-----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, Bi8V4EG7Hy7xRyowl6BjAm3TfFawxjhMNHtIBORfoO2S/1G5gCP6/aIzpw0wnD+m TCc4CjneIgEcJs6wxEK6nw== 0000950135-96-004820.txt : 19961115 0000950135-96-004820.hdr.sgml : 19961115 ACCESSION NUMBER: 0000950135-96-004820 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961005 FILED AS OF DATE: 19961113 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 001-12375 FILM NUMBER: 96660283 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 FORM 10-Q 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 For the quarterly period ended October 5, 1996 Commission File Number 0-13069 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 Incorporation or Organization) Identification No.) ONE ATHENAEUM STREET CAMBRIDGE, MASSACHUSETTS 02142 (Address of Principal Executive Offices) (617) 494-1200 (Registrant's Telephone Number, Including Area Code) Indicate by check [X] 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 8, 1996, there were 44,166,785 outstanding shares of the issuer's Common Stock, par value $.01 per share. 1 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, 1996 (unaudited) and December 31, 1995................ 3 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1996 and 1995 (unaudited)................ 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 (unaudited)....................... 5 Notes to Condensed Consolidated Financial Statements................ 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 10 Part II - Other Information --------------------------- ITEM 1. Legal Proceedings................................................... 14 ITEM 6. Exhibits and Reports on Form 8-K.................................... 14 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE LEARNING COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, December 31, 1996 1995 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $104,476 $ 77,832 Accounts receivable (less allowances for returns of $9,581 and $6,851, respectively) 61,473 32,402 Inventories 15,760 18,997 Other current assets 19,676 23,627 -------- -------- 201,385 152,858 Property and equipment, net 22,194 19,621 Goodwill, net 496,798 580,165 Acquired technology and other intangible assets, net 173,415 147,769 -------- -------- $893,792 $900,413 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 66,721 $ 50,603 Current portion of long-term debt 3,199 4,434 Current portion of related party debt -- 4,314 Merger related accruals 12,808 40,089 Revolving line of credit 25,000 -- Due to The Former Learning Company stockholders 328 25,353 -------- -------- 108,056 124,793 -------- -------- LONG-TERM OBLIGATIONS: Senior Convertible Notes 339,650 350,000 Senior Exchangeable/Convertible Note 150,000 150,000 Other long-term obligations 6,233 3,982 -------- -------- 495,883 503,982 -------- -------- DEFERRED INCOME TAXES 96,769 57,119 STOCKHOLDERS' EQUITY 193,084 214,519 -------- -------- $893,792 $900,413 ======== ========
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, ------------------------------- ------------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- REVENUES $ 90,055 $ 41,579 $ 237,308 $ 119,408 COSTS AND EXPENSES: Costs of production 23,095 12,656 63,799 38,563 Sales, marketing and support 17,061 9,425 48,311 27,570 General and administrative 7,044 5,929 20,794 18,284 Research and development 9,710 3,097 26,457 8,764 Amortization and merger related charges 120,818 -- 373,407 -- ----------- ----------- ----------- ----------- 177,728 31,107 532,768 93,181 OPERATING INCOME (LOSS) (87,673) 10,472 (295,460) 26,227 INTEREST INCOME (EXPENSE), net (5,506) 1,274 (18,225) 517 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE TAXES (93,179) 11,746 (313,685) 26,744 PROVISION FOR INCOME TAXES: Current 6,774 1,703 14,783 3,906 Deferred (6,774) -- (14,783) -- ----------- ----------- ----------- ----------- -- 1,703 -- 3,906 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (93,179) $ 10,043 $ (313,685) $ 22,838 =========== =========== =========== =========== NET INCOME (LOSS) PER SHARE $ (2.08) $ 0.36 $ (8.02) $ 0.83 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 44,798,000 28,266,000 39,124,000 27,447,000
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, --------------------------- 1996 1995 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(313,685) $ 22,838 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 321,555 7,938 Charge for purchased research and development 56,688 -- Changes in operating assets and liabilities: Accounts receivable (34,164) (12,135) Accounts payable and accruals 6,025 (1,841) Other 8,823 (17,768) --------- -------- 45,242 (968) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets and other (13,456) (9,027) Payment of merger related accruals (35,414) -- Payments to stockholders of The Former Learning Company (25,025) -- Acquisitions 21,518 (23,325) Other -- (1,706) --------- -------- (52,377) (34,058) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital leases and long-term debt (6,233) (310) Repurchase of Senior Convertible Notes (8,350) -- Borrowings (repayments) under line of credit 25,000 (4,666) Proceeds from issuance of common stock for settlement of expenses 2,888 -- Proceeds from issuance of common stock related to exercise of stock options, net 21,435 113,996 Other (764) -- --------- -------- 33,976 109,020 --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (197) 904 --------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS 26,644 74,898 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 77,832 12,205 --------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 104,476 $ 87,103 ========= ========
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, ----------------- 1996 1995 -------- ------ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued to acquire MECC $220,184 $ -- Common stock issued to acquire tewi -- 3,640 Common stock issued in other acquisitions 15,255 8,481 Increase in APIC due to value of in-the-money employee stock options acquired in connection with the acquisition of MECC 19,444 -- Common stock issued for settlement of expenses 10,132 -- Common stock issued to settle note payable to related party 3,053 -- Equipment acquired under capital leases 1,262 --
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. (formerly known as SoftKey International Inc.) ("TLC" or the "Company") for the three and nine months ended September 30, 1996 and 1995 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 for the year ended January 6, 1996. The results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. Effective October 24, 1996 the Company changed its name from SoftKey International Inc. to The Learning Company, Inc. The third quarter reporting period for 1996 ended on October 5, 1996 and the third quarter reporting period for 1995 ended on September 30, 1995. For clarity of presentation and comparison, all references to the Year Ended December 31, 1995 relate to the period January 1, 1995 to January 6, 1996. The periods from January 7, 1996 to October 5, 1996 and from January 1, 1995 to September 30, 1995 are referred to as the "Nine Months Ended September 30, 1996" and the "Nine Months Ended September 30, 1995," respectively, throughout these financial statements. The periods from July 2, 1995 to September 30, 1995 and from July 7, 1996 to October 5, 1996 are referred to as the "Third Quarter 1995" and the "Third Quarter 1996," respectively. On December 28, 1995, the Company acquired Compton's NewMedia, Inc. and Compton's Learning Company (collectively, "Compton's") in exchange for a combination of common stock and the assumption of certain intercompany indebtedness from Tribune Company. On December 22, 1995, the Company acquired control of The Learning Company ("The Former Learning Company") for cash. On July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi") in exchange for a combination of cash and common stock. Each of these acquisitions was accounted for using the purchase method of accounting. On August 31, 1995, the Company acquired Future Vision Holding, Inc. ("Future Vision") for common stock. This transaction was accounted for using the pooling-of-interests method. Prior period amounts have been restated to reflect the pooling-of-interests with Future Vision. On May 17, 1996, the Company acquired the Minnesota Educational Computing Corporation (MECC) ("MECC"), in exchange for 9,174,349 shares of common stock. The purchase price for MECC was allocated as follows:
Purchase Price (inclusive of value of in-the-money stock options and deferred income taxes) $283,496 Less: Fair value of net tangible assets 13,990 -------- Excess to allocate 269,506 -------- Less: excess allocated to: Incomplete technology 56,688 Completed technology and products 88,501 Brands and trademarks 894 -------- 146,083 -------- Goodwill $123,423 ========
7 8 Summarized pro forma combined results of operations for the Nine Months Ended September 30, 1996 and the Nine Months Ended September 30, 1995 are shown as if the transactions had occurred at the beginning of the period presented. Pro forma adjustments relate primarily to amortization of goodwill and complete technology and merger related charges. The TLC pro forma results of operations for the Nine Months Ended September 30, 1995 have been prepared assuming the acquisitions of The Former Learning Company, Compton's and tewi had occurred at the beginning of the period and include the charge for MECC purchased incomplete technology. These pro forma combined results of operations include the historical results from each of the acquired businesses and do not reflect any reductions in operating costs derived from consolidation of functional departments in the companies or the one time charges for purchased incomplete technology of The Former Learning Company and Compton's. In addition, pro forma combined operating income (loss) includes pro forma amortization of assets resulting from purchase accounting of $41,128 and $391,468, respectively, and pro forma interest on convertible debt of $0 and $20,625, respectively, for the Nine Months Ended September 30, 1996 and the Nine Months Ended September 30, 1995.
MECC Nine Months Ended Including Pro Forma September 30, 1996 TLC Adjustments Pro Forma Combined - --------------------------- ---------------------- ------------------- ------------------ Revenues $ 237,308 $ 7,800 $ 245,108 Operating loss (295,460) (50,340) (345,800) Net loss (313,685) (41,030) (354,715) Net loss per share $ (8.02) $ (8.15) TLC MECC Nine Months Ended Including Pro Forma Including Pro Forma September 30, 1995 Adjustments Adjustments Pro Forma Combined - --------------------------- ------------------- ------------------- ------------------ Revenues $ 183,946 $ 22,163 $ 206,109 Operating loss (290,862) (76,330) (367,192) Net loss (294,605) (63,010) (357,615) Net loss per share $ (9.06) $ (8.58)
On August 12, 1996 the Company acquired Edusoft S.A., an educational software company located in Paris, France, in exchange for the issuance of 752,275 shares of common stock. In addition, certain stockholders are eligible to earn additional purchase price dependent upon future operating results. This acquisition was accounted for as a purchase. The results of operations were not material to the Company and, accordingly, pro forma information is not provided herein. 2. GOODWILL AND OTHER INTANGIBLE ASSETS The excess cost over the fair value of net assets acquired is recorded as goodwill and is amortized on a straight-line basis over 2 years, except for the goodwill associated with the Company's Canadian income tax software business, which is being amortized on a straight-line basis over its estimated useful life of 40 years. The cost of identified intangible assets is generally amortized on a straight-line basis over its estimated useful life of 2 to 7 years. Deferred financing costs are being amortized on a straight-line basis over the term of the related debt financing. The carrying value of goodwill and intangible assets is reviewed on a quarterly and annual basis for the existence of facts or circumstances both internally and externally that may suggest impairment. To date no such impairment has occurred. Should there be an impairment in the future, the Company will measure the amount of the impairment based on discounted expected future cash flows. The cash flow estimates that will be used will contain management's best estimates, using appropriate and customary assumptions and projections at the time. 8 9 3. LONG-TERM OBLIGATIONS September 30, December 31, 1996 1995 ------------- ------------ Senior Convertible Notes $341,650 $350,000 Related party Senior Convertible/ Exchangeable Notes 150,000 154,314 Capital leases 2,073 1,614 Other 5,359 6,802 -------- -------- 499,082 512,730 Less: current portion (3,199) (8,748) -------- -------- $495,883 $503,982 ======== ========
On April 5, 1996 the Company issued 158,099 shares of common stock in settlement of $3,000 of related party debt plus accrued interest to Tribune Company, a stockholder. 9 10 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 for the year ended January 6, 1996. 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. INTRODUCTION The Learning Company, Inc. (formerly known as SoftKey International Inc.) ("TLC" or the "Company") is a leading developer and publisher of high quality consumer software for PC's, primarily produced on CD-ROM. The Company develops, licenses, manufactures, distributes and markets a wide range of consumer titles in the lifestyle, edutainment, productivity, entertainment and education categories. In addition, the Company develops, markets and distributes income tax software and provides comprehensive nationwide tax processing for personal, corporate and trust tax returns in Canada. On May 17, 1996, the Company acquired the Minnesota Educational Computing Corporation (MECC) ("MECC") in exchange for common stock. On December 28, 1995, the Company acquired Compton's NewMedia, Inc. and Compton's Learning Company (collectively "Compton's") in exchange for a combination of common stock and cancellation of certain intercompany indebtedness from Tribune Company. On December 22, 1995, the Company acquired control of The Learning Company ("The Former Learning Company") for cash. On July 21, 1995 the Company acquired tewi Verlag GmbH ("tewi") in exchange for a combination of cash and common stock. Each of these transactions were accounted for as a purchase. Accordingly, results are combined from the date of the respective merger onwards for the above transactions. Results (in terms of dollar amounts) for the Three and Nine Months Ended September 30, 1996 are not directly comparable to the Three and Nine Months Ended September 30, 1995 because they do not include results from the purchases. Accordingly, management's discussion and analysis for these periods is generally based upon a comparison of specified results as a percentage of total revenues. On August 31, 1995, TLC acquired all of the outstanding common stock of Future Vision Holding, Inc. This transaction was accounted for using the pooling-of-interests method of accounting. Prior period results have been restated to reflect the pooling-of-interest. RESULTS OF OPERATIONS NET INCOME. The Company incurred a net loss of $93,179 ($2.08 per fully diluted share) on revenues of $90,055 in the Third Quarter 1996 and a net loss of $313,685 ($8.02 per fully diluted share) on revenues of $237,308 in the Nine Months Ended September 30, 1996 as compared to net income of $10,043 ($0.36 per fully diluted share) on revenues of $41,579 in the Third Quarter 1995 and net income of $22,838 ($0.83 per fully diluted share) on revenues of $119,408 in the Nine Months Ended September 30, 1995. The increase in revenue is primarily a result of the acquisitions of The Former Learning Company and Compton's in December 1995 and MECC in May 1996. The net loss in the Third Quarter 1996 and Nine Months Ended September 30, 1996 is a result of the effect of the amortization of goodwill and other merger related costs of $120,818 and $373,407, respectively. 10 11 REVENUES. Revenues by distribution channel for the Third Quarter 1996 as compared to the Third Quarter 1995 and the Nine Months Ended September 30, 1996 as compared to the Nine Months Ended September 30, 1995 are as follows:
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------- ------------------------------------------ 1996 % 1995 % 1996 % 1995 % ------- --- ------- --- -------- --- -------- --- Retail $50,394 56% $20,430 49% $123,503 52% $ 53,038 45% OEM 8,113 9% 6,471 16% 21,708 9% 14,341 12% School 7,722 9% -- -- 17,220 7% -- -- Direct response 8,238 9% 6,190 15% 22,372 9% 19,569 16% International 14,453 16% 7,115 17% 37,123 16% 15,617 13% Tax software and services 1,135 1% 1,373 3% 15,382 7% 16,843 14% ------- --- ------- --- -------- --- -------- --- $90,055 100% $41,579 100% $237,308 100% $119,408 100% ======= === ======= === ======== === ======== ===
Total revenues increased 117% in the Third Quarter 1996 as compared to Third Quarter 1995 and 99% for the Nine Months Ended September 30, 1996 as compared to the Nine Months Ended September 30, 1995 due to several factors, including the effect of revenues from the acquisitions of The Former Learning Company, Compton's and MECC and an increase in the sales of the Company's Platinum and KeyKids "jewel-case only" line of products. Retail revenues increased as a result of the acquisitions of The Former Learning Company, Compton's and MECC plus a general increase in sales of consumer software products through retailers such as Office Depot, K-Mart and OfficeMax. International sales increased primarily as a result of the acquisition of tewi on July 21, 1995 and an increase in translated foreign language versions of the Company's products available for sale. Original equipment manufacturer ("OEM") revenues increased due to the availability of new product offerings for this channel. Direct response revenues increased on a dollar basis but decreased as a percentage of revenues due to the overall increase in revenues resulting from product sales of the acquired companies which did not formerly participate in the direct mail channel. Prior to the acquisition of The Former Learning Company and MECC, the Company did not participate in the school channel. Revenues from the Tax Division declined for the Nine Months Ended September 30, 1996 as compared to the Nine Months Ended September 30, 1995 as a result of increased competition in the Canadian income tax market. COSTS AND EXPENSES. The Company's costs and expenses and the respective percentages of revenues for the Third Quarter 1996 as compared to the Third Quarter 1995 and the Nine Months Ended September 30, 1996 as compared to the Nine Months Ended September 30, 1995 are as follows:
Three Months ended September 30, Nine Months Ended September 30, ---------------------------------------------- -------------------------------------------------- % of % of % of % of 1996 Revenues 1995 Revenues 1996 Revenues 1995 Revenues ------- -------- -------- -------- -------- -------- ------- -------- Costs of production $23,095 25% $12,656 30% $ 63,799 27% $38,563 33% Sales, marketing and support 17,061 19% 9,425 23% 48,311 20% 27,570 23% Research and development 9,710 11% 3,097 7% 26,457 11% 8,764 7% General and administrative 7,044 8% 5,929 14% 20,794 9% 18,284 15% ------- -- ------- -- -------- -- ------- -- $56,910 63% $31,107 74% $159,361 67% $93,181 78% ======= == ======= == ======== == ======= ==
Total costs and expenses decreased as a percentage of revenues to 63% and 67% in the Third Quarter 1996 and in the Nine Months Ended September 30, 1996, respectively, as compared with 74% and 78% in the Third Quarter 1995 and the Nine Months Ended September 30, 1995, respectively. This decrease as a percentage of revenues was caused primarily by the reduction in general and administrative costs and costs of production as a result of the integration and centralization of the operations of the acquired companies. 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, decreased in the Third Quarter 1996 and the Nine Months Ended September 30, 1996 to 25% and 27% of revenues, respectively, as compared to 30% and 33% of revenues for the Third Quarter 1995 and the Nine Months Ended September 30, 1995, respectively. The decrease in 11 12 costs of production as a percentage of revenues was caused by reduced prices on the cost to manufacture product and the impact from The Former Learning Company and MECC having historically higher gross margin selling products than the Company prior to these acquisitions, an increase in sales in the OEM, school and direct response channels, all of which typically enjoy higher gross margins than the Company's traditional retail box product. As well, the Company has seen an increase in sales of its Platinum line of products, which, due to the nature of the packaging in a jewel-case, also generate higher gross margins. Sales, marketing and support expenses decreased to 19% of revenues in the Third Quarter 1996 as compared to 23% of revenues in the Third Quarter 1995 and 20% of revenues in the Nine Months Ended September 30, 1996 as compared to 23% of revenues in the Nine Months Ended September 30, 1995. The percentage decrease was a result of the Company reducing both fixed costs and employee headcount of the combined Company following the acquisitions in 1995 and early 1996. Research and development costs increased to 11% of revenues for both the Third Quarter 1996 and Nine Months Ended September 30, 1996, as compared to 7% in both the Third Quarter 1995 and Nine Months Ended September 30, 1995. The increase is a result of a higher proportion of internally developed products from The Former Learning Company, Compton's and MECC than previously from the Company prior to these acquisitions. General and administrative expenses decreased to 8% of revenues in the Third Quarter 1996 as compared to 14% in the Third Quarter 1995 and 9% of revenues in the Nine Months Ended September 30, 1996 as compared to 15% of revenues in the Nine Months Ended September 30, 1995. This is primarily the result of the closure of a Future Vision Holding, Inc. facility in New York and consolidation of finance and manufacturing functions in Europe. In addition, the percentage of revenues decrease resulted from a general reduction in overhead costs and employee headcount following the acquisitions in 1995 and 1996. During the Third Quarter 1996 and Nine Months Ended September 30, 1996, charges of $120,818 and $373,407, respectively, resulting from the acquisitions of The Former Learning Company, Compton's and MECC were incurred. Included in the Nine Months Ended September 30, 1996 is $56,688 related to a charge for in-process technology and the remainder relates to amortization of goodwill and acquired technology related assets. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased from $77,832 at December 31, 1995 to $104,476 at September 30, 1996. This increase was attributable to the cash provided by general operations, cash received from the acquisition of MECC of $21,481 and proceeds from stock option exercises of $21,435, offset by the repayment of approximately $35,414 of merger related liabilities and purchases of equipment and other for $13,456. During the Nine Months Ended September 30, 1996 the Company paid $25,025 of amounts due to the stockholders of The Former Learning Company. During the Nine Months Ended September 30, 1996 the Company generated cash from operations of $45,242. As of November 8, 1996 the Company has outstanding $339,650 principal amount 5 1/2% Senior Convertible Notes due 2000 (the "Senior Convertible Notes") and $150,000 principal amount 5 1/2% Senior Convertible/Exchangeable Notes due 2000 held by the Tribune Company (the "Tribune Notes"). The Senior Convertible Notes and Tribune Notes will be redeemable by the Company on or after November 2, 1998 at declining redemption prices. On August 1, 1996, the Company announced that its Board of Directors authorized the repurchase by the Company over the next twelve months of up to $50 million principal amount of its Senior Convertible Notes from time to time in the open market and privately negotiated transactions. Any purchases would depend on price, market conditions and other factors. The Company intends to use its excess cash flow from operations for any such purchases. During the Third Quarter 1996 Senior Convertible Notes declined by $10,350. The Company also has in place a revolving line of credit (the "Line"), to provide for a maximum availability of $50,000. Borrowings under the Line become due on July 1, 1997 and bear interest at the prime rate (8.25% at September 30, 1996). The Line is subject to certain financial covenants, is secured by a general security interest in 12 13 certain operating subsidiaries of the Company and by a pledge of the stock of certain of its subsidiaries. The Line is guaranteed by the Company. There was $25,000 drawn on the Line at September 30, 1996. 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. The Company also conducts its tax software business in Canada, which has experienced foreign currency exchange rate fluctuation relative to the US dollar. In order to mitigate this exposure, from time to time the Company has purchased foreign exchange options contracts, none of which are outstanding at September 30, 1996. Cash flow from operations on a short-term basis is positively impacted by the seasonality of the income tax software business in the first two quarters of the calendar year. 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 market. The Company is continuously evaluating 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 Certain of the information contained in this Quarterly Report on Form 10-Q which are not historical facts may include forward looking statements. The forward looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward looking statements, including those discussed below or in the Company's Annual Report on Form 10-K for the fiscal year ended January 6, 1996. 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 expects the level of competition in the consumer software industry will become more intense and that companies with greater access to capital, new products and retail shelf space may enter its market. In addition, should competitors of the Company continue to consolidate, it will increase the risk associated with channel management and product offerings. The Company has recently completed the acquisitions of The Former Learning Company, Compton's and MECC and may plan to seek acquisitions of businesses, products or technologies in the future that are complementary to its current business. There can be no assurance that the Company will not encounter difficulties in integrating these or future businesses, products or technologies. As a result of the acquisitions in 1995 and the acquisition of MECC in 1996, the Company will have substantial amounts of non-cash amortization of goodwill and intangible assets over the next few years. This will result in substantial operating losses in the future. The rate of change in the consumer software industry has continued to increase. As consumers have become more accustomed to purchasing multimedia software the Company believes they have developed, and will continue to develop, increased sophistication with respect to the content and quality of their software purchases, demanding increasingly full featured and content rich programs. In addition, the development time for new platforms on which the Company's products run is decreasing, requiring the Company to update or discontinue products at shorter intervals. The Company also anticipates that the future demand for on-line and Internet compatible products will increase and it will be required to continuously re-evaluate its product strategy. The Company continually assesses and redefines its existing distribution strategy to meet these future demands. These factors make the Company's future revenue and profitability increasingly unpredictable. 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 Securities and Exchange Commission and is not intended to serve as a basis for projections of future events. 13 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is not a party to any material legal proceedings other than ordinary routine litigation and arbitration incidental to its business. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Amended and Restated Combination Agreement by and among WordStar International Incorporated, SoftKey Software Products Inc., Spinnaker Software Corporation and SSC Acquisition Corporation dated as of August 17, 1993, as amended(1) 2.2 Agreement and Plan of Merger dated November 30, 1995 by among the Company, Cubsco I Inc., Cubsco II Inc., Tribune Company, Compton's NewMedia, Inc., and Compton's Learning Company(2) 2.3 SoftKey/TLC Agreement and Plan of Merger dated December 6, 1995 among the Company, Kidsco Inc. and The Learning Company(2) 2.4 Agreement and Plan of Merger by and among the Company, SchoolCo Inc. and Minnesota Educational Computing Corporation (MECC) dated as of October 30, 1995(3) 3.1 Restated Certificate of Incorporation, as amended(4) 3.2 Bylaws of the Company, as amended(4) 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")(3) 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 Trustee(5) 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 Agreement(5) 4.5 Form of Securities Resale Registration Rights Agreement by and among the Company and Tribune Company(6) 4.6 Form of Indenture between the Company and State Street Bank and Trust Company, as Trustee, for 5 1/2% Senior Convertible/Exchangeable Notes Due 2000(2) 10.1 Fifth Amendment dated as of October 4, 1996 by and among SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of September 30, 1994 11.1 Statement Re: Computation of Per Share Earnings 14 15 - ---------------------- 1 Incorporated by reference to schedules included in the Company's definitive Joint Management Information Circular and Proxy Statement dated December 27, 1993. 2 Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated December 11, 1995. 3 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. 4 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 6, 1996. 5 Incorporated by reference to exhibits filed with Company's Registration Statement on Form S-3 (Reg No. 333- 145), filed January 26, 1996. 6 Filed as exhibits to Exhibit 2.2 hereto. (b) REPORTS ON FORM 8-K None 15 16 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. November 11, 1996 /s/ R. Scott Murray ----------------------------------- R. Scott Murray Chief Financial Officer (principal financial and accounting officer) 16 17 EXHIBIT INDEX ------------- EXHIBIT PAGE NUMBER DESCRIPTION Number - ------- ----------- ------ 2.1 Amended and Restated Combination Agreement by and among WordStar International Incorporated, SoftKey Software Products Inc., Spinnaker Software Corporation and SSC Acquisition Corporation dated as of August 17, 1993, as amended(1) 2.2 Agreement and Plan of Merger dated November 30, 1995 by among the Company, Cubsco I Inc., Cubsco II Inc., Tribune Company, Compton's NewMedia, Inc., and Compton's Learning Company(2) 2.3 SoftKey/TLC Agreement and Plan of Merger dated December 6, 1995 among the Company, Kidsco Inc. and The Learning Company(2) 2.4 Agreement and Plan of Merger by and among the Company, SchoolCo Inc. and Minnesota Educational Computing Corporation (MECC) dated as of October 30, 1995(3) 3.1 Restated Certificate of Incorporation, as amended(4) 3.2 Bylaws of the Company, as amended(4) 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")(3) 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 Trustee(5) 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 Agreement(5) 4.5 Form of Securities Resale Registration Rights Agreement by and among the Company and Tribune Company(6) 4.6 Form of Indenture between the Company and State Street Bank and Trust Company, as Trustee, for 5 1/2% Senior Convertible/Exchangeable Notes Due 2000(2) 10.1 Fifth Amendment dated as of October 4, 1996 by and among SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of September 30, 1994 11.1 Statement Re: Computation of Per Share Earnings - ---------------------- 1 Incorporated by reference to schedules included in the Company's definitive Joint Management Information Circular and Proxy Statement dated December 27, 1993. 2 Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated December 11, 1995. 3 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. 17 18 4 Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 6, 1996. 5 Incorporated by reference to exhibits filed with Company's Registration Statement on Form S-3 (Reg No. 333- 145), filed January 26, 1996. 6 Filed as exhibits to Exhibit 2.2 hereto. 18 EX-10.1 2 FIFTH AMENDMENT TO LOAN DOCUMENTS 1 Exhibit 10.1 ------------ FIFTH AMENDMENT TO LOAN DOCUMENTS --------------------------------- AMENDMENT dated as of October 4, 1996 (the "AMENDMENT") by and among SOFTKEY INC., a Minnesota corporation ("SOFTKEY"), MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC), a Minnesota corporation ("MECC"), SOFTKEY MULTIMEDIA INC., a Massachusetts corporation ("MULTIMEDIA"), and THE LEARNING COMPANY, a Delaware corporation, each referred to hereinafter as a "BORROWER" and, collectively, as the "BORROWERS", and FLEET NATIONAL BANK, as successor in interest to Fleet Bank of Massachusetts, N.A. (together with its successors, the "BANK"). PRELIMINARY STATEMENT 1. SoftKey and its corporate affiliates SchoolCo Inc., a Minnesota corporation ("SCHOOLCO"), Multimedia and The Learning Company, each a wholly-owned subsidiary of SoftKey International Inc., a Delaware Corporation (the "GUARANTOR") (SoftKey and such affiliates being collectively referred to herein as the "ORIGINAL BORROWERS"), are parties with the Bank to a Credit Agreement dated as of September 30, 1994, as previously amended by a letter amendment dated as of December 5, 1994, a Second Amendment to Loan Documents dated as of May 17, 1995, a Third Amendment to Loan Documents dated as of December 22, 1995, and a Fourth Amendment to Loan Documents dated as of February 28, 1996 (as so amended and as the same may be amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), pursuant to which the Bank agreed to make Revolving Line of Credit Loans to SoftKey and the other Original Borrowers up to a maximum aggregate principal amount of $50,000,000. Unless otherwise defined herein, capitalized terms used herein shall have the same respective meanings as set forth in the Credit Agreement. 2. Pursuant to a certain plan of reorganization and merger, SchoolCo has merged with and into MECC. As a consequence, MECC is the legal successor to SchoolCo and a wholly-owned subsidiary of the Guarantor. 3. The Bank and the Borrowers wish to amend and waive compliance with certain provisions of the Credit Agreement and the other Loan Documents on the terms set forth herein, including, without limitation, by confirming that MECC has become a co-Borrower with SoftKey, Multimedia and The Learning Company under the Credit Agreement and the other Loan Documents. NOW THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: I. Section Amendments to Credit Agreement. ------------------------------ A. Section 1.1 is hereby amended by deleting the date "June 30, 1997" appearing in the fourth line thereof and substituting in lieu thereof the date "June 30, 1998". A. Section 1.5 is hereby amended by deleting the date "July 1, 1997" appearing in the third line thereof and substituting in lieu thereof the date "July 1, 1998". 2 A. Section 3.2 is hereby amended by amending and restating the last sentence thereof to read as follows: "In order to secure the obligations of the Guarantor under the Guaranty, the Guarantor shall enter into an amended and restated pledge agreement in the form previously agreed upon by the Guarantor and the Bank (the "SECOND AMENDED AND RESTATED PLEDGE AGREEMENT"), pursuant to which the Guarantor shall pledge to the Bank all the outstanding shares of capital stock of SoftKey and the New Subsidiaries." A. Section 6.12(a) is hereby amended by deleting the period at the end of the first sentence thereof and substituting the following in lieu thereof: "; PROVIDED, HOWEVER, that the aforesaid list, description and other information relating to the intellectual property and products of MECC shall be provided to the Bank on or before October 4, 1996." A. Section 6.12(b) is hereby amended by deleting the period at the end of the first sentence thereof and substituting the following in lieu thereof: "; PROVIDED, HOWEVER, that in the case of MECC such action shall be taken on or before October 4, 1996." A. Section 6.12(b) is hereby further amended by deleting the phrase "SCHEDULE B" and substituting in lieu thereof the phrase "SCHEDULE A". A. Section 6.13(a) is hereby amended by deleting the period following the date "January 1, 1996" and substituting the following in lieu thereof: "; PROVIDED, HOWEVER, that in the case of MECC such action shall be taken on or before October 4, 1996." A. Section 7.8 is hereby amended by deleting the word "and" from the phrase "and (e)" and by deleting the period following the phrase "SCHEDULE A" and substituting the following in lieu thereof: "; and (f) subject to the conditions set forth below, payments, not to exceed $30,000,000 in the aggregate, for the purpose of repurchasing the Borrower's 5 1/2% Senior Convertible Notes due 2000 (the "SENIOR CONVERTIBLE NOTES"); PROVIDED, HOWEVER, that (i) any such payments shall be made only during the fiscal quarters ending October 5, 1996 and January 4, 1997, (ii) the amount of such payments made during the fiscal quarter ending October 5, 1996 shall not exceed $10,000,000 in the aggregate, (iii) the amount of such payments made during the fiscal quarter ending January 4, 1997 shall not exceed $20,000,000 in the aggregate, and (iv) in the event the Borrower makes any such payment during either of the aforementioned fiscal quarters, it shall at the end of the immediately succeeding fiscal quarter maintain cash in an amount equal to at least $50,000,000 plus the aggregate amount of the then outstanding Extensions of Credit." A. Section 7.13 is hereby amended by adding the following sentence at the end thereof: "For purposes of this Section 7.13, any gains resulting from the repurchase of Senior Convertible Notes or other Indebtedness of the Borrower shall not be taken into account for purposes of calculating Adjusted Net Income." 3 A. Sections 7.14 and 7.15 are hereby amended and restated in their entirety as follows: "7.14 LEVERAGE RATIO. In the case of the fiscal quarter ending on January 4, 1997 and each fiscal quarter thereafter, the Borrowers will not permit the Leverage Ratio to be greater than 3.75 to 1 for the four fiscal quarters ending with such quarter; PROVIDED, HOWEVER, in the event that the Tribune Notes are during such fiscal quarter exchanged for preferred stock (unless the Borrowers furnish evidence reasonably satisfactory to the Bank in the form of a legal opinion, accountants' letter or otherwise to the effect that such preferred stock would not be treated as stockholders' equity but as indebtedness under GAAP or applicable law) in accordance with the terms thereof, the maximum Leverage Ratio shall be immediately readjusted to 3.0 to 1. "7.15 INTEREST COVERAGE RATIO. The Borrowers will not permit the Interest Coverage Ratio to be less than (a) 3.0 to 1 for the fiscal quarter ending July 6, 1996, (b) 3.5 to 1 for the fiscal quarter ending October 5, 1996 and (c) in the case of the fiscal quarter ending January 4, 1997 and each fiscal quarter thereafter, 3.5 to 1 for the four fiscal quarters ending with such quarter." A. Section 9 is hereby amended by amending and restating the definitions of "Borrowers", "Leverage Ratio", "New Subsidiaries" and "Security Instruments" as follows: ""BORROWERS" shall mean SoftKey and each of the New Subsidiaries." ""LEVERAGE RATIO" means, for any period, the ratio of Funded Indebtedness less cash in excess of $10 million to Operating Cash Flow." ""NEW SUBSIDIARIES" shall mean MECC, The Learning Company and Multimedia." ""SECURITY INSTRUMENTS" shall mean, collectively, the security agreements executed by SoftKey and the New Subsidiaries, including without limitation the New Subsidiary Security Agreements, and each other instrument or agreement that purports to secure the Obligations of the Borrowers to the Bank." A. Section 9 is hereby further amended by adding the following definition of "Senior Convertible Notes": ""SENIOR CONVERTIBLE NOTES" shall have the meaning set forth in Section 7.8." A. Section 10.15 is hereby amended by deleting from the first sentence thereof the phrase "SchoolCo and each New Subsidiary" and substituting in lieu thereof the phrase "Each New Subsidiary". A. The Credit Agreement is hereby further amended by replacing the Schedule appearing as "Schedule B -- Designated Software Products" with the Schedule appended hereto as SCHEDULE A. I. Section Amendments to Other Loan Documents. ---------------------------------- A. (a) The definition of "Secured Obligations" in Section 1 of the Security Agreement dated as of September 30, 1994 between SoftKey and the Bank (the "SOFTKEY SECURITY AGREEMENT") is hereby amended by deleting the phrase "SchoolCo Inc. 4 " and substituting in lieu thereof the phrase "Minnesota Educational Computing Corporation (MECC)". (b) The SoftKey Security Agreement is hereby further amended by making such other changes thereto as may be necessary or appropriate to reflect the amendment to the definition of "Secured Obligations" set forth in Section 2.1(a) hereof. (c) Section 1 of the SoftKey Security Agreement is hereby further amended by adding the following new definition: ""INVESTMENT PROPERTY" means all "investment property" (as defined in the Uniform Commercial Code as in effect in The Commonwealth of Massachusetts from time to time), whether now owned or hereafter acquired by the Company." (d) Section 3(a) of the SoftKey Security Agreement is hereby amended by inserting the following new item (iii-a) between existing items (iii) and (iv) in the list of Collateral set forth therein: "(iii-a) Investment Property;". A. (a) The definition of "Borrowers" in Section 1 of the Amended and Restated Security Agreement dated as of February 28, 1996 between The Learning Company and the Bank (the "LEARNING COMPANY SECURITY AGREEMENT") is hereby amended and restated in its entirety as follows: ""BORROWERS" means the Company, SoftKey, Minnesota Educational Computing Corporation (MECC) and SoftKey Multimedia Inc., together with the respective successors of the foregoing corporations and any other corporation or entity that shall in the future become a "Borrower" for purposes of the Credit Agreement." (b) The Learning Company Security Agreement is hereby further amended by making such other changes thereto as may be necessary or appropriate to reflect the amendment to the definition of "Borrowers" set forth in Section 2.2(a) hereof. (c) Section 1 of the Learning Company Security Agreement is hereby further amended by adding the following new definition: ""INVESTMENT PROPERTY" means all "investment property" (as defined in the Uniform Commercial Code as in effect in The Commonwealth of Massachusetts from time to time), whether now owned or hereafter acquired by the Company." (d) Section 3 of the Learning Company Security Agreement is hereby amended by inserting the following new item (iii-a) between existing items (iii) and (iv) in the list of Collateral set forth therein: "(iii-a) Investment Property;". A. (a) The definition of "Borrowers" in the Security Agreement dated as of February 28, 1996 between Multimedia and the Bank (the "MULTIMEDIA SECURITY AGREEMENT") is hereby amended and restated in its entirety as follows: ""BORROWERS" means the Company, SoftKey, Minnesota Educational Computing Corporation and The Learning Company, together with the respective successors of the foregoing corporations and any other corporation or entity that shall in the future become a "Borrower" for purposes of the Credit Agreement." 5 (b) The Multimedia Security Agreement is hereby further amended by making such other changes thereto as may be necessary or appropriate to reflect the amendment to the definition of "Borrowers" set forth in Section 2.3(a) hereof. (c) Section 1 of the Multimedia Security Agreement is hereby further amended by adding the following new definition: ""INVESTMENT PROPERTY" means all "investment property" (as defined in the Uniform Commercial Code as in effect in The Commonwealth of Massachusetts from time to time), whether now owned or hereafter acquired by the Company." (d) Section 3 of the Multimedia Security Agreement is hereby amended by inserting the following new item (iii-a) between existing items (iii) and (iv) in the list of Collateral set forth therein: "(iii-a) Investment Property;". I. Section Conditions of Effectiveness. ---------------------------- This Amendment shall be deemed effective as of October 4, 1996 (the "EFFECTIVE DATE"), provided that the Bank shall have received the following on or before such date: 1. two copies of this Amendment executed by each Borrower; 1. the Third Amendment to Guaranty in the form enclosed duly executed by the Guarantor; 1. an amended and restated promissory note in the form enclosed duly executed by each Borrower (the "AMENDED NOTE"); 1. an amended and restated pledge agreement in the form enclosed herewith (the "SECOND AMENDED AND RESTATED PLEDGE AGREEMENT") duly executed by the Guarantor, together with stock certificates representing all the outstanding shares of capital stock of SoftKey, The Learning Company, Multimedia and MECC, together with appropriate stock powers executed in blank; 1. the amended and restated security agreement in the form enclosed herewith (the "MECC SECURITY AGREEMENT") duly executed by MECC, pursuant to which MECC grants to the Bank a security interest in all its assets, together with such UCC financing statements as the Bank may request duly executed by MECC; 1. a certificate of the Secretary or Assistant Secretary of each of SoftKey, The Learning Company and Multimedia as to resolutions of the Board of Directors of each such corporation authorizing this Amendment and the Amended Note; 1. a certificate of the Secretary or Assistant Secretary of MECC certifying as to (i) the charter and by-laws of MECC; (ii) resolutions of the Board of Directors of MECC authorizing the transactions and the execution of the documents contemplated hereby; and (iii) the incumbency and specimen signatures of the officers of MECC authorized to execute and deliver this Amendment, the Amended Note, the MECC Security Agreement and any other Loan Documents; 1. a Certificate of the Secretary or Assistant Secretary of the Guarantor as to resolutions of the Board of Directors of the Guarantor authorizing the Second Amended and Restated Pledge Agreement and the the Third Amendment to Guaranty; 6 1. opinions of counsel to each of the Borrowers and the Guarantor in form and substance reasonably acceptable to the Bank; and 1. a certificate of the chief financial officer of SoftKey to the effect that the acquisition of MECC has been consummated substantially in accordance with the acquisition terms and conditions previously disclosed to the Bank and attaching true and complete copies of the operative acquisition documents. I. Section Special Covenants And Representations With Regard To The Addition ----------------------------------------------------------------- Of Mecc As A Co-Borrower. - ------------------------ A. MECC does hereby assume and agree to perform all of the obligations of SchoolCo, its corporate predecessor, of whatever kind under and pursuant to the Credit Agreement and the other Loan Documents to which SchoolCo was a party. Each of MECC, The Learning Company and Multimedia (the "NEW SUBSIDIARIES") hereby agrees, jointly and severally with SoftKey, to be bound by the terms and conditions of the Credit Agreement and shall, for all purposes thereof, be a "Borrower" thereunder as of the Effective Date. A. Each of the New Subsidiaries, jointly and severally with SoftKey, hereby represents, warrants and covenants to the Bank that, after giving effect to this Amendment and to the transactions contemplated hereby: 1. The execution, delivery and performance by such New Subsidiary of this Amendment, the Amended Note and the Security Instruments to which it is a party will directly and indirectly inure to the benefit of such New Subsidiary, are in pursuit of its business purposes as an integral part of the business conducted and proposed to be conducted by SoftKey together with such New Subsidiary and are reasonably necessary and convenient in connection with the conduct of the business conducted and proposed to be conducted by it. By virtue of the foregoing, among other things, each New Subsidiary is receiving at least reasonably equivalent consideration from the Bank for its obligations undertaken under this Amendment, the Amended Note and the Security Instruments to which it is a party. 1. After giving effect to the transactions contemplated by this Amendment, each New Subsidiary has, and will have access to, adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection therewith as such debts mature. 1. Each New Subsidiary has and, after giving effect to the transactions contemplated hereby, will have assets having a fair saleable value in excess of the amount required to pay its probable liability on its existing debts as they become absolute and matured. The foregoing representations and warranties shall constitute representations and warranties of the New Subsidiaries under the Credit Agreement. Each of such representations and warranties shall survive and not be waived by the execution and delivery of this Amendment. I. Section Confirmation Of Representations, Absence Of Default. --------------------------------------------------- Each Borrower (including without limitation the New Subsidiaries) hereby confirms that the representations set forth in the Loan Documents (including without limitation those set forth in Section 6.9 of the Credit Agreement as to use of proceeds), as amended by this Amendment, are true and correct as of the date hereof, subject to the exceptions 7 and further disclosures set forth in SCHEDULE B hereto. Each Borrower hereby confirms that, except as set forth in Section 6 hereof or in SCHEDULE B hereto, no Event of Default has occurred and is continuing under the Credit Agreement. I. Section Waiver of Certain Existing Defaults. ----------------------------------- The Bank and the Borrowers acknowledge and agree that certain Events of Default (the "EXISTING DEFAULTS") have occurred and currently exist with respect to the financial covenants set forth in Section 7.12, Section 7.14 and Section 7.15 of the Credit Agreement as in effect prior to the effectiveness of this Amendment. The Bank hereby waives, effective upon the Effective Date, the Existing Defaults, PROVIDED that this waiver shall in no event be deemed to constitute a waiver with respect to any fiscal period other than the fiscal period ended April 6, 1996 or with respect to any covenants other than the financial covenants identified in this Section 6. I. Section Reference to and Effect on the Credit Agreement and the other Loan ------------------------------------------------------------------ Documents. - --------- A. Upon the Effective Date, each reference in the Credit Agreement to "this Credit Agreement", "hereunder", "hereof", "herein", or words of like import referring to the Credit Agreement, and each reference in the Amended Note and each of the other Loan Documents to "the Credit Agreement", "thereunder", "thereof", "therein", or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. A. Upon the Effective Date, each reference in the Credit Agreement and the other Loan Documents to the "Borrowers" shall mean and be a reference to the "Borrowers" or to "each Borrower" as the context may require, and shall reflect the addition of the MECC as a co-borrower on a joint and several basis under the Credit Agreement and the other Loan Documents. A. Except as specifically amended above, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed. Except for the original promissory note and the amended and restated promissory notes dated as of December 22, 1995 and February 28, 1996, each of which is superseded by the Amended Note and has been, or will be, marked "cancelled" and returned to SoftKey, each of the other Loan Documents, as amended hereby, is in full force and effect and is hereby ratified and confirmed. Each Borrower (and the Guarantor by its execution of the Third Amendment to Guaranty) agrees that, as of the date hereof, it has no defenses against the obligations represented by the Credit Agreement, the Amended Note, the Guaranty or the other Loan Documents. A. The amendments and waivers set forth herein (i) do not constitute a waiver or modification of any term, condition or covenant of the Credit Agreement, the Amended Note, any other Loan Documents or any of the instruments or documents referred to by the foregoing documents, other than as expressly set forth herein, and (ii) shall not prejudice any rights which the Bank may now or hereafter have under or in connection with the Credit Agreement, the Amended Note, the other Loan Documents or any of the instruments or documents referred to therein. 8 I. Section Cost and Expenses. ----------------- Each Borrower agrees, jointly and severally, to pay on demand all costs and expenses of the Bank in connection with the preparation, reproduction, execution and delivery of this Amendment and any other instruments and documents to be delivered hereunder, including the reasonable fees and out-of-pocket expenses of Sullivan & Worcester LLP, special counsel for the Bank with respect thereto. I. Section Governing Law. ------------- THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. I. Section Counterparts. ------------ This Amendment may be signed in one or more counterparts each of which shall constitute an original and all of which, when taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF the parties hereto have caused this Amendment to be executed under seal by their respective officers thereunto duly authorized as of the date first above written. SOFTKEY INC. By: ------------------------------ Name: R. Scott Murray Title: Chief Financial Officer MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) By: ------------------------------ Name: R. Scott Murray Title: Chief Financial Officer THE LEARNING COMPANY By: ------------------------------ Name: R. Scott Murray Title: Chief Financial Officer 9 SOFTKEY MULTIMEDIA INC. By: ------------------------------ Name: R. Scott Murray Title: Chief Financial Officer FLEET NATIONAL BANK, as successor in interest to Fleet Bank of Massachusetts, N.A. By: ------------------------------ Name: Thomas W. Davies Title: Vice President 10 SCHEDULE A SCHEDULE A -- Designated Software Products ------------------------------------------ (Section 6.12 of the Credit Agreement) 11 SCHEDULE B Exceptions and Qualifications to Representations ------------------------------------------------ (Section 5 of this Amendment) [If none, please initial:___________] EX-11.1 3 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 THE LEARNING COMPANY, INC. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 ----------- ----------- ------------ ----------- FULLY DILUTED Net income (loss) $ (93,179) $ 10,043 $ (313,685) $ 22,838 Weighted average common and Exchangeable Shares outstanding 44,798,000 26,534,000 39,124,000 25,918,000 Incremental shares calculated by the Treasury -- 1,732,000 -- 1,529,000 Stock Method applied to options, convertible debentures and warrants issued, using the greater of the closing and average fair value ----------- ----------- ------------ ----------- Common and common share equivalents outstanding for purposes of calculating fully diluted earnings per share 44,798,000 28,266,000 39,124,000 27,447,000 ----------- ----------- ----------- ----------- Fully diluted earnings (loss) per share $ (2.08) $ 0.36 $ (8.02) $ 0.83 =========== =========== =========== ===========
19 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET OF THE LEARNING COMPANY, INC. AS OF SEPTEMBER 30, 1996, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS JAN-04-1997 JAN-07-1996 OCT-05-1996 1 104,476 0 61,473 9,581 15,760 201,385 22,194 0 893,792 108,056 489,650 484 0 0 192,600 893,792 237,308 237,308 63,799 63,799 468,969 21,426 18,225 (313,685) 0 0 0 0 0 (313,685) (8.02) (8.02)
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