-----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, KfsQoCHU23kybXOQ0mlXgPCgTdXrASSSxO5bDLqFY5gGitM2ouQ0AFCw9iTillbJ 18BPwIg3pjYDArBz/NQxBw== 0000950135-98-005722.txt : 19981110 0000950135-98-005722.hdr.sgml : 19981110 ACCESSION NUMBER: 0000950135-98-005722 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981109 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-12375 FILM NUMBER: 98740622 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 10-Q 1 THE LEARNING COMPANY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 the quarterly period ended October 3, 1998 Commission File Number 1-12375 THE LEARNING COMPANY, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 94-2562108 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) ONE ATHENAEUM STREET CAMBRIDGE, MASSACHUSETTS 02142 (Address of Principal Executive Offices) (617) 494-1200 (Registrant's Telephone Number, Including Area Code) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- As of November 2, 1998, there were 85,556,631 outstanding shares of the issuer's common stock, par value $.01 per share. 2 THE LEARNING COMPANY, INC. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION -------------------------------
PAGE ---- ITEM 1. Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets at September 30, 1998 and December 31, 1997...................... 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997................................... 4 Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 1998 and 1997............................. 5 Notes to Condensed Consolidated Financial Statements.......... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 12 PART II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings............................................. 18 ITEM 4. Submission of Matters to a Vote of Security Holders........... 18 ITEM 6. Exhibits and Reports on Form 8-K.............................. 18
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. THE LEARNING COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, December 31, 1998 1997 ------------ ----------- (unaudited) ASSETS CURRENT ASSETS: Cash and short-term investments $234,796 $188,956 Accounts receivable (less allowances for returns of $46,637 and $47,643, respectively) 117,247 161,927 Inventories 44,507 39,382 Other current assets 51,941 35,863 -------- -------- 448,491 426,128 Intangible assets, net 179,404 145,848 Other long-term assets 63,711 51,798 -------- -------- $691,606 $623,774 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities $252,997 $220,192 -------- -------- LONG-TERM OBLIGATIONS: Long-term debt 190,955 294,356 Accrued and deferred income taxes 70,586 75,167 Other long-term obligations 4,134 8,069 -------- -------- 265,675 377,592 -------- -------- STOCKHOLDERS' EQUITY 172,934 25,990 -------- -------- $691,606 $623,774 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 4 THE LEARNING COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------------- 1998 1997 1998 1997 ------------ ------------- -------------- ------------- REVENUES $212,723 $ 141,737 $ 564,042 $ 401,532 COSTS AND EXPENSES: Costs of production 63,011 40,326 185,039 118,291 Sales and marketing 54,529 38,746 163,223 103,806 General and administrative 14,132 10,755 43,668 34,534 Development and software costs 24,947 25,041 72,809 65,991 Amortization, merger and other charges 63,659 148,400 282,852 403,058 -------- ---------- ---------- --------- 220,278 263,268 747,591 725,680 -------- ---------- ---------- --------- OPERATING LOSS (7,555) (121,531) (183,549) (324,148) INTEREST EXPENSE AND OTHER, net (1,215) (4,798) (4,006) (12,355) -------- ---------- ---------- --------- LOSS BEFORE TAXES (8,770) (126,329) (187,555) (336,503) PROVISION FOR INCOME TAXES 12,442 (13,167) 12,442 (8,558) -------- ---------- ---------- -------- NET LOSS $(21,212) $ (113,162) $ (199,997) $(327,945) ======== ========== ========== ========= NET LOSS PER SHARE - basic and diluted $ (0.24) $ (1.72) $ (2.55) $ (5.00) WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED SHARES OUTSTANDING 89,457,000 65,895,000 78,534,000 65,561,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 THE LEARNING COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, ------------------------ 1998 1997 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(199,997) $(327,945) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, amortization and other 170,183 386,538 Provisions for returns and doubtful accounts 76,484 52,819 Charge for incomplete technology 119,924 29,297 Changes in operating assets and liabilities: Accounts receivable (25,395) (22,959) Accounts payable and accruals (40,510) (1,905) Other (20,585) (53,056) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 80,104 62,789 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets and other (26,694) (13,171) Businesses acquired, net of cash acquired (99,135) (89,486) Acquisition related items (66,195) (604) --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (192,024) (103,261) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital leases (1,171) (515) Borrowings under line of credit (2,300) 10,000 Repurchase of Senior Convertible Notes (6,000) (28,000) Proceeds from issuance of common stock 35,189 7,403 Proceeds from the issuance of special warrants, net 134,346 -- Other (3,578) (15,105) --------- --------- NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES 156,486 (26,217) --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 201 (1,846) --------- --------- EFFECT OF BRODERBUND EXCLUDED PERIOD 1,073 -- --------- --------- NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS 45,840 (68,535) CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 188,956 259,223 --------- --------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 234,796 $ 190,688 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 THE LEARNING COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, ----------------------------------- 1998 1997 ------------- -------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued to acquire Mindscape $30,000 $ -- Common stock issued to acquire Sofsource 45,000 -- Common stock issued to settle earn-out agreements 5,573 -- Common stock issued in exchange for Senior Notes 96,695 -- Common stock issued to settle note payable to related party -- 3,053
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 7 THE LEARNING COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) 1. BASIS OF PRESENTATION The condensed consolidated financial statements of The Learning Company, Inc. ("TLC" or the "Company") for the Three Months and Nine Months Ended September 30, 1998 and 1997 are unaudited and reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K, as amended, for the year ended January 3, 1998 and the supplemental consolidated financial statements and notes thereto included in the Company's Current Report on Form 8-K dated August 31, 1998, as amended. The results of operations for the Three Months and Nine Months Ended September 30, 1998 are not necessarily indicative of the results for the entire year ending December 31, 1998. On August 31, 1998, the Company acquired Broderbund Software, Inc. ("Broderbund"), a developer and publisher of consumer software for the home and school. This transaction was accounted for using the pooling-of-interest method of accounting. The accompanying financial statements have been restated to include the results and balances of Broderbund for all periods presented. The third quarter reporting period for 1998 ended on October 3, 1998 and the third quarter reporting period for 1997 ended on October 4, 1997. The periods from July 5, 1998 to October 3, 1998 and from July 7, 1997 to October 4, 1997 are referred to as the "Third Quarter 1998" and the "Third Quarter 1997" or the "Three Months Ended September 30, 1998" and the "Three Months Ended September 30, 1997," respectively. The periods from January 4, 1998 to October 3, 1998 and from January 7, 1997 to October 4, 1997 are referred to as the "Nine Months Ended September 30, 1998" and the "Nine Months Ended September 30, 1997," respectively, throughout these financial statements and Form 10-Q. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions regarding items such as return reserves and allowances, net realizable value of intangible assets and valuation allowances for deferred tax assets that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include: return reserves, inventory reserves, valuation of deferred tax assets and valuation and useful lives of intangible assets. Actual results could differ from these estimates. 2. BUSINESS COMBINATIONS BRODERBUND - ---------- On August 31, 1998, the Company acquired all of the issued and outstanding common shares of Broderbund in exchange for 16,848,753 shares of common stock of the Company pursuant to an agreement and plan of merger dated June 21, 1998 whereby each share of common stock of Broderbund was exchanged into 0.80 shares of the Company's common stock. This acquisition has been accounted for using the pooling-of-interests method of accounting. The balances as at December 31, 1997 and the results for the Nine Months Ended September 30, 1998 and 1997 have been restated to include the balances and results of Broderbund. The balance sheet of the Company as at December 31, 1997 has been combined with the balance sheet of Broderbund as at November 30, 1997. Retained earnings have been charged with the net income for the omitted period of December 31, 1997 of $682. Revenues, operating expenses and operating income for the excluded month of December 1997 were $28,712, $27,974 and $738, respectively. The financial results for the Nine Months Ended September 30, 1998 include the results of the previously separate businesses for the Six Months Ended June 30, 1998. Revenues and net loss from the previously separate operations of the Company and Broderbund were revenues of $242,853 and $108,466 and net loss of $154,159 and $24,636, respectively, in the Six Month Period Ended June 30, 1998, which are included in these financial statements. 7 8 Results of the previously separate entities for the Nine Months Ended September 30, 1997 were as follows:
Nine Months Ended Combined September 30, 1997 TLC Broderbund Adjustments Restated - --------------------------- ------ ----------- ----------- --------- Revenues $272,237 $129,295 $ -- $401,532 Operating loss (291,815) (39,083) (6,750) (324,148) Net loss (307,678) (22,377) 2,110 (327,945) Net loss per share $ (6.28) $ (1.35) $ (5.00)
In order to conform the application of generally accepted accounting principles between the two separate entities, an adjustment of $3,601 and $4,640 to increase the valuation allowance for income tax assets was recorded in each of the Nine Month Periods Ended September 30, 1998 and 1997, respectively. The adjustments increase the valuation allowance for uncertainty of recoverability of income tax assets of Broderbund as it was determined that it was more likely than not that some or all of the assets would not be realized under the combined entity. There were no intercompany transactions between the two companies other than a termination fee of $18,000 paid by The Learning Company, a corporation that the Company acquired in 1995 (the "Former Learning Company"), to Broderbund in December 1995 related to the proposed merger between the two companies that was terminated. This amount was recorded as other income by Broderbund and was included in the determination of the purchase price of the Former Learning Company by the Company. Accordingly, the merger termination fee was eliminated from the Broderbund net income for the year ended August 31, 1996 and the purchase price of the Former Learning Company was reduced, resulting in a reduction in amortization of goodwill in the Nine Months Ended September 30, 1997 of $6,750. MINDSCAPE - --------- On March 5, 1998, the Company acquired control of Mindscape, Inc., a consumer software company, and certain affiliated companies ("Mindscape") for a total purchase price of $152,557 paid in cash of $122,557 and the remainder through the issuance of 1,366,743 shares of common stock. The transaction was accounted for using the purchase method of accounting. The purchase price for Mindscape was allocated as follows: Purchase price $152,557 Plus: fair value of net liabilities assumed 3,297 -------- 155,854 -------- Excess allocated to: Incomplete technology 103,000 Completed technology and products 13,000 Brands and trade names 30,000 -------- 146,000 -------- Goodwill $ 9,854 ========
The Company primarily used the income approach to determine the fair value of the identified intangible assets acquired. The debt-free cash flows, net of provision for operating expenses, were discounted to a net present value. The Company believes that the incomplete products under development had not reached technical feasibility at the date of the acquisition, had no alternative future use and additional development is required to ensure their commercial viability. In order to develop the acquired incomplete technology into commercially viable products the Company will be required to complete development of proprietary code, development of the artistic and graphic works and design of the remaining storyboards. Complete technology is being amortized using the straight-line method over its estimated useful life of five years and goodwill and brands and trade names are being amortized using the straight-line method over its estimated useful life of ten years. Summarized pro forma combined results of operations for the Nine Months Ended September 30, 1998 and 1997 are shown as if the transaction had occurred at the beginning of the period presented. Pro forma adjustments relate 8 9 primarily to amortization of goodwill and complete technology. These pro forma combined results of operations include the historical results from Mindscape and do not reflect any reductions in operating costs derived from consolidation of functional departments. In addition, the pro forma combined operating loss includes pro forma amortization of acquired intangible assets resulting from the acquisition of Mindscape for the Nine Months Ended September 30, 1998 and 1997 of $2,621 and 5,070, respectively.
Mindscape Nine Months Ended The Learning Including Pro Forma Pro Forma September 30, 1998 Company, Inc. Adjustments Combined - ------------------- ------------- ------------------- ---------- Revenues $564,042 $ 9,090 $ 573,132 Operating loss (183,549) (44,270) (227,819) Net loss (199,997) (45,330) (245,327) Net loss per share $ (2.55) $ (3.07) Mindscape Nine Months Ended The Learning Including Pro Forma Pro Forma September 30, 1997 Company, Inc. Adjustments Combined - ------------------- ------------- ------------------- ---------- Revenues $ 401,532 $71,621 $ 473,153 Operating loss (324,148) (28,826) (352,974) Net loss (327,945) (22,129) (350,074) Net loss per share $ (5.00) $ (4.69)
SOFSOURCE, INC. - --------------- On June 2, 1998, the Company acquired control of Sofsource, Inc. an educational software company, for a total purchase price of $45,000 which was settled through the issuance of 1,641,138 shares of common stock. Under the terms of the stock purchase agreement, the sellers have the right to require the Company to repurchase any shares of common stock issued to satisfy the purchase price that are not sold by December 31, 1998. In the event that the sellers receive less than $45,000 of proceeds from the sale of such common stock, the Company is obligated to pay to the sellers the shortfall in cash. In the event that the sellers receive more than $45,000, the sellers are obligated to pay the Company such excess amount received. Any such payment in the future would be recorded as an adjustment to stockholders' equity. Pro forma results for Sofsource were not material. This acquisition was accounted for using the purchase method of accounting. The purchase price for Sofsource was allocated as follows: Purchase price $45,000 Plus: fair value of net liabilities assumed 2,287 ------- Excess to allocate 47,287 ------- Less: excess allocated to Incomplete technology 14,924 Brands and trade names 3,322 ------- 18,246 ------- Goodwill $29,041 ======= The Company primarily used the income approach to determine the fair value of the identified intangible assets acquired. The debt-free cash flows, net of provision for operating expenses, were discounted to a net present value. The Company believes that the incomplete products under development had not reached technical feasibility at the date of the acquisition, had no alternative future use and additional development is required to ensure their commercial viability. In order to develop the acquired incomplete technology into commercially viable products the Company will be required to complete development of proprietary code, development of the artistic and graphic works and design of the remaining storyboards. Goodwill and brands and trade names are being amortized using the straight-line method over its estimated useful life of ten years. 9 10 \3. ISSUANCE OF SPECIAL WARRANTS On March 12, 1998, the Company's Canadian subsidiary, SoftKey Software Products Inc. ("SoftKey"), issued in a private placement in Canada 8,687,500 special warrants for net proceeds of approximately $134,000. On July 9, 1998 each special warrant was exchanged into one exchangeable non-voting share of SoftKey (an "Exchangeable Share") without additional payment. The Exchangeable Shares are exchangeable at the option of the holder on a one-for-one basis for common stock of the Company without additional payment. 4. BORROWINGS On August 7, 1998, the Company amended its revolving line of credit (the "Line") to provide a maximum availability of $147,500, of which $40,000 is outstanding at September 30, 1998. Borrowings under the line are due July 1, 2000 and bears interest at variable rates. The Line is subject to certain financial covenants, is secured by a general security interest in certain operating subsidiaries of the Company and by a pledge of the stock of certain of its subsidiaries. The outstanding balance of $40,000 was repaid after October 3, 1998. 5. COMPREHENSIVE LOSS Effective January 4, 1998, the Company adopted Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income." The Company's comprehensive loss was as follows:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------ 1998 1997 1998 1997 --------- ---------- ---------- ---------- Net loss $(21,212) $(113,162) $(199,997) $(327,945) Other comprehensive loss (592) (1,978) (6,236) (5,099) -------- --------- --------- --------- Total comprehensive loss $(21,804) $(115,140) (206,233) $(333,044) ======== ========= ========= =========
Other comprehensive loss includes losses on foreign currency translation and the unrealized gain (loss) on short-term investments. 6. INVENTORIES Inventories are stated at the lower of weighted average cost or net realizable value and include third-party assembly costs, CD-ROM discs, manuals and an allocation of fixed overhead.
September 30, December 31, 1998 1997 ------------- ------------ Components $ 1,802 $ 8,333 Finished goods 42,705 31,049 ------- ------- $44,507 $39,382 ======= =======
7. COMPUTATION OF EARNINGS PER SHARE For the year ended December 31, 1997, the Company adopted Statement of Accounting Standard No. 128 ("FAS 128"), which requires the presentation of Basic and Dilutive earnings per share, which replaces primary and fully diluted earnings per share. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Dilutive net loss per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of common stock equivalents. Common stock equivalents consist of convertible debentures, preferred stock, stock options and warrants. The dilutive computations do not include common stock equivalents for the Three and Nine Months Ended September 30, 1998 and 1997 as their inclusion would be antidilutive. Dilutive elements would include the 750,000 shares of Series A Preferred Stock (which is ultimately convertible into 15,000,000 shares of common stock) issued on December 5, 1997 and employee stock options totaling 16,269,038 and 13,641,086 at September 30, 1998 and 1997, respectively. 10 11 8. SALE OF INCOME TAX SOFTWARE BUSINESS On July 9, 1998, the Company sold its Canadian income tax software business for approximately $45,000 in cash. The net gain on sale was not material. 9. AMORTIZATION, MERGER AND OTHER CHARGES During the Third Quarter 1998, the Company announced a restructuring plan related to the merger with Broderbund. A total of $63,659 was charged in the Third Quarter 1998 as amortization, merger and other charges. Included in the charge are termination benefits of $17,962 related to the termination of approximately 600 employees at Broderbund and the Company in areas of administration, development, manufacturing, sales and marketing. The charge also includes facility closure cost of $22,050, professional fees and other transaction costs of $10,128, amortization of intangible assets of $4,249 and discontinued product costs of $9,270. The amortization, merger and other charges for the Nine Months Ended September 30, 1998 includes a charge for incomplete technology related primarily to the acquisitions of Mindscape and Sofsource totaling $119,826. 10. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company will adopt SFAS No. 133 by January 1, 2000 and does not expect SFAS No. 133 to have a material impact on its financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" which changes the way public companies report information about operating segments. SFAS No. 131 which is based on the management approach to segment reporting establishes requirements to report selected segment information quarterly and to report entity wide disclosures about products and services major customers and the material countries in which the entity holds assets and reports revenue. Management is currently evaluating the effects of this change on its reporting of segment information. The Company will adopt SFAS No. 131 for its fiscal year ending December 31, 1998. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated financial statements and the notes thereto and in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K, as amended, for the year ended January 3, 1998 and the supplemental consolidated financial statements and notes thereto included in the Company's Current Report on Form 8-K dated August 31, 1998, as amended. All dollar amounts presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands, except per share amounts. Certain of the information contained in this Quarterly Report on Form 10-Q which are not historical facts may include "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's actual results may differ materially from those set forth in such forward-looking statements. Certain risks and uncertainties including, but not limited to, those discussed below in "Factors Affecting Future Operating Results," as well as in the Company's Annual Report on Form 10-K, as amended, for the 1997 fiscal year as filed with the Securities and Exchange Commission (the "SEC"), as well as other factors, may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. The information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations is provided pursuant to applicable regulations of the SEC and is not intended to serve as a basis for projections of future events. INTRODUCTION The Learning Company, Inc. ("TLC" or the "Company") develops and publishes a broad range of high quality branded consumer software for personal computers ("PCs") that educate and entertain across every age category, from young children to adults. The Company's primary emphasis is in educational, productivity and reference software, but it also offers a selection of lifestyle and entertainment products, both in North America and internationally. The Company has a history of acquiring companies in order to broaden its product lines and sales channels. During the first nine months of 1998, the Company acquired Mindscape, Inc. and certain affiliated companies ("Mindscape"), Sofsource, Inc. ("Sofsource") and Broderbund Software, Inc. ("Broderbund"). The Company distributes its products through retail channels, including direct sales to computer electronics stores, office superstores, mass merchandisers, discount warehouse stores and software specialty stores which control over 23,000 North American storefronts. The Company also sells its products directly to consumers through the mail, telemarketing and the Internet, and directly to schools. The Company's international sales are conducted from subsidiaries in Germany, France, Holland, Ireland, the United Kingdom, Australia and Japan. The Company also derives revenue from licensing its products to original equipment manufacturers ("OEMs"), which bundle the Company's products for sale with computer systems or components and through on-line offerings. RESULTS OF OPERATIONS NET LOSS. The Company incurred a net loss of $21,212 ($.24 per share) and $199,997 ($2.55 per share) on revenues of $212,723 and $564,042 in the Third Quarter 1998 and the Nine Months Ended September 30, 1998 as compared to a net loss of $113,162 ($1.72 per share) and $327,945 ($5.00 per share) on revenues of $141,737 and $401,532 in the Third Quarter 1997 and the Nine Months Ended September 30, 1997. The net loss in the Third Quarter 1998, the Nine Months Ended September 30, 1998, the Third Quarter 1997 and the Nine Months Ended September 30, 1997 is a result of the effect of the amortization, merger and other charges of $63,659, $282,852, $148,400 and $403,058, respectively. REVENUES. Revenues by distribution channel for the Third Quarter 1998 as compared to the Third Quarter 1997 and the Nine Months Ended September 30, 1998 as compared to the Nine Months Ended September 30, 1997 are as follows: 12 13
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------- ----------------------------------------- 1998 % 1997 % 1998 % 1997 % --------- ------ --------- ------- --------- ------ ------- ------- Retail $117,848 56% $71,091 50% $289,619 51% $199,004 50% OEM 11,347 5% 9,873 7% 30,964 5% 24,163 6% School 19,769 9% 16,175 11% 56,968 10% 46,031 11% Direct response 24,801 12% 19,244 14% 81,716 15% 56,283 14% On-line 5,126 2% -- -- 9,521 2% -- -- International 33,832 16% 22,380 16% 86,511 15% 63,195 16% Tax software and services -- -- 2,974 2% 8,744 2% 12,855 3% -------- --- -------- --- -------- --- -------- --- $212,723 100% $141,737 100% $564,043 100% $401,531 100% ======== === ======== === ======== === ======== ===
Revenues increased in dollars and as a percentage of total revenue for the Three and Nine Months Ended September 30, 1998 as compared to the Three and Nine Months Ended September 30, 1997 primarily due to growth in the demand for consumer software. Retail revenues also were higher than the prior year due to the acquisitions of Mindscape and Sofsource and the launch of several new and upgraded products, which included: Reader Rabbit's Math Ages 4-6, The American Girls Premiere - 2nd Edition, Compton's Encyclopedia 1999 Deluxe, Cosmopolitan Virtual Makeover, National Geographic Maps, Dr. Seuss: Preschool, Rugrats Adventure Game, among others. OEM sales increased in dollars for the Three and Nine Months Ended September 30, 1998 as compared to the Three and Nine Months Ended September 30, 1997 primarily due to additional demand from PC manufacturers across the industry. International sales increased in dollars for the Three and Nine Months Ended September 30, 1998 as compared to the Three and Nine Months Ended September 30, 1997 primarily as a result of the higher PC sales in Europe and revenues from the acquisition of Mindscape. Direct response revenues increased in dollars for the Three and Nine Months Ended September 30, 1998 as compared to the Three and Nine Months Ended September 30, 1997 due to growth in the Company's catalog based sales to end users and due to revenues from Mindscape. School sales increased in dollars for the Three and Nine Months Ended September 30, 1998 as compared to the Three and Nine Months Ended September 30, 1997 due to the increasing demand for software in American schools. The tax software business was sold on July 9, 1998. COSTS AND EXPENSES. The Company's costs and expenses and the respective percentages of revenues for the Third Quarter 1998 as compared to the Third Quarter 1997 and the Nine Months Ended September 30, 1998 as compared to the Nine Months Ended September 30, 1997 are as follows:
Three Months ended September 30, Nine Months Ended September 30, ------------------------------------------ ------------------------------------------- 1998 % 1997 % 1998 % 1997 % --------- ------ --------- ------ --------- ------- --------- ------ Costs of production $63,011 30% $40,326 28% $185,039 33% $118,291 29% Sales and marketing 54,529 26% 38,746 27% 163,223 29% 103,806 26% Development and software costs 24,947 12% 25,041 18% 72,809 13% 65,991 16% General and administrative 14,132 7% 10,755 8% 43,668 8% 34,534 9% -------- --- -------- --- -------- --- -------- --- $156,619 75% $114,868 81% $464,739 83% $322,622 80% ======== === ======== === ======== === ======== ===
Costs of production includes the cost of manuals, packaging, diskettes, duplication, assembly and fulfillment charges. In addition, costs of production includes royalties paid to third-party developers and inventory obsolescence reserves. Costs of production as a percentage of revenues increased in the Third Quarter 1998 and the Nine Months Ended September 30, 1998 as compared to the Third Quarter 1997 and the Nine Months Ended September 30, 1997 from 28% and 29% to 30% and 33%, respectively. The increase in costs of production as a percentage of revenues in Third Quarter 1998 and the Nine Months Ended September 30, 1998 from Third Quarter 1997 and the Nine Months Ended September 30, 1997 was caused by sale of products from the acquisitions of Mindscape, Sofsource, and Creative Wonders that have 13 14 higher production costs and royalty rates and was also due to a higher proportion of sales of entertainment and affiliate label products in the first nine months of the year over prior years. Sales and marketing expenses decreased to 26% of revenues in the Third Quarter 1998 as compared to 27% of revenues in the Third Quarter 1997 and increased to 29% of revenues in the Nine Months Ended September 30, 1998 as compared to 26% in the Nine Months ended September 30, 1997. The decrease in the Third Quarter 1998 is due to a lower spending level on entertainment titles, which had in the past comprised a greater proportion of the product mix. In addition, the Company began to realize savings from the integration of the Broderbund sales and marketing operations. Development and software costs decreased to 12% of revenues in the Third Quarter 1998 and to 13% of revenues in the Nine Months Ended September 30, 1998 as compared to 18% and 16% of revenues in the Third Quarter 1997 and the Nine Months Ended September 30, 1997 due to the timing of product introduction and a decrease in spending on entertainment development projects, which typically have a higher cost of development. General and administrative expenses decreased to 7% of revenues in the Third Quarter 1998 and to 8% of revenues in the Nine Months Ended September 30, 1998 as compared to 8% and 9% of revenues in the Second Quarter 1997 and the Nine Months Ended September 30, 1997 due to continued efforts to reduce both fixed costs and employee headcount related to the integration of the Company's acquisitions. In absolute dollars general and administrative expenses increased in the Third Quarter 1998 and the Nine Months Ended September 30, 1998 as compared to the Third Quarter 1997 and the Nine Months Ended September 30, 1997 due to the costs from the Mindscape operations, the acquisition of which was accounted for using the purchase method of accounting. The Company reported amortization, merger and other charges in the Third Quarter 1998 and the Nine Months Ended September 30, 1998 and the Third Quarter 1997 and the Nine Months Ended September 30, 1997 of $63,659, $282,852, $148,400, and $403,058, resulting primarily from the acquisitions. The charges in the Third Quarter 1998 include costs of severance, facility closure, discontinued product costs, professional fees and printing costs related to the merger with Broderbund. The charges in the Nine Months Ended September 30, 1998 include $119,924 of incomplete technology write-offs related to the acquisitions of Mindscape and Sofsource, with the remainder relating to amortization of goodwill, amortization of acquired technology related assets and other expenses. LIQUIDITY AND CAPITAL RESOURCES Cash and short-term investments increased from $188,956 at December 31, 1997 to $234,796 at September 30, 1998. This increase was attributable to the issuance by the Company's Canadian subsidiary, SoftKey Software Products Inc. ("SoftKey"), of 8,687,500 special warrants in a private placement for proceeds of approximately $134,000 offset by the cash paid to acquire Mindscape of approximately $120,000. Other financing activities generated a further $22,486 and investing activities used $72,024 offset by cash generated from operating activities of $80,104. As of October 3, 1998, the Company has outstanding $200,955 principal amount Senior Convertible Notes ($10,000 is included as current). The Senior Convertible Notes will be redeemable by the Company on or after November 2, 1998 at declining redemption prices. Should the Senior Convertible Notes not convert under their terms into common stock, there can be no assurances that the Company will have sufficient cash flows from future operations to meet payment requirements under the debt or be able to refinance the notes under favorable terms or at all. On August 7, 1998, the Company amended its revolving line of credit (the "Line") to provide a maximum availability of $147,500, of which $40,000 was outstanding at September 30, 1998. Borrowings under the line are due July 1, 2000 and bear interest at variable rates. The Line is subject to certain financial covenants, is secured by a general security interest in certain operating subsidiaries of the Company and by a pledge of the stock of certain of its subsidiaries. The outstanding balance of $40,000 was repaid after October 3, 1998. 14 15 The Company, through its wholly owned subsidiary, The Learning Company Funding, Inc. (a separate special purpose corporation), is party to a receivables purchase agreement whereby it can sell without recourse undivided interests in eligible pools of trade accounts receivable on a revolving basis during a five year period ending September 30, 2002 of up to $100,000, of which $75,000 was used as of October 3, 1998. The Company acts as servicing agent for the sold receivables in the collection and administration of the accounts. In addition, the Company has a European accounts receivable factoring facility where it can sell up to $25,000 of European accounts receivable on a recourse basis to its banks, of which $25,000 was used as of October 3, 1998. Income generated by the Company's subsidiaries in certain foreign countries cannot be repatriated to the Company in the United States without payment of additional taxes since the Company does not currently receive a U.S. tax credit with respect to income taxes paid by the Company (including its subsidiaries) in those foreign countries. At the present time, the Company expects that its cash flows from operations will be sufficient to finance the Company's operations for at least the next twelve months. Longer-term cash requirements are dictated by a number of external factors, which include the Company's ability to launch new and competitive products, the strength of competition in the consumer software industry and the growth of the home computer and software markets. In addition, the Company's Senior Convertible Notes mature November 1, 2000. If not converted to common stock, the Company may be required to secure alternative financing sources. There can be no assurance that alternative financing sources will be available on terms acceptable to the Company in the future or at all. The Company continuously evaluates products and technologies for acquisitions, however no estimation of short-term or long-term cash requirements for such acquisitions can be made at this time. FUTURE OPERATING RESULTS The Company operates in a rapidly changing environment that is subject to many risks and uncertainties. Some of the important risks and uncertainties which may cause the Company's operating results to differ materially or adversely are discussed below and in the Company's Annual Report on Form 10-K, as amended, for the 1997 fiscal year on file with the SEC. The Company's future operating results are subject to a number of uncertainties, including its ability to develop and introduce new products, the introduction of competitive products and general economic conditions. In addition, the Company competes for retail shelf space and general consumer awareness with a number of companies that market consumer software, including competitors and potential competitors that possess significantly greater capital, marketing resources and brand recognition than the Company. Furthermore, the rapid changes in the market and the increasing number of new products available to consumers have increased, and are expected to continue to increase, the degree of consumer acceptance risk with respect to any specific title that the Company may publish. YEAR 2000 COMPLIANCE Many existing computer systems use only the last two digits to identify a year. Consequently, as the year 2000 approaches, many systems do not yet recognize the difference in a year that begins with "20" instead of "19." Unless corrected, this, as well as other date-related processing issues, may result in systems failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Year 2000 issue also may affect the Company's products. The Company has appointed a Year 2000 project team to develop and implement a comprehensive four-phase Year 2000 readiness plan for its worldwide operations relating to the following three areas: (1) the Company's internal systems (including information technology such as financial and order entry systems and non-information technology systems such as facilities); (2) third party customers, vendors and others with whom the Company does business and (3) the Company's products. The project team includes members of senior management and prepares progress reports to the board of directors on a regular basis. 15 16 Phase One (inventory) consists of identifying all the Company's systems, relationships and products that may be impacted by Year 2000. Phase Two (assessment) involves determining the Company's current state of Year 2000 readiness for those areas identified in the inventory phase and prioritizing the areas that need to be fixed. Phase Three (remediation) will consist of developing a plan for those areas identified as needing correction in the assessment phase. Phase Four (implementation) will consist of executing the action plan and completing the steps identified to attain Year 2000 readiness. The Company is currently in the inventory phase of the plan for both its internal systems and its third party relationships, although, for certain known critical internal systems, the Company has completed the assessment and remediation phases. For the Company's products, it is either in the inventory or assessment phase of the plan. The Company has not yet determined a date by which it expects to complete implementation for all of the targeted areas, but it intends to complete such implementation well in advance of January 1, 2000. INTERNAL SYSTEMS AND THIRD PARTY ISSUES The Company for some time has been taking, and will continue to take, actions intended to resolve Year 2000 issues through planned replacement or upgrades of its internal computer equipment and software systems. For this purpose, the term "computer equipment and software" includes systems that are commonly considered IT systems, including accounting, data processing and telephone/PBX systems, as well as systems that are not commonly considered IT systems such as security systems, fax machines or other miscellaneous systems. Both IT and non-IT systems may contain embedded technology, which complicates the Company's Year 2000 inventory, assessment, remediation and implementation efforts. The Company currently believes that the cost of its Year 2000 inventory, assessment, remediation and implementation efforts with respect to internal systems, as well as the costs to be incurred with respect to Year 2000 issues of third parties, should not exceed $1,000,000, which expenditures will be funded from operating cash flows. Because the Company is still in the inventory phase of its readiness plan with respect to many of its internal systems and with respect to third parties, it is difficult to estimate with certainty the ultimate amount of such costs. As discussed below, the Company believes that a substantial portion of its remediation and implementation efforts with respect to internal systems will be conducted in connection with the integration of the businesses acquired by the Company in 1998 with the Company's operations. As of August 31, 1998 the Company estimates that it has incurred costs of approximately $350,000 related to its Year 2000 inventory, assessment, remediation and implementation efforts with respect to internal systems. All of the $350,000 relates to analysis, repair or replacement of existing software, upgrades of existing software, evaluation of information received from significant vendors, service providers or customers, or consulting advisory agents. Other non-Year 2000 IT efforts have not been materially delayed or impacted by Year 2000 initiatives. In 1998 the Company acquired Mindscape, Sofsource, PF.Magic and Broderbund, as well as their respective subsidiaries. None of these companies had made substantial progress in its own Year 2000 readiness plans with respect to internal systems or third parties. While the Company is in the process of integrating these businesses into its Year 2000 readiness plan, their addition complicates the Company's Year 2000 inventory, assessment, remediation and implementation efforts. This effect is mitigated somewhat because the Company intends in most instances to move, or in certain cases has moved or is in the process of moving, most accounting, data processing, telephone/PBX and other IT processes of these businesses to the Company's systems, which are to a greater extent already Year 2000 ready. For example, the Company's primary software package for sales order processing, distribution, manufacturing and finance is the JD Edwards software package for Sales Order Processing, Distribution, Manufacturing and Finance version 7.3, which the Company has been informed by JD Edwards and believes is Year 2000 ready. In connection with the planned integration of the operations of Company's recently acquired businesses, these businesses will operate from the same JD Edwards system. While the Company is dedicating substantial resources toward attaining Year 2000 readiness, there is no assurance that the Company will be successful in its efforts to address all Year 2000 systems issues. If all Year 2000 issues are not properly identified, or assessment, remediation or implementation are not effected timely with respect to Year 2000 issues that are identified, there can be no assurance that the Year 2000 issue will not materially adversely impact the Company's results of operations or adversely affect the Company's relationships with customers, vendors or others. For example, failure to achieve Year 2000 16 17 readiness for the Company's internal systems could delay its ability to manufacture and ship products, disrupt customer service and technical support facilities, or interrupt customer access to online products and services. The Company also relies heavily on third parties such as manufacturing suppliers, service providers and a large retail distribution channel. If these or other third parties experience Year 2000 failures or malfunctions, there could be a material adverse impact on the Company's ability to conduct ongoing operations. For example, the ability to manufacture and ship products into the retail channel, to receive retail sales information necessary to maintain proper inventory levels, or to complete online transactions dependent upon third party service providers could be affected. PRODUCTS The Company and its subsidiaries currently sell hundreds of different software products primarily for use in homes and schools, and have sold over the last few years many hundreds of additional products that have been discontinued but may still be used by consumers. As a matter of course, products currently under development are being designed to be Year 2000 compliant. The Company is also in the process of testing certain of its products for Year 2000 compliance. Because the Company's products tend to have few time-sensitive components, the Company is able to use existing internal staff to identify and test its products, and the resources necessary to test its products are not significant. Because the Company is still in the inventory and assessment phases of its readiness plan with respect to its products, it is difficult to estimate with certainty the ultimate cost of its Year 2000 inventory, assessment, remediation and implementation efforts with respect to products. Due to the nature of the Company's products, however, the Company does not currently believe that such costs will be material. If the Company's products are not Year 2000 ready, the Company could suffer increased costs, lost sales or other negative consequences resulting from customer dissatisfaction, including litigation. The Company is aware of the potential for claims against it and other companies for damages arising from products that are or were not Year 2000 ready. In addition, because of the large number of products sold by the Company currently and in the past, the Company could face lawsuits relating to the Year 2000 readiness of products that it no longer sells and that it no longer supports. The Company believes, however, that any such claims with respect to its current or past products would be without merit. The Company does not currently have any Year 2000 related contingency plans. The Company expects to institute appropriate contingency planning at the completion of the assessment phase of its Year 2000 readiness plan. The above discussion regarding costs, risks and estimated completion dates for the Year 2000 is based on the Company's best estimates given information that is currently available, and is subject to change. Actual results will differ materially from these estimates. 17 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is subject to various pending claims. Management, after review and consultation with counsel, considers that any liability from the disposition of such lawsuits in the aggregate would not have a material adverse effect upon the consolidated financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The Company held a Special Meeting of Stockholders on August 31, 1998. (b) The Special Meeting did not involve the election of directors. (c) The first matter voted upon at the Special Meeting was a proposal to approve the issuance of shares of Common Stock, par value $.01 per share, of the Company ("Common Stock"), as contemplated by the Agreement and Plan of Merger dated as of June 21, 1998 among the Company, TLC Merger Corp. and Broderbund. Such proposal was approved. The votes were reported as follows: For: 60,914,700 Against: 64,507 Abstain: 51,408 The second matter voted upon at the Special Meeting was a proposal to approve an amendment to the Company's Long Term Equity Incentive Plan to increase the number of shares of Common Stock issuable thereunder from 9,000,000 to 14,000,000. Such proposal was approved. The votes were reported as follows: For: 40,951,902 Against: 18,755,013 Abstain: 1,323,600 Broker Non-Votes: 100 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Certificate of Incorporation, as amended1 3.2 Certificate of Designation of Series A Convertible Participating Preferred Stock Setting Forth the Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of such Series of Preferred Stock2 3.3 Bylaws of the Company, as amended3 18 19 4.1 Indenture dated as of October 16, 1995 between the Company and State Street Bank and Trust Company, as Trustee, for 5 1/2% Senior Convertible Notes due 2000 (the "Indenture")4 4.2 First Supplemental Indenture to the Indenture, dated as of November 22, 1995, by and between the Company and State Street Bank and Trust Company, as Trustee5 4.3 Note Resale Registration Rights Agreement dated as of October 23, 1995 by and between the Company, on the one hand, and the Initial Purchasers set forth therein, on the other hand (the "Registration Rights Agreement")5 4.4 Letter Agreement dated November 22, 1995 amending the Registration Rights Agreement5 4.5 Form of Securities Resale Registration Rights Agreement by and among the Company and Tribune Company6 4.6 Voting and Exchange Trust Agreement dated as of February 4, 1994 among the Company and SoftKey Software Products Inc. and R-M Trust Company, as Trustee7 4.7 Plan of Arrangement of SoftKey Software Products Inc. under Section 182 of the Business Corporations Act (Ontario)7 4.8 Special Warrant Indenture dated March 12, 1998 between SoftKey Software Products Inc. and CIBC Mellon Trust Company8 4.9 Registration Rights Agreement dated as of August 26, 1997 among the Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III, L.P., Thomas H. Lee Foreign Fund III, L.P., Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP Associates, L.P., BCIP Trust Associates, L.P., Centre Capital Investors II, L.P., Centre Capital Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II, L.P. , State Board of Administration of Florida, Centre Parallel Management Partners, L.P. and Centre Partners Coinvestment, L.P. 3 10.1 Long-Term Equity Incentive Plan, restated as of August 31, 1998* 10.2 Third Amendment, dated as of August 7, 1998, to Amended and Restated Credit Agreement dated as of May 6, 1998 among Fleet National Bank, as agent, Goldman Sachs Credit Partners L.P., as syndication agent, the lenders named therein, TLC Multimedia Inc., Learning Company Properties Inc., TEC Direct, Inc., Learning Services, Inc., Skills Bank Corporation, Microsystems Software, Inc. and Mindscape, Inc. 10.3 Second Amendment, dated as of August 7, 1998, to the Receivables Purchase Agreement dated as of June 30, 1997 among The Learning Company Funding, Inc., Lexington Parker Capital Company, LLC, Fleet National Bank, as agent, TLC Multimedia Inc. and the Company 27.1 Financial Data Schedule - ------------------------- * Denotes management contract or compensatory plan or arrangement. 1 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 4, 1998. 19 20 2 Incorporated by reference to exhibits filed with the Company's Definitive Proxy Statement filed October 24, 1997. 3 Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended January 3, 1998. 4 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. 5 Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3 (Reg . No. 333-145) filed January 26, 1996. 6 Filed as exhibits to the Agreement and Plan of Merger dated November 30, 1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc., Tribune Company, Compton's NewMedia, Inc. and Compton's Learning Company, incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated December 11, 1995. 7 Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3 (Reg . No. 333-40549) filed December 3, 1997. 8 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 4, 1998. (b) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K dated July 24, 1998 reporting that the Company had entered into an Underwriting Agreement with Tribune Company and Smith Barney, Inc. and that the Company had issued 4,404 shares of Common Stock to four foreign investors. The Company filed a Current Report on Form 8-K dated August 31, 1998 reporting that the Company had acquired Broderbund by means of the merger of TLC Merger Corp., a wholly owned subsidiary of the Company, with and into Broderbund, with Broderbund remaining as the surviving corporation. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LEARNING COMPANY, INC. /S/ R. Scott Murray ------------------------------------------ R. Scott Murray Executive Vice President and Chief Financial Officer (principal financial and accounting officer) November 9, 1998 21 22 EXHIBIT INDEX ------------- EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Certificate of Incorporation, as amended1 3.2 Certificate of Designation of Series A Convertible Participating Preferred Stock Setting Forth the Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of such Series of Preferred Stock2 3.3 Bylaws of the Company, as amended3 4.1 Indenture dated as of October 16, 1995 between the Company and State Street Bank and Trust Company, as Trustee, for 5 1/2% Senior Convertible Notes due 2000 (the "Indenture")4 4.2 First Supplemental Indenture to the Indenture, dated as of November 22, 1995, by and between the Company and State Street Bank and Trust Company, as Trustee5 4.3 Note Resale Registration Rights Agreement dated as of October 23, 1995 by and between the Company, on the one hand, and the Initial Purchasers set forth therein, on the other hand (the "Registration Rights Agreement")5 4.4 Letter Agreement dated November 22, 1995 amending the Registration Rights Agreement5 4.5 Form of Securities Resale Registration Rights Agreement by and among the Company and Tribune Company6 4.6 Voting and Exchange Trust Agreement dated as of February 4, 1994 among the Company and SoftKey Software Products Inc. and R-M Trust Company, as Trustee7 4.7 Plan of Arrangement of SoftKey Software Products Inc. under Section 182 of the Business Corporations Act (Ontario)7 4.8 Special Warrant Indenture dated March 12, 1998 between SoftKey Software Products Inc. and CIBC Mellon Trust Company8 4.9 Registration Rights Agreement dated as of August 26, 1997 among the Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III, L.P., Thomas H. Lee Foreign Fund III, L.P., Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP Associates, L.P., BCIP Trust Associates, L.P., Centre Capital Investors II, L.P., Centre Capital Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II, L.P. , State Board of Administration of Florida, Centre Parallel Management Partners, L.P. and Centre Partners Coinvestment, L.P. 3 10.1 Long-Term Equity Incentive Plan, restated as of August 31, 1998* 10.2 Third Amendment, dated as of August 7, 1998, to Amended and Restated Credit Agreement dated as of May 6, 1998 among Fleet National Bank, as agent, Goldman Sachs Credit Partners L.P., as syndication agent, the lenders named therein, TLC Multimedia Inc., Learning Company Properties Inc., TEC Direct, Inc., Learning Services, Inc., Skills Bank Corporation, Microsystems Software, Inc. and Mindscape, Inc. 10.3 Second Amendment, dated as of August 7, 1998, to the Receivables Purchase Agreement, dated as of June 30, 1997, among The Learning Company Funding, Inc., Lexington 22 23 Parker Capital Company, LLC, Fleet National Bank, as agent, TLC Multimedia Inc. and the Company 27.1 Financial Data Schedule - ------------------------- * Denotes management contract or compensatory plan or arrangement. 1 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 4, 1998. 2 Incorporated by reference to exhibits filed with the Company's Definitive Proxy Statement filed October 24, 1997. 3 Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended January 3, 1998. 4 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. 5 Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3 (Reg . No. 333-145) filed January 26, 1996. 6 Filed as exhibits to the Agreement and Plan of Merger dated November 30, 1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc., Tribune Company, Compton's NewMedia, Inc. and Compton's Learning Company, incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated December 11, 1995. 7 Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3 (Reg. No. 333-40549) filed December 3, 1997. 8 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 4, 1998. EX-10.1 2 LONG-TERM EQUITY INCENTIVE PLAN 1 EXHIBIT 10.1 THE LEARNING COMPANY, INC. LONG TERM EQUITY INCENTIVE PLAN RESTATED AS OF AUGUST 31, 1998 1. PURPOSE; DEFINITIONS. A. PURPOSE. The purpose of the Plan is to provide selected eligible employees of, and consultants to, The Learning Company, Inc., a Delaware corporation, its Subsidiaries (as defined herein) and Affiliates (as defined herein) an opportunity to participate in The Learning Company, Inc.'s future by offering them long-term, performance-based and other incentives and equity interests in The Learning Company, Inc. so as to retain, attract and motivate management personnel. B. DEFINITIONS. For purposes of the Plan, the following terms have the following meanings: 1. "AFFILIATE" means a parent or subsidiary corporation, as defined in the applicable provisions (currently Section 425) of the Code. 2. "ANNUAL BASE SALARY" with respect to a participant who is a Covered Employee as of the end of the year shall mean the annual rate of base salary of such participant as in effect as of the first day of any year, without regard to any optional or mandatory deferral of base salary pursuant to a salary deferral arrangement. 3. "AWARD" means any award under the Plan, including any Option, Stock Appreciation Right, Restricted Stock, Stock Purchase Right, or Performance Share Award. 4. "AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Plan participant setting forth the terms and conditions of the Award. 5. "BOARD" means the Board of Directors of the Company. 6. "CHANGE IN CONTROL" has the meaning set forth in Section 10A. 7. "CHANGE IN CONTROL PRICE" has the meaning set forth in Section 10C. 8. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor. 9. "COMMISSION" means the Securities and Exchange Commission and any successor agency. 10. "COMMITTEE" means the Committee referred to in Section 2, or the 2 Board in its capacity as administrator of the Plan in accordance with Section 2. 11. "COMPANY" means The Learning Company, Inc., a Delaware corporation. 12. "COVERED EMPLOYEE" has the meaning set forth in Section 162(m)(3) of the Code. 13. [Intentionally Omitted] 14. "DISABILITY" means permanent and total disability as determined by the Committee for purposes of the Plan. 15. "DISINTERESTED PERSON" has the meaning set forth in Rule 16b-3(d)(3) under the Exchange Act and any successor definition adopted by the Commission. 16. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor. 17. "FAIR MARKET VALUE" means as of any given date: (a) If the Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market, the closing sale price for the Stock or the closing bid, if no sales are reported, as quoted on such system or exchange (or the largest such exchange) for the date the value is to be determined (or if there are no sales for such date, then for the last preceding business day on which there were sales), as reported in the WALL STREET JOURNAL or similar publication. (b) If the Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the mean between the high bid and low asked prices for the Stock on the date the value is to be determined (or if there are no quoted prices for the date of grant, then for the last preceding business day on which there were quoted prices). (c) In the absence of an established market for the Stock, as determined in good faith by the Committee, with reference to the Company's net worth, prospective earning power, dividend-paying capacity, and other relevant factors, including the goodwill of the Company, the economic outlook in the Company's industry, the Company's position in the industry and its management and the values of stock of other corporations in the same or a similar line of business. 18. "INCENTIVE STOCK OPTION" means any Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. 18A. "NON-EMPLOYEE DIRECTOR" has the meaning set forth in Rule 16b-3 under the Exchange Act and any successor definition adopted by the Commission. 2 3 19. "NON-QUALIFIED STOCK OPTION" means any Option that is not an Incentive Stock Option. 20. "OUTSIDE DIRECTOR" has the meaning set forth in Section 162(m). 21. "OPTION" means an Option granted under Section 5. 22. "PERFORMANCE SHARE" means the equivalent, as of any time such assessment is made, of the Fair Market Value of one share of Stock. 23. "PERFORMANCE SHARE AWARD" means an Award under Section 9. 24. "PLAN" means this Learning Company, Inc. Long Term Equity Incentive Plan, as amended from time to time. 25. "PRE-TAX PROFIT" shall mean the net profit before income taxes of the Company for each year determined in accordance with generally accepted accounting principles and reported upon by the Company's independent accountants. 26. "RESTRICTED STOCK" means an Award of Stock subject to restrictions, as more fully described in Section 7. 27. "RULE 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange Act, as amended from time to time, and any successor rule. 28. "SECTION 162(m)" means Section 162(m) of the Code, as amended from time to time, and any successor provision. 29. "STOCK" means the Common Stock, $0.01 par value, of the Company, and any successor security. 30. "STOCK APPRECIATION RIGHT" means an Award granted under Section 6. 31. "STOCK PURCHASE RIGHT" means an Award granted under Section 8. 32. "SUBSIDIARY" has the meaning set forth in Section 425 of the Code. 33. "TERMINATION" means, for purposes of the Plan, with respect to a participant, that the participant has ceased to be, for any reason, with or without cause, an employee of, or a consultant to, the Company, or a Subsidiary or Affiliate of the Company, such that such participant is neither an employee of, or a consultant to, the Company, a Subsidiary, or any Affiliate. 3 4 2. ADMINISTRATION. A. COMMITTEE. The Plan shall be administered by the Board or, upon delegation by the Board, by a committee of the Board comprised of not less than two members (i) each member of which shall be, to the extent required to comply with Rule 16b-3 and unless the Committee determines that Rule 16b-3 is not applicable to the Plan, a Non-Employee Director, and (ii) each member of which shall be, to the extent required to comply with Section 162(m) and unless the Committee determines that Rule 162(m) is not applicable to the Plan, an Outside Director. In connection with the administration of the Plan, the Committee shall have the powers possessed by the Board. The Committee may act only by a majority of its members, except that the Committee (i) may authorize any one or more of its members or any officer of the Company to execute and deliver documents on behalf of the Committee and (ii) so long as not otherwise required for the Plan to comply with Rule 16b-3 (unless the Committee determines that Rule 16b-3 is not applicable to the Plan) and so long as not otherwise required for the Plan to comply with Section 162(m) (unless the Committee determines that Section 162(m) is not applicable to the Plan), may delegate to one or more officers or directors of the Company authority to grant Awards to persons who are not subject to Section 16 of the Exchange Act with respect to Stock and who are not Covered Employees. The Board at any time may abolish the Committee and revest in the Board the administration of the Plan. B. AUTHORITY. The Committee shall grant Awards to eligible employees and consultants. In particular and without limitation, the Committee, subject to the terms of the Plan, shall: 1. Select the officers, other employees and consultants to whom Awards may be granted; 2. Determine whether and to what extent Awards are to be granted under the Plan; 3. Determine the number of shares to be covered by each Award granted under the Plan; (a) determine the terms and conditions of any Award granted under the Plan and any related loans to be made by the Company, based upon factors determined by the Committee; (b) determine to what extent and under what circumstances any Award payments may be deferred by a Plan participant; and 4. Make adjustments in the Performance Goals (as hereinafter defined) in recognition of unusual or non-recurring events affecting the Company or the financial statements of the Company, or in response to changes in applicable laws, regulations, or accounting principles. 4 5 C. COMMITTEE DETERMINATIONS BINDING. The Committee may adopt, alter and repeal administrative rules, guidelines and practices governing the Plan as it from time to time shall deem advisable, interpret the terms and provisions of the Plan, any Award, any Award Agreement and otherwise supervise the administration of the Plan. Any determination made by the Committee pursuant to the provisions of the Plan with respect to any Award shall be made in its sole discretion at the time of the grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time. All decisions made by the Committee under the Plan shall be binding on all persons, including the Company and Plan participants. 3. STOCK SUBJECT TO PLAN. A. NUMBER OF SHARES. The total number of shares of Stock reserved and available for issuance pursuant to Awards under the Plan shall be 14,000,000 shares. Such shares may consist, in whole or in part, of authorized and unissued shares or shares reacquired in private transactions or open market purchases, but all shares issued under the Plan regardless of source shall be counted against the 14,000,000 share limitation. If any Option terminates or expires without being exercised in full or if any shares of Stock subject to an Award are forfeited or if an Award otherwise terminates without a payment being made to the participant in the form of Stock, the shares issuable under such Option or Award shall again be available for issuance in connection with Awards; provided that, to the extent required for the Plan to comply with Rule 16b-3, in the case of forfeiture, cancellation, exchange or surrender of shares of Restricted Stock, the number of shares with respect to such Awards shall not be available for Awards hereunder unless dividends paid on such shares are also forfeited, canceled, exchanged or surrendered. If any shares of Stock subject to an Award are repurchased by the Company, the shares issuable under such Award shall again be available for issuance in connection with Awards other than Options and Stock Appreciation Rights. To the extent an Award is paid in cash, the number of shares of Stock representing, at Fair Market Value on the date of the payment, the value of the cash payment shall not be available for later grant under the Plan. B. INDIVIDUAL LIMITS. In any year during the term of this Plan (commencing January 1, 1995), no Plan participant can receive stock-based Awards including Options, Stock Appreciation Rights which are granted without reference to an Option, Restricted Stock, Stock Purchase Rights and Performance Shares, relating to shares of Stock which in the aggregate exceed 20% of the total number of shares of Stock authorized pursuant to the Plan, as adjusted pursuant to the terms hereof. C. ADJUSTMENTS. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, spin-off, sale of substantial assets or other change in corporate structure affecting the Stock, such substitution or adjustments shall be made in the aggregate number and kind of shares of Stock reserved for issuance under the Plan, in the number, kind and exercise price of shares subject to outstanding Options, in the number, kind and purchase price of shares subject to outstanding Stock Purchase Rights and in the number 5 6 and kind of shares subject to other outstanding Awards, as may be determined to be appropriate by the Committee in its sole discretion; provided that the number and kind of shares subject to any Award shall always be rounded down to the nearest whole number; and provided further that with respect to Incentive Stock Options, such adjustment shall be made in accordance with Section 424 of the Code. Such adjusted exercise price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Option. 4. ELIGIBILITY. Awards may be granted to officers and other employees of, and consultants to, the Company, its Subsidiaries and its Affiliates (excluding any person who serves only as a director). 5. STOCK OPTIONS. A. TYPES. Any Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant to any Plan participant Incentive Stock Options, Non-Qualified Stock Options, or any type of Option (in each case with or without Stock Appreciation Rights). Incentive Stock Options may be granted only to employees of the Company, its parent (within the meaning of Section 425 of the Code) or its Subsidiaries. Any portion of an Option that does not qualify as an Incentive Stock Option shall constitute a Non-Qualified Stock Option. B. TERMS AND CONDITIONS. Options granted under the Plan shall be subject to the following terms and conditions: 1. OPTION TERM. The term of each Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the Option is granted, and no Non-Qualified Stock Option shall be exercisable more than 11 years after the date the Option is granted. If, at the time the Company grants an Incentive Stock Option, the optionee owns directly or by attribution stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Affiliate of the Company, the Incentive Stock Option shall not be exercisable more than five years after the date of grant. 2. GRANT DATE. The Company may grant Options under the Plan at any time and from time to time before the Plan terminates. The Committee shall specify the date of grant or, if it fails to do so, the date of grant shall be the date of action taken by the Committee to grant the Option; provided that no Option may be exercised prior to execution of the applicable Award Agreement. However, if an Option is approved in anticipation of employment, the date of grant shall be the date the intended optionee is first treated as an employee for payroll purposes. 6 7 3. EXERCISE PRICE. The exercise price per share of Stock purchasable under a Non-Qualified Stock Option shall be equal to at least 50%, and not more than 100%, of the Fair Market Value on the date of grant, provided that no Option granted to an employee whom the Committee determines is likely to be a Covered Employee at the end of the year shall have an exercise price below 100% of Fair Market Value on the date of grant. The exercise price per share of Stock purchasable under an Incentive Stock Option shall be equal to at least the Fair Market Value on the date of grant; provided that if at the time the Company grants an Incentive Stock Option, the optionee owns directly or by attribution stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Affiliate of the Company the exercise price shall be not less than 110% of the Fair Market Value on the date the Incentive Stock Option is granted. 4. EXERCISABILITY. Subject to the other provisions of the Plan, an Option shall be exercisable in its entirety at the time of grant or at such times and in such amounts as are specified in the Award Agreement evidencing the Option. The Committee, in its absolute discretion, at any time may waive any limitations respecting the time at which an Option first becomes exercisable in whole or in part. 5. METHOD OF EXERCISE; PAYMENT. To the extent the right to purchase shares has accrued, Options may be exercised, in whole or in part, from time to time, by written notice from the optionee to the Company stating the number of Shares being purchased, accompanied by payment of the exercise price for the shares. The Committee, in its discretion, may elect at the time of Option exercise that any Non-Qualified Stock Option be settled in cash rather than Stock. 6. NO DISQUALIFICATION. Notwithstanding any other provision in the Plan, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code or, without the consent of the optionee affected, to disqualify any Incentive Stock Option under such Section 422. 6. STOCK APPRECIATION RIGHTS. A. RELATIONSHIP TO OPTIONS; NO PAYMENT BY PARTICIPANT. A Stock Appreciation Right may be awarded either (i) with respect to Stock subject to an Option held by a participant or (ii) without reference to an Option. If an Option is an Incentive Stock Option, a Stock Appreciation Right granted with respect to such Option may be granted only at the time of grant of the related Incentive Stock Option, but if the Option is a Non-Qualified Stock Option, the Stock Appreciation Right may be granted either simultaneously with the grant of the related Non-Qualified Stock Option or at any time during the term of such related Non-Qualified Stock Option. No consideration shall be paid by a participant with respect to a Stock Appreciation Right. B. WHEN EXERCISABLE. A Stock Appreciation Right shall be exercisable at such 7 8 times and in whole or in part, each as determined by the Committee, subject, with respect to Plan participants subject to Section 16(b) of the Exchange Act, to Rule 16b-3. Any exercise by the participant of a Stock Appreciation Right for cash shall be made only during the window period specified in Rule 16b-3(e)(3)(iii) and any successor rule (the "Window Period"), unless the Committee determines that Rule 16b-3 is not applicable to the Plan. If a Stock Appreciation Right is granted with respect to an Option, unless the Award Agreement otherwise provides, the Stock Appreciation Right may be exercised only to the extent to which shares covered by the Option are not at the time of exercise subject to repurchase by the Company. C. EFFECT ON RELATED RIGHT; TERMINATION OF STOCK APPRECIATION RIGHT. If a Stock Appreciation Right granted with respect to an Option is exercised, the Option shall cease to be exercisable and shall be canceled to the extent of the number of shares with respect to which the Stock Appreciation Right was exercised. Upon the exercise or termination of an Option, related Stock Appreciation Rights shall terminate to the extent of the number of shares as to which the Option was exercised or terminated, except that, unless otherwise determined by the Committee at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Option shall not be reduced until the number of shares covered by exercise or termination of the related Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right granted independently from an Option shall terminate and shall be no longer exercisable at the time determined by the Committee at the time of grant, but not later than 10 years from the date of grant. Upon the Termination of the participant, a Stock Appreciation Right granted with respect to an Option shall be exercisable only to the extent to which the Option is then exercisable. D. FORM OF PAYMENT UPON EXERCISE. Despite any attempt by a Plan participant to elect payment in a particular form upon exercise of a Stock Appreciation Right, the Committee, in its discretion, may elect to cause the Company to pay cash, Stock, or a combination of cash and Stock upon exercise of the Stock Appreciation Right. E. AMOUNT OF PAYMENT UPON EXERCISE. Upon the exercise of a Stock Appreciation Right, the Plan participant shall be entitled to receive one of the following payments, as determined by the Committee under Section 6D. hereof: 1. STOCK. That number of whole shares of Stock equal to the number computed by dividing (A) an amount (the "Stock Appreciation Right Spread"), rounded to the nearest whole dollar, equal to the product computed by multiplying (x) the excess of (1) if the Stock Appreciation Right may only be exercised during the Window Period, the highest Fair Market Value on any day during the Window Period, and otherwise, the Fair Market Value on the date the Stock Appreciation Right is exercised, over (2) the exercise price per share of Stock of the related Option, or in the case of a Stock Appreciation Right granted without reference to an Option, such other price as the Committee establishes at the time the Stock Appreciation Right is granted, by (y) the number of shares of Stock with respect to 8 9 which a Stock Appreciation Right is being exercised by (B) (1) if the Stock Appreciation Right may only be exercised during the Window Period, the highest Fair Market Value during the Window Period in which the Stock Appreciation Right was exercised, and (2) otherwise, the Fair Market Value on the date the Stock Appreciation Right is exercised; plus, if the foregoing calculation yields a fractional share, an amount of cash equal to the applicable Fair Market Value multiplied by such fraction (such payment to be the difference of the fractional share); or 2. CASH. An amount in cash equal to the Stock Appreciation Right Spread; or 3. CASH AND STOCK. A combination of cash and Stock, the combined value of which shall equal the Stock Appreciation Right Spread. 7. RESTRICTED STOCK. Shares of Restricted Stock shall be subject to the following terms and conditions: A. PRICE. Plan participants awarded Restricted Stock, within 45 days of receipt of the applicable Award Agreement, which in no event shall be later than ten (10) days after the Award grant date, shall pay to the Company, if required by applicable law, an amount equal to the par value of the Stock subject to the Award. If such payment is not made and received by the Company by such date, the Award of Restricted Stock shall lapse. B. RESTRICTIONS. Subject to the provisions of the Plan and the Award Agreement, during a period set by the Committee, commencing with, and not exceeding 10 years from, the date of such award (the "Restriction Period"), the Plan participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock. Within these limits, the Committee may in its discretion provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service, performance or such other factors or criteria as the Committee may determine. C. DIVIDENDS. Unless otherwise determined by the Committee, cash dividends with respect to shares of Restricted Stock shall be automatically reinvested in additional Restricted Stock, and dividends payable in Stock shall be paid in the form of Restricted Stock. D. TERMINATION. Except to the extent otherwise provided in the Award Agreement and pursuant to Section 7B., upon termination of a Plan participant's employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. E. SPECIAL PROVISIONS REGARDING AWARDS. Notwithstanding anything to the contrary contained in this Section 7, all awards of Restricted Stock granted pursuant to this Section 7 to participants who are employees whom the Committee determines are likely to 9 10 be Covered Employees at the end of the year shall have restrictions which will lapse contingent on the attainment of such performance goals as may be established by the Committee which may be based on earnings, earnings growth, revenues, gross margin, expenses, market share, improvement of financial ratings or achievement of balance sheet or income statement objectives and may be absolute in their terms or measured against or in relationship to other companies comparably or similarly situated. Such performance goals may be particular to a participant or the division, department, line of business, subsidiary or other unit in which the participant works, or may be based on the performance of the Company generally, and may cover such period as may be specified by the Committee. Notwithstanding the foregoing, all performance objectives shall comply with the provisions of Section 162(m) of the Code and the regulations promulgated thereunder. F. TIME AND FORM OF PAYMENT. In the case of Plan participants who are Covered Employees as of the end of the year, unless otherwise determined by the Committee, shares of Restricted Stock shall be released from restrictions only after achievement of the applicable performance goals has been certified by the Committee. 8. STOCK PURCHASE RIGHTS. A. PRICE. The Committee may grant Stock Purchase Rights which shall enable the recipients to purchase Stock at a price equal to not less than 50%, and not more than 100%, of Fair Market Value on the date of grant. B. EXERCISABILITY. Stock Purchase Rights shall be exercisable for a period determined by the Committee not exceeding 30 days from the date of grant. The Committee, however, may provide that, if required under Rule 16b-3, Stock Purchase Rights granted to persons subject to Section 16(b) of the Exchange Act shall not become exercisable until six months and one day after the grant date and shall then be exercisable for 10 trading days at the purchase price specified by the Committee in accordance with Section 8A. C. SPECIAL PROVISIONS REGARDING AWARDS. In no event shall any awards be granted under this Section 8 to an employee who the Committee determines is likely to be a Covered Employee at the end of the year. 9. PERFORMANCE SHARES. A. AWARDS. The Committee shall determine the nature, length (which shall in no event be greater than 10 years) and starting date of the performance (the "Performance Period") for each Performance Share Award. The consideration payable to a participant with respect to a Performance Share Award shall be an amount determined by the Committee in the exercise of the Committee's discretion at the time of the Award; provided that the amount of consideration may be zero and may in no event exceed 50% of a Plan participant's Annual Base Salary at the time of grant. The Committee shall determine the performance objectives to be used in awarding Performance Shares (the "Performance Goals") and the extent to 10 11 which such Performance Shares have been earned. Performance Periods may overlap and participants may participate simultaneously with respect to Performance Share Awards that are subject to different Performance Periods and different performance factors and criteria. At the beginning of each Performance Period, the Committee shall determine for each Performance Share Award subject to such Performance Period the number of shares of Stock (which may constitute Restricted Stock) to be awarded to the participant at the end of the Performance Period if and to the extent that the relevant measures of performance for such Performance Share Award are met. Such number of shares of Stock may be fixed or may vary in accordance with such performance or other criteria as may be determined by the Committee. The Committee may provide that amounts equivalent to interest at such rates as the Committee may determine or amounts equivalent to dividends paid shall be payable with respect to Performance Share Awards. In addition to the provisions set forth in Section 11J., the Committee, in its discretion, may modify the terms of any Performance Share Award (except for those Participants who are Covered Employees), including the specification and measurement of performance goals. B. TERMINATION OF EMPLOYMENT. Except as otherwise provided in the Award Agreement or determined by the Committee, in the event of Termination during a Performance Period for any reason, then the Plan participant shall not be entitled to any payment with respect to the Performance Shares subject to the Performance Period. C. FORM OF PAYMENT. Payment shall be made in the form of cash or whole shares of Stock as the Committee, in its discretion, shall determine. D. SPECIAL PROVISIONS REGARDING AWARDS. In no event shall any awards be granted under this Section 9 to an employee whom the Committee determines is likely to be a Covered Employee at the end of the year. 10. CHANGE IN CONTROL. A. DEFINITION OF "CHANGE IN CONTROL". For purposes of Section 1B., a "Change in Control" means the occurrence of either of the following: 1. Any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a Company Subsidiary, a Company Affiliate, or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (or a successor to the Company) representing 35% or more of the combined voting power of the then outstanding securities of the Company or such successor; or 2. At any time that the Company has registered shares under the Exchange Act, at least 40% of the directors of the Company constitute persons who were not at the time of their first election to the Board, candidates proposed by a majority of the Board in office prior to the time of such first election; or 11 12 3. The dissolution of the Company or liquidation of more than 50% in value of the Company or a sale of assets involving 50% or more in value of the assets of the Company, (x) any merger or reorganization of the Company whether or not another entity is the survivor, (y) a transaction pursuant to which the holders, as a group, of all of the shares of the Company outstanding prior to the transaction hold, as a group, less than 50% of the combined voting power of the Company or any successor company outstanding after the transaction, or (z) any other event which the Board determines, in its discretion, would materially alter the structure of the Company or its ownership. B. IMPACT OF EVENT. Except as expressly provided in any Award agreement, in the event of a "Change in Control" as defined in Section 10A, the following provisions shall apply: 1. Any Stock Appreciation Rights and Options outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested; provided, that in the case of the holder of Stock Appreciation Rights who is actually subject to Section 16(b) of the Exchange Act, such Stock Appreciation Rights shall have been outstanding for at least six months at the date such Change in Control is determined to have occurred; 2. The restrictions and limitations applicable to any Restricted Stock and Stock Purchase Rights shall lapse and such Restricted Stock shall become fully vested; 3. The value (net of any exercise price and required tax withholdings) of all outstanding Options, Stock Appreciation Rights, Restricted Stock, and Stock Purchase Rights, unless otherwise determined by the Committee at or after grant and subject to Rule 16b-3, shall be cashed out on the basis of the "Change in Control Price," as defined in Section 11C., as of the date such Change in Control is determined to have occurred or such other date as the Board may determine prior to the Change in Control; 4. Any outstanding Performance Share Awards shall be vested and paid in full as if all performance criteria had been met; provided, however, that the foregoing provision shall only apply, with respect to the events described in Section 10A.1, 10A.3(x), 10A.3(z), and 10A.4, if and to the extent so specifically determined by the Committee in the exercise of the Committee's discretion, which determination may be amended or reversed only by the affirmative vote of a majority of the persons who were directors at the time such determination was made. C. CHANGE IN CONTROL PRICE. For purposes of this Section 10, "Change in Control Price" means the highest price per share paid in any transaction reported on any established stock exchange, national market system or other established market for the Stock, or paid or offered in any bona fide transaction related to a potential or actual Change in Control of the Company at any time during the preceding 60-day period as determined by the Committee, except that in the case of Incentive Stock Options and Stock Appreciation Rights relating to 12 13 Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Board decides to cash out such Options. 11. GENERAL PROVISIONS. A. AWARD GRANTS. Any Award may be granted either alone or in addition to other Awards granted under the Plan. Subject to the terms and restrictions set forth elsewhere in the Plan, the Committee shall determine the consideration, if any, payable by the participant for any Award and, in addition to those set forth in the Plan, any other terms and conditions of the Awards. The Committee may condition the grant or payment of any Award upon the attainment of Performance Goals or such other factors or criteria, including vesting based on continued employment or consulting, as the Committee shall determine. Performance Goals may vary from Plan participant to Plan participant and among groups of Plan participants and shall be based upon such Company, subsidiary, group or division factors or criteria as the Committee may deem appropriate, including, but not limited to, earnings per share or return on equity (except as otherwise required for Plan participants who are Covered Employees as of the end of the year in order to comply with Section 162(m)). The other provisions of Awards also need not be the same with respect to each recipient. Unless otherwise specified in the Plan or by the Committee, the date of grant of an Award shall be the date of action by the Committee to grant the Award. The Committee may also substitute new Options for previously granted Options, including previously granted Options having higher exercise prices. B. TYPES OF SHARES. The Committee, in its discretion, may determine at the time of an Award that in lieu of Stock there shall be issuable under, or applicable to the measurement of, any Award any of the following: (i) Restricted Stock; (ii) shares of any series of common stock of the Company other than Stock and shares of any series of common stock of any Subsidiary or Affiliate of the Company ("Common Shares"); or (iii) shares of any series of preferred stock of the Company ("Preferred Shares"); provided that (A) with respect to shares issuable upon exercise of Incentive Stock Options, Common Shares and Preferred Shares shall be limited to shares of any Subsidiary authorized as of the date the Plan is approved by the Board and (B) with respect to shares issuable upon exercise of Non-Qualified Stock Options and Stock Appreciation Rights, Common Shares and Preferred Shares shall be limited to shares of any Subsidiary or Affiliate of the Company. In such event, the Committee shall determine the number of shares of Stock equivalent to such Restricted Stock, Common Shares or Preferred Shares for the purpose of calculating the shares of Stock issued under the Plan; provided that a Common Share or a Preferred Share in no event shall be deemed equal to less than one share of Stock. C. AWARD AGREEMENT. As soon as practicable after the date of an Award grant, the Company and the participant shall enter into a written Award Agreement specifying the date of grant and the terms and conditions of the Award. D. CERTIFICATES. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock transfer orders, legends and other restrictions as 13 14 the Committee may deem advisable under the rules, regulations and other requirements of the Commission, any stock exchange upon which the Stock is then listed, any national market system over which the Stock is then quoted and any applicable federal, state or foreign securities law. E. TERMINATION. With respect to Awards (other than Options), in the event of Termination for any reason other than death or Disability, Awards held at the date of Termination (and only to the extent then exercisable or payable, as the case may be) may be exercised in whole or in part at any time within 90 days after the date of Termination, or such lesser period specified in the Award Agreement (but in no event after the expiration date of the Award), but not thereafter. With respect to Options, in the event of Termination for any reason other than death or Disability, Options held at the date of Termination (to the extent then exercisable) may be exercised in whole or in part within 90 days after the date of Termination, or such other period (which may be longer or shorter than 90 days) which shall be specified in the Award Agreement (but in no event shall any Option remain exercisable after the expiration date of such Option). If Termination is due to death or Disability, or a participant dies or becomes disabled within the period that the Award remains exercisable or payable, as the case may be, after Termination, only Awards (including Options) held at the date of death or Disability (and only to the extent then exercisable or payable, as the case may be) may be exercised in whole or in part by the participant in the case of Disability, by the participant's personal representative or by the person to whom the Award is transferred by will or the laws of descent and distribution, at any time within 18 months after the death or one year after the Disability, as the case may be, of the participant (or such other period which shall be specified in the Award Agreement, but in no event shall any Award remain exercisable after the expiration of such Award). In the event of Termination by reason of the participant's retirement (as determined in the exercise of the Committee's sole discretion), Awards (including Options) may be exercised in whole or in part at any time within two years after the date of Termination (or such other period which shall be specified in the Award Agreement, but in no event shall any Award remain exercisable after the expiration date of such Award). F. DELIVERY OF PURCHASE PRICE. Plan participants shall make all or any portion of any payment due to the Company with respect to the consideration payable for, upon exercise of, or for federal, state, local or foreign tax payable in connection with, an Award by delivery of cash; and if and only to the extent authorized by the Committee, all or any portion of such payment may be made by delivery of any property (including without limitation a promissory note of the participant or shares of Stock or other securities and, in the case of an Option, surrender of shares issuable upon exercise of that Option) other than cash, so long as, if applicable, such property constitutes valid consideration for the Stock under applicable law. To the extent participants may make payments due to the Company upon grant or exercise of Awards by the delivery of shares of Stock or other securities, the Committee, in its discretion, may permit participants constructively to deliver for any such payment securities of the Company held by the participant for at least three months. Constructive delivery shall be effected by (i) identification by the participant of shares intended to be delivered constructively, (ii) confirmation by the Company of participant's ownership of such shares 14 15 (for example, by reference to the Company's stock records, or by some other means of verification) and (iii) if applicable, upon exercise, delivery to the participant of a certificate for that number of shares equal to the number of shares for which the Award is exercised less the number of shares constructively delivered. G. TAX WITHHOLDING. If and to the extent authorized by the Committee in its discretion, a person who has received an Award or payment under an Award may make an election to deliver to the Company a promissory note of the Plan participant on the terms set forth in Section 11F or to have shares of Stock or other securities of the Company withheld by the Company or to tender any such securities to the Company to pay the amount of tax that the Committee in its discretion determines to be required to be withheld by the Company. 1. Such election shall be irrevocable; 2. Such election shall be subject to the disapproval of the Committee; 3. In the case of participants subject to Section 16(b) of the Exchange Act, the election and the exercise of the Award may not be made within six months after the grant of the Award (and in the case of a Stock Appreciation Right, any related Award) to be exercised (except that this limitation shall not apply in the event of death or Disability of such person before the six-month period expires); and 4. In the case of participants subject to Section 16(b) of the Exchange Act, such election may be made either (A) at least six months before the date that the amount of tax to be withheld in connection with such exercise is determined or (B) in any ten-day period beginning on the third business day following the date of release for publication of quarterly or annual summary statements of sales and earnings. Any shares or other securities so withheld or tendered will be valued by the Committee as of the date they are withheld or tendered; provided, that Stock shall be valued at the Fair Market Value on such date. The value of the shares withheld or tendered may not exceed the required federal, state, local and foreign withholding tax obligations as computed by the Company. Unless the Committee permits otherwise, the Plan participant shall pay to the Company in cash, promptly when the amount of such obligations becomes determinable, all applicable federal, state, local and foreign withholding taxes that the Committee in its discretion determines to result from the lapse of restrictions imposed upon an Award or upon exercise of an Award or from a transfer or other disposition of shares acquired upon exercise or payment of an Award or otherwise related to the Award or the shares acquired in connection with an Award. H. TRANSFERABILITY. Unless otherwise provided in an Award Agreement, no Award shall be assignable or otherwise transferable by the participant other than by will or by the laws of descent and distribution, and, during the life of the participant, an Award shall be exercisable, and any elections with respect to an Award shall be made, only by the Plan 15 16 participant or such participant's guardian or legal representative. I. RIGHTS OF FIRST REFUSAL. At the time of grant, the Committee may provide in connection with any Award that the shares of Stock received as a result of such Award shall be subject to a right of first refusal pursuant to which the participant shall be required to offer to the Company any shares that the participant wishes to sell at the then Fair Market Value subject to such other terms and conditions as the Committee may specify at the time of grant J. ADJUSTMENT OF AWARDS; WAIVERS. The Committee may adjust the Performance Goals and measurements applicable to Awards (i) to take into account changes in law and accounting and tax rules, (ii) to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events, or circumstances in order to avoid windfalls or hardships, (iii) to make such adjustments as the Committee deems necessary or appropriate to reflect any material changes in business conditions and (iv) in any other manner determined in its discretion. In the event of hardship or other special circumstances of a participant and otherwise in its discretion, the Committee may waive in whole or in part any or all restrictions, conditions, vesting, or forfeiture with respect to any Award granted to such Plan participant. K. ELECTION TO DEFER PAYMENT. To the extent, if any, permitted by the Committee, a Plan participant may elect, at such time as the Committee may in its discretion specify, to defer payment of all or a portion of an Award. L. NON-COMPETITION. The Committee may condition the Committee's discretionary waiver of a forfeiture or vesting acceleration at the time of Termination of a Plan participant holding any unexercised or unearned Award or the waiver of restrictions upon any Award upon a requirement that such participant agree to and actually (i) not engage in any business or activity competitive with any business or activity conducted by the Company and (ii) be available, unless such participant shall have died, for consultations at the request of the Company's management, all on such terms and conditions (including conditions in addition to (i) and (ii)) as the Committee may determine. M. DIVIDENDS. The reinvestment of dividends in additional Stock or Restricted Stock at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Awards). N. REGULATORY COMPLIANCE. Each Award under the Plan shall be subject to the condition that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Stock upon any securities exchange or under any state or federal law, (ii) the consent or approval of any government or regulatory body, or (iii) an agreement or representations by the participant with respect thereto, is necessary or desirable, then such Award shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval, agreement or representations shall have been effected or obtained free of any conditions not acceptable to the Committee. 16 17 O. RIGHTS AS STOCKHOLDER. Unless the Plan or the Committee expressly specifies otherwise, a Plan participant shall have no rights as a stockholder with respect to any shares covered by an Award until the participant is entitled, under the terms of the Award, to receive such shares. Subject to Sections 3B. and 7C., no adjustment shall be made for dividends or other rights for which the record date is prior to the date the certificates are delivered. P. BENEFICIARY DESIGNATION. The Committee, in its discretion, may establish procedures for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid. Q. ADDITIONAL PLANS. Nothing contained in the Plan shall prevent the Company or a Subsidiary or Affiliate of the Company from adopting other or additional compensation arrangements for its employees. R. NO EMPLOYMENT RIGHTS. The adoption of the Plan shall not confer upon any employee any right to continued employment nor shall it interfere in any way with the right of the Company or a Subsidiary or Affiliate of the Company to terminate the employment of any employee at any time. S. INTERPRETATION. Notwithstanding any provision of the Plan, the Plan shall always be administered, and Awards shall always be granted and exercised, in such a manner as to conform to the provisions of Rule 16b-3 and Section 162(m), unless the Committee determines that Rule 16b-3 or Section 162(m) are not applicable to the Plan. The Plan is designed and intended to comply with Rule 16b-3 and, to the extent applicable, with Section 162(m), and all provisions hereof shall be construed in a manner to so comply. T. GOVERNING LAW. The Plan and all Awards shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. U. USE OF PROCEEDS. All cash proceeds to the Company under the Plan shall constitute general funds of the Company. V. UNFUNDED STATUS OF PLAN. The Plan shall constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or arrangements to meet the obligations created under the Plan to deliver Stock or make payments; provided, that unless the Committee otherwise determines, the existence of such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan. W. ASSUMPTION BY SUCCESSOR. The obligations of the Company under the Plan and under any outstanding Award may be assumed by any successor corporation, which for purposes of the Plan shall be included within the meaning of "Company". X. PLAN DESIGNATION AND STATUS. Notwithstanding the designation of this 17 18 document as a plan for convenience of reference and to standardize certain provisions applicable to all types of Awards, each type of Award shall be deemed to be a separate "plan" for purposes of Section 16 of the Exchange Act and any applicable state securities laws. 12. AMENDMENTS AND TERMINATION. The Board may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuance shall be made which would impair the rights of a participant under an outstanding Award without the Plan participant's consent. In addition, to the extent required for the Plan to comply with Rule 16b-3 or Section 162(m) or, with respect to provisions solely as they relate to Incentive Stock Options, to the extent required for the Plan to comply with Section 422A of the Code, the Board may not amend or alter the Plan without the approval of a majority of the votes cast at a duly held stockholders' meeting at which a quorum of the voting power of the Company is represented in person or by proxy, where such amendment or alteration would: A. Except as expressly provided in the Plan, increase the total number of shares reserved for issuance pursuant to Awards under the Plan; B. Except as expressly provided in the Plan, change the minimum price terms of Section 5B.3 or Section 8A; C. Change the class of employees and consultants eligible to participate in the Plan; D. Extend the maximum Option term under Section 5B. or the maximum exercise period under Section 8B.; or E. Materially increase the benefits accruing to participants under the Plan. The Board of Directors may, at any time without stockholder approval, amend the Plan and the terms of any Award outstanding under the Plan, provided that such amendment is designed to maximize federal income tax benefits accorded to Awards or, if the Committee determines that Rule 16b-3 is applicable to the Plan, to comply with Rule 16b-3 and provided further that with respect to outstanding Awards, the Plan participant consents to such amendment. 13. EFFECTIVE DATE OF PLAN. The Plan, and any amendments thereto, shall be effective on the date the same is adopted by the Board, but all Awards shall be conditioned upon approval of the Plan, and any amendment thereto requiring such approval, at a duly held stockholders' meeting by the affirmative vote of the holders of shares representing a majority of the voting power of the Company represented in person or by proxy and entitled to vote at the meeting. 18 19 14. TERM OF PLAN. No Award shall be granted on or after July 1, 2000, but Awards granted prior to July 1, 2000 (including, without limitation, Performance Share Awards for Performance Periods commencing prior to July 1, 2000) may extend beyond that date. 19 EX-10.2 3 AMENDED AND RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.2 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIRD AMENDMENT, dated as of August 7, 1998 (this "THIRD AMENDMENT"), to Amended and Restated Credit Agreement, dated as of May 6, 1998, as amended (the "AGREEMENT"; capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Agreement), among TLC Multimedia Inc., Learning Company Properties Inc., TEC Direct, Inc., Learning Services Inc., Skills Bank Corporation, Microsystems Software, Inc., and Mindscape, Inc., as borrowers, the financial institutions named therein as lenders (the "LENDERS"), and Fleet National Bank, as agent for the Lenders (the "AGENT"). W I T N E S E T H WHEREAS, pursuant to the First Amendment to Amended and Restated Credit Agreement dated as of July 1, 1998 (the "FIRST AMENDMENT"), the Borrowers, the Lenders and the Agent previously amended the Agreement to provide for a temporary reduction in the Commitment of Fleet National Bank ("FLEET") and the Total Commitment thereunder; WHEREAS, pursuant to the Second Amendment to Amended and Restated Credit Agreement dated as of July 24, 1998, the Borrowers, the Lenders and the Agent amended the Agreement to extend the period of said temporary reduction by thirty (30) days to August 27, 1998; WHEREAS, the parties wish to provide for the expiration of the period of reduction prior to August 27, 1998 upon the execution and delivery of certain other financing agreements; and WHEREAS, the parties wish to reduce by $1,000,000 both the Commitment of Fleet and the Total Commitment on the terms set forth below; NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements set forth herein, the Borrowers, the Lenders and the Agent agree as follows: 1. Upon the earlier of (a) August 27, 1998 and (b) the execution, delivery and effectiveness of an Amended and Restated Liquidity Agreement amending and restating the Liquidity Agreement originally dated as of June 30, 1997 among The Learning Company Funding, Inc., Lexington Parker Capital Company, LLC, certain liquidity institutions and Fleet National Bank as agent for such institutions, and provided that the Commitments have not been terminated pursuant to the terms of the Agreement, the Commitment of Fleet shall be $122,500,000 and the Total Commitment shall be $147,500,000. 2 2. On or before August 31, 1998, the Borrowers shall cause to be pledged to the Agent approximately 65% (but in any event less than 66 2/3%) of the outstanding capital stock of each Designated Foreign Subsidiary. 3. Except as specifically amended by this Third Amendment, the Agreement is hereby ratified, confirmed and approved. The Agreement, as supplemented and amended by this Third Amendment, shall be construed as one and the same instrument. This Third Amendment may be executed in any number of counterparts, each of which counterpart, when so executed, shall be deemed to be an original and such counterparts shall constitute one and the same instrument. 4. This Third Amendment shall be governed by and construed in accordance with the internal laws of The Commonwealth of Massachusetts and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. [Remainder of page blank.] -2- 3 IN WITNESS WHEREOF, the undersigned have duly executed this Third Amendment to Amended and Restated Credit Agreement under seal as of the date first above written. TLC MULTIMEDIA INC. LEARNING COMPANY PROPERTIES INC. TEC DIRECT, INC. LEARNING SERVICES, INC. SKILLS BANK CORPORATION MICROSYSTEMS SOFTWARE, INC. By: /s/ R. Scott Murray ------------------------------------ R. Scott Murray Chief Financial Officer MINDSCAPE, INC. By: /s/ R. Scott Murray ------------------------------------ R. Scott Murray Vice President GOLDMAN SACHS CREDIT PARTNERS L.P. By: ------------------------------------ Name: Title: FLEET NATIONAL BANK, INDIVIDUALLY AND AS AGENT By: ------------------------------------ Name: Title: -3- 4 IN WITNESS WHEREOF, the undersigned have duly executed this Third Amendment to Amended and Restated Credit Agreement under seal as of the date first above written. TLC MULTIMEDIA INC. LEARNING COMPANY PROPERTIES INC. TEC DIRECT, INC. LEARNING SERVICES, INC. SKILLS BANK CORPORATION MICROSYSTEMS SOFTWARE, INC. By: ------------------------------------ R. Scott Murray Chief Financial Officer MINDSCAPE, INC. By: ------------------------------------ R. Scott Murray Vice President GOLDMAN SACHS CREDIT PARTNERS L.P. By: /s/ STEPHEN B. KING ------------------------------------ Name: STEPHEN B. KING Title: AUTHORIZED SIGNATURE FLEET NATIONAL BANK, INDIVIDUALLY AND AS AGENT By: ------------------------------------ Name: Title: -3- 5 IN WITNESS WHEREOF, the undersigned have duly executed this Third Amendment to Amended and Restated Credit Agreement under seal as of the date first above written. TLC MULTIMEDIA INC. LEARNING COMPANY PROPERTIES INC. TEC DIRECT, INC. LEARNING SERVICES, INC. SKILLS BANK CORPORATION MICROSYSTEMS SOFTWARE, INC. By: ------------------------------------ R. Scott Murray Chief Financial Officer MINDSCAPE, INC. By: ------------------------------------ R. Scott Murray Vice President GOLDMAN SACHS CREDIT PARTNERS L.P. By: ------------------------------------ Name: Title: FLEET NATIONAL BANK, INDIVIDUALLY AND AS AGENT By: /s/ Daniel G. Head, Jr. ------------------------------------ Name: Daniel G. Head, Jr. Title: Senior Vice President -3- EX-10.3 4 AMENDED RECEIVABLE PURCHASE AGREEMENT 1 EXHIBIT 10.3 SECOND AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT THIS SECOND AMENDMENT (this "SECOND AMENDMENT"), made as of August 7, 1998, to Receivables Purchase Agreement, dated as of June 30, 1997, as amended, by and among THE LEARNING COMPANY FUNDING, INC., a Delaware corporation (the "SELLER"), LEXINGTON PARKER CAPITAL COMPANY, LLC, a Delaware limited liability company, as purchaser (the "PURCHASER"), FLEET NATIONAL BANK, a national banking association, as the agent (the "AGENT"), TLC MULTIMEDIA INC., a Minnesota corporation, as servicer ("TLC MULTIMEDIA" or "SERVICER"), and THE LEARNING COMPANY, INC., a Delaware corporation ("TLC"). WITNESSETH: WHEREAS, the Seller, the Purchaser, the Agent, the Servicer and TLC are parties to a certain Receivables Purchase Agreement, dated as of June 30, 1997, as amended (the "RECEIVABLES PURCHASE AGREEMENT"); and WHEREAS, the parties hereto wish to amend the Receivables Purchase Agreement pursuant to Section 9.2(b) thereof. NOW THEREFORE, in consideration of the mutual promises and agreements herein, the parties hereto agree as follows: 1. The definitions of "LIQUIDITY AGREEMENT" and "PURCHASE LIMIT" in Exhibit I to the Receivables Purchase Agreement are amended and restated in their entireties to read, respectively, as follows: "'LIQUIDITY AGREEMENT' means the Amended and Restated Liquidity Agreement dated as of August 7, 1998, as amended and in effect from time to time, among Purchaser, the Liquidity Banks and Fleet as agent." "'PURCHASE LIMIT' means $100,000,000." 2. Except as specifically amended by this Second Amendment, the Receivables Purchase Agreement is hereby ratified, confirmed and approved. The Receivables Purchase Agreement, as supplemented and amended by this Second Amendment, shall be construed as one and the same instrument. This Second Amendment may be executed in any number of counterparts, each of which counterpart, when so executed, shall be deemed to be an original and such counterparts shall constitute one and the same instrument. 2 3. This Second Amendment shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. [Remainder of page intentionally left blank] -2- 3 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Receivables Purchase Agreement to be executed and delivered as an instrument under seal by their duly authorized officers as of the date first above written. SELLER: THE LEARNING COMPANY FUNDING, INC. By: /s/ R. Scott Murray ------------------------------------ Name: R. Scott Murray Title: Chief Financial Officer PURCHASER: LEXINGTON PARKER CAPITAL COMPANY, LLC By: ------------------------------------ Name: Title: AGENT: FLEET NATIONAL BANK By: ------------------------------------ Name: Title: SERVICER: TLC MULTIMEDIA INC. By: /s/ R. Scott Murray ------------------------------------ Name: R. Scott Murray Title: Chief Financial Officer THE LEARNING COMPANY, INC. By: /s/ R. Scott Murray ------------------------------------ Name: R. Scott Murray Title: Chief Financial Officer -3- 4 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Receivables Purchase Agreement to be executed and delivered as an instrument under seal by their duly authorized officers as of the date first above written. SELLER: THE LEARNING COMPANY FUNDING, INC. By: ------------------------------------ Name: Title: PURCHASER: LEXINGTON PARKER CAPITAL COMPANY, LLC By: /s/ Thomas J. Irvin ------------------------------------ Name: Thomas J. Irvin Title: Manager AGENT: FLEET NATIONAL BANK By: ------------------------------------ Name: Title: SERVICER: TLC MULTIMEDIA INC. By: ------------------------------------ Name: Title: THE LEARNING COMPANY, INC. By: ------------------------------------ Name: Title: -3- 5 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Receivables Purchase Agreement to be executed and delivered as an instrument under seal by their duly authorized officers as of the date first above written. SELLER: THE LEARNING COMPANY FUNDING, INC. By: ------------------------------------ Name: Title: PURCHASER: LEXINGTON PARKER CAPITAL COMPANY, LLC By: ------------------------------------ Name: Title: AGENT: FLEET NATIONAL BANK By: /s/ Daniel G. Head, Jr. ------------------------------------ Name: Daniel G. Head, Jr. Title: Senior Vice President SERVICER: TLC MULTIMEDIA INC. By: ------------------------------------ Name: Title: THE LEARNING COMPANY, INC. By: ------------------------------------ Name: Title: -3- EX-27.1 5 FINANCIAL DATA SCHEDULE
5 0000719612 THE LEARNING COMPANY 1,000 U.S. DOLLARS 3-MOS JAN-02-1999 JUL-05-1998 OCT-03-1998 1 234,796 0 117,247 46,637 44,507 51,941 63,711 0 691,606 252,997 190,955 0 0 0 172,934 691,606 212,723 212,723 63,011 157,267 0 0 (1,215) (8,770) 12,442 (21,212) 0 0 0 (21,212) (.24) (.24)
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