Mindscape. TLC issued approximately 1,366,700 shares of common stock in connection with the acquisition of Mindscape. On March 6, 1998, TLC's Canadian subsidiary, SoftKey Software Products Inc. ("SoftKey"), agreed to sell to certain Canadian institutional investors 8,687,500 special warrants for aggregate proceeds of approximately $134,500. TLC used approximately $120,000 of the proceeds in connection with the acquisition of Mindscape. Each special warrant is exercisable without additional payment for one of SoftKey's Exchangeable Non-Voting Shares (the "Exchangeable Shares"). TLC has issued a special voting share (the "Voting Share") which has a number of votes equal to the number of Exchangeable Shares outstanding. The holder of the Voting Share is not entitled to dividends and shall vote with the common stockholders as a single class. SoftKey's Exchangeable Shares are exchangeable on a one-for-one basis for TLC's common stock without additional payment. The private placement is ultimately subject to certain conditions, including receipt of certain regulatory approvals. For presentation in these pro forma combined condensed consolidated financial statements, TLC included special warrants, representing approximately 7,750,900 shares of common stock, in the computation of basic and diluted earnings per share as if the special warrants had been exercised for Exchangeable Shares at the beginning of the Year Ended December 31, 1997. -----END PRIVACY-ENHANCED MESSAGE-----