-----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, EO37YDKACRMKgLtDU+LzaK7j6ZCM/3jFCdwJwzIr0VW1IYJpYA2tLiik1aNCuGd/ 6wa+/ix1fZKrjr9BNLtDGg== 0000950135-98-001554.txt : 19980317 0000950135-98-001554.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950135-98-001554 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980313 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-K SEC ACT: SEC FILE NUMBER: 001-12375 FILM NUMBER: 98565713 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-K 1 THE LEARNING COMPANY 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the fiscal year ended January 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 incorporation) (IRS Employer Identification No.) ONE ATHENAEUM STREET CAMBRIDGE, MASSACHUSETTS 02142 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 494-1200 -------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ---------------------------- ------------------------------------ Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ The aggregate market value of voting stock of the registrant held by non-affiliates of the registrant as of February 2, 1998 was approximately $779,986,631. As of February 2, 1998, 49,919,124 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Stockholders expected to be held in May 1998 are incorporated by reference into Part III. 2 TABLE OF CONTENTS PART I Page ---- 1. Business 3 2. Properties 12 3. Legal Proceedings 13 4. Submission of Matters to a Vote of Security Holders 14 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters 16 6. Selected Financial Data 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 8. Consolidated Financial Statements and Supplementary Data 30 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55 PART III 10. Directors and Executive Officers of the Registrant 55 11. Executive Compensation 55 12. Security Ownership of Certain Beneficial Owners and Management 55 13. Certain Relationships and Related Transactions 55 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 56 2 3 ITEM 1. BUSINESS 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 across every age category, from young children to adults. The Company's primary emphasis is in educational and reference software, but it also offers a selection of lifestyle, productivity and, to a lesser extent, entertainment products, both in North America and internationally. The Company's educational products are principally sold under a number of well known brands, including The Learning Company, MECC and Creative Wonders brands. The Company develops and markets educational products for children ages 18 months to 7 years in the popular "Reader Rabbit" family, which includes both single-subject and multi-subject titles such as Reader Rabbit's Reading 1 and Reader Rabbit's Math 1, and Reader Rabbit's Toddler, Reader Rabbit's Pre-school, Reader Rabbit's Kindergarten and Reader Rabbit's 1st Grade. The Company also publishes educational products for this age group based on the popular Sesame Street and Madeline characters, among others. For children seven years and older, the Company develops and markets engaging educational products such as the long-running "Trail" series, which includes Oregon Trail 3rd Edition, as well as products based on the popular Baby-Sitter's Club books. During 1997, the Company launched its American Girls Premiere title, which is marketed towards girls in this age group. The Company develops and markets several different lines of software designed to teach children and adults such foreign languages as French, German, Spanish and Japanese. These lines include, among others, the Learn to Speak and Berlitz lines of products. The Company's reference products include the "Compton's Home Library" line which includes, among others, Compton's Interactive Encyclopedia and Compton's World Atlas. In addition, the Company offers a line of medical reference products that includes BodyWorks, Home Medical Reference Library and Mosby's Medical Encyclopedia. The Company's productivity line is marketed under the SoftKey and the Creative Office brands. The Company also publishes a lower-priced line of products in box version under the Key and Classics brands and a jewel-case only version under the SoftKey brand. During 1997, the Company began offering an Internet filtering product with the introduction of the popular Cyber Patrol, which allows parents and teachers to choose what content on the Internet is appropriate for children. Adults can choose to block material organized into many different categories such as violence, nudity, and explicit sexual material and hate speech. In addition to marketing the product to homes and schools, the Company is also marketing to corporations a version of Cyber Patrol that can block sites with content such as sports, leisure and shopping to improve productivity in the office. 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. The Company has a history of acquiring companies in order to broaden its product lines and sales channels. During 1997, the Company completed a number of small complementary acquisitions in the educational software segment. During the third quarter of 1997, the Company acquired Learning Services Inc. ("Learning Services") (a national school software catalog for teachers), Skills Bank Corporation ("Skills Bank") (a developer of older age and remedial educational software for schools) and Microsystems Software, Inc. ("Microsystems") (an Internet filtering publisher and creator of Cyber Patrol). During the fourth quarter of 1997, the Company acquired control of Creative Wonders, L.L.C. ("Creative Wonders") (a developer of branded children's educational software) and acquired TEC Direct, Inc. ("TEC Direct") (the publisher of an educational consumer software catalog). The Company was incorporated in California in October 1978 and re-incorporated in Delaware in October 1986. In February 1994, the Company, which was then known as WordStar International Incorporated, completed a three-way business combination with SoftKey Software Products Inc. and Spinnaker Software Corporation in which the Company changed its name to SoftKey International Inc. In May 1996, the Company consummated the acquisition of Minnesota 3 4 Educational Computing Corporation (MECC) ("MECC"), an educational software publisher. That acquisition, together with the acquisitions in December 1995 of The Learning Company ("The Former Learning Company") and Compton's NewMedia, Inc. ("Compton's"), marked the completion of the Company's strategic initiative to expand its educational software franchise. In October 1996, the Company changed its name from SoftKey International Inc. to The Learning Company, Inc. to reflect its emphasis on educational software. The Company's executive offices are located at One Athenaeum Street, Cambridge, Massachusetts 02142. Its telephone number is (617) 494-1200, and its internet web site is located at http:/www.learningco.com. INDUSTRY BACKGROUND The consumer software market has grown over the past few years as a result of several major trends, including the increasing installed base of PCs in the home, the improved multimedia capabilities of PCs and the increasing demand for a greater number of high quality, affordably priced software applications. In addition, consumers are exposed to software purchase opportunities from a wide variety of sources and with increased frequency. The Internet increased consumers exposure to a variety of software products and technologies and therefore increased their expectations for high quality multimedia educational and reference software. In addition to traditional software offerings, today's successful software companies should also be able to offer hybrid CD-ROM/Internet titles. The Company believes the Internet has reduced barriers to enter the market and has allowed competitors with less access to capital to compete effectively. Improved product performance, expanded memory and enhanced multimedia capabilities have been the main drivers of growth in the consumer software market. Improvements in multimedia technology have made possible engaging, highly interactive environments filled with rich content such as enhanced graphics, animation and photographs, realistic sounds and music and clips of film and video. These capabilities are particularly relevant to the education, reference, lifestyle and entertainment categories, as specific software purchases within these categories are largely driven by their content, appearance and degree of interactivity. The demand for a large number and broad spectrum of value-priced software products is also having significant impact on consumer software distribution. The distribution of consumer software has expanded beyond traditional software retailers and computer stores to include mass merchandisers, price clubs and superstores. As demand for consumer software has grown with improvements in multimedia technology, consumers have also grown more sophisticated in their expectations for software, requiring increasingly easy to use, content rich products. Furthermore, competition has continued to increase among new and existing multimedia software publishers, increasing price pressure and competition for limited retail shelf space. This competition is characterized by increased emphasis on channel marketing, coupon rebate programs and advertising. As this trend continues, it will become increasingly important for companies to achieve greater sell-through unit volumes through brand name recognition, to establish strong relationships with retailers and to consistently launch new product offerings with state-of-the-art capabilities and rich content. PRODUCTS The Company develops, publishes and markets software products that educate across every age, from young children to adults. The Company strives for recognition from retailers, parents, teachers and students as the leader in educational and reference software. The Company's strategy is to leverage its name brands and breadth of content by selling across a range of price points and through multiple distribution channels. By creating software titles that parents and teachers trust to teach children fundamental skills at all age levels, the Company strives to create an ongoing buying relationship with its consumers that continues as their children grow older. The Learning Company and Creative Wonders Educational Software The Company's educational brands represent a series of products tailored to support the most fundamental learning topics taught in schools. The product lines are organized by age and by subject area, covering everything from learning essentials for pre-schoolers to test preparation for college-bound students and foreign language instruction for adults. Market research and an experienced staff of educational specialists seek to ensure that the content of each program is educational, engaging, age-appropriate, non-violent and effectively delivered. Highlights from the educational product line include: 4 5 - - The Reader Rabbit series of software is designed to develop a lifelong love of learning in children ages 2 through 9. During 1997, the Company launched its early learning series of multi-subject titles including Reader Rabbit's Toddler, Reader Rabbit's Preschool, Reader Rabbit's Kindergarten and Reader Rabbit's 1st Grade. Other products in the Reader Rabbit series include Reader Rabbit's Reading 1, Reading 2 and Math 1. The Reader Rabbit series of products has been developed based on a wealth of research by educators, parents, children and reading specialists in order to create the most educational, engaging, easy-to-use reading and multi-subject software. In 1997, the Company expanded its line of multi-subject learning titles with the introduction of The Cluefinders' 3rd Grade Adventures, the first of a new series of products designed to meet the educational needs and interest of older children. - - The American Girls Premiere, which is based on The American Girls Collection successful line of historical fiction books, dolls and accessories from Pleasant Company, is a new creativity program designed for girls aged 7 to 12. The product allows young girls to bring American history to life by creating and producing their own plays featuring five of the American Girls Doll characters. - - The Trail series, including Oregon Trail 3rd Edition, are interactive education products where children learn about history and geography while taking part in exciting interactive adventures. - - The Munchers series of products for children ages 6 to 12 is used widely in both schools and homes to build children's skills and confidence in math, spelling and trivia. - - TLC is a leader in foreign language software with its four lines of products covering language instruction in Spanish, French, German, Italian, Japanese and English. Appropriate for high school age through adult users, each line combines state-of-the-art technology with advanced language learning techniques to create highly interactive and effective products, that meet the abilities, interests and price sensitivities of all consumers. Learn To Speak, is a comprehensive and complete interactive course using state of the art technology to develop all-around fluency for the entire family. The Berlitz line, designed to help the user learn a language quickly, is an effective and complete interactive language course branded with the famous Berlitz name. The For Everyone line uses a fun, easy and interactive approach to learning a foreign language and is designed for high school students and adults who want to learn real-life conversation. Berlitz Think and Talk, based on the proven Berlitz teaching method, offers a complete introductory language study at a value price. - - The Company markets a number of additional products for older children, including Success Builder - High School, Score Builder for the SAT and ACT, Treasure Mathstorm and Super Solvers Mission: T.H.I.N.K. During 1997, the Company acquired Creative Wonders, an educational software publisher. Creative Wonders focuses on creating educational software for children using well-known branded content. The Creative Wonders line of products are sold by the Company under the Creative Wonders brand and includes: - - The Sesame Street series using the well-known characters from Children's Television Workshop in a series of early learning titles that includes among others Sesame Street: Toddlers Deluxe, Sesame Street: Reading is Fun! (Toddler Edition), Sesame Street: Elmo's Preschool Deluxe, and Sesame Street: Get Set for Kindergarten Deluxe. - - The Madeline Classroom Companion Series is a fun and comprehensive way to help young girls get a successful start in school. This series includes Madeline: Preschool & Kindergarten, Madeline: 1st and 2nd Grade as well as a number of titles for children ages 5 and up such as European Adventures, Thinking Games and The Magnificent Puppet Show. - - The Schoolhouse Rock series reinforces essential learning skills for children to succeed in elementary school. The series includes Schoolhouse Rock 1st and 2nd Grade Essentials and Schoolhouse Rock 1st-4th Grade Math Essentials. Reference and Lifestyle Software The Compton's Home Library brand comprises a complete line of core reference, lifestyle and special interest programs. The Compton's Home Library products are designed specifically to meet consumers' home information needs. Each product in the line provides easy access to a wealth of information for researching, learning and exploring, with many providing direct links to the World-Wide-Web for up-to-date information. Products in this line include Compton's Interactive Encyclopedia-1998 Edition, Compton's World Atlas, Compton's Deluxe Weight Watchers Light and Tasty and Compton's Interactive Bible--NIV. 5 6 The Company's medical reference products are among the best-selling titles in the industry. Strong brands and rich multimedia content enables the Company to sell these products across all of its channels. The Company offers a line of medical reference products that includes the popular BodyWorks, Home Medical Reference Library and Mosby's Medical Encyclopedia. Internet Filtering Software Cyber Patrol is the Company's popular Internet filtering software designed to help protect children in cyberspace. Cyber Patrol allows parents and teachers to choose what content on the Internet is appropriate for children. Adults can choose to block material organized into many different categories such as violence, nudity, explicit sexual material and hate speech. Cyber Patrol can be customized for use by up to 10 different children. Adults can add or delete specific sites based on their own beliefs and judgment, so that, for example, content blocked for a 7-year-old can remain available to a 15-year-old. The latest version, Cyber Patrol 4.0, offers a daily update of blocked sites, assuring even greater protection in a Web environment that changes daily. In addition to marketing the product to homes and schools, the Company is also marketing to corporations a version of Cyber Patrol that can block sites with content such as sports, leisure and shopping that improves productivity in the office. Productivity Software Productivity titles targeted at the home, small business and home office users are the flagship titles under the SoftKey brand. The price points and content of these programs are designed for the consumer who purchases programs to meet very specific needs. During 1997, the Company launched the "Creative Office" series. Included in this series are Calendar Creator 5.0, PhotoFinish 4.1 and Resume Pro 3.0. Each of these titles has had a long history of success in the productivity market. The "Key" line is designed to meet productivity needs of those users who appreciate good value and quality performance. This line includes a range of personal productivity tools, content such as fonts and clip art, office productivity solutions and design tools. Value Software The Value lines under the Key, SoftKey and Classic brands are recognized as top performers in the budget category of software. These lines offer consumers brand name software at affordable prices in a jewel case only and boxed format ranging in retail price from $9.99 to $14.95. The line covers all software categories including reference, education, productivity, lifestyle and games. Tax Software and Services In Canada, the Company is a supplier of income tax software products and services through its subsidiary SoftKey Software Products Inc. ("SoftKey"). Large and small accounting firms, corporations and small businesses in Canada rely on the Company to develop and annually update software products for all aspects of income tax preparation. The Company also publishes personal tax preparation software for use by individuals. The Company offers tax software products under the TaxPrep, CanTax, Informatrix, HomeTax and L'Impot Personnel brands. SALES AND MARKETING The Company distributes its consumer software products through retail, direct response, OEMs and school channels within North America and through international channels throughout Europe and the Pacific Rim. Retail Channels. The Company has relationships with over 50 national retailers and direct distributors controlling over 23,000 individual North American storefronts where most of the nation's software sales occur. The Company's retail distribution strategy is to foster strong direct relationships with large retailers through a broad product offering, actively participating in channel management and innovative merchandising. These direct relationships have been the result of an established history of developing and publishing a wide range of products and actively working with retailers to understand consumer purchasing behavior and trends. Retailers routinely share sell-through sales data with the Company, providing the Company with the ability to proactively tailor its product offerings, modify distribution tactics and optimize product marketing, merchandising, promotions and mix for specific retail channels and stores. The Company sponsors merchandising programs and provides electronic data interchange ("EDI") to most major accounts. The Company intends to continue to build its relationships with the retail channels in an effort to further strengthen these 6 7 strategic relationships. The Company's dealer sales channel consists of traditional PC hardware and software retail stores, including national and regional chains and superstores. Increasingly, the Company sells its products to office superstores such as Office Depot, OfficeMax and Staples, electronic superstores such as CompUSA, Circuit City and Best Buy and mass merchants such as Wal-Mart and K-Mart. In addition, the Company sells to distributors such as Ingram Micro Inc., GT Interactive and Navarre. Direct Response. The Company's database of over 7 million end-users provides many cross-marketing opportunities. The Company mailed over 16 million pieces of targeted direct mail in 1997. The Company typically utilizes targeted customer mailings highlighting specific products. Prior to a full mailing, the Company conducts test mailings at different price points and marketing approaches in order to maximize response rates from its customers. The Company also sells its products through direct mailings to potential end-users who are not part of the installed user base using rented mailing lists. The Company made approximately 4 million outbound telephone calls in 1997 to sell its products to its customers. The Company has electronic registration of its consumer software products that allows it to collect data from its customers that in turn provide customer leads for the direct response business. The Company maintains an Internet website which contains a catalog of the Company's products which consumers can use to browse through the Company's products and submit orders on-line or by telephone. Original Equipment Manufacturers. The objective of the Company's OEM sales strategy is to assist hardware manufacturers and on-line services to differentiate their product lines and to introduce the Company's brands to new computer hardware buyers. The Company licenses its software products to OEMs (including IBM, Apple, Compaq, Hewlett-Packard and America On-Line), which typically purchase the Company's products in higher volumes and at lower prices than retail stores and distributors. The manufacturing costs incurred by the Company for OEM sales are typically lower than for its boxed product because in many cases the products are duplicated by the OEMs and sold without packaging or, in some instances, documentation. In addition, the Company receives royalties from a number of OEMs that have no production costs, which results in higher gross margins for the Company. School Channel. The Company's efforts in the school channel focus on the unique needs of the school market through targeted and specialized marketing and services. The Company sells products directly to schools and school districts through field based direct sales representatives, telemarketing and direct mail. Sales are also made through authorized resellers and distributors including Educational Resources, Ingram Micro and Baker & Taylor. The Company markets its school products to over 795 key school districts, 85,000 school buildings and, in turn, to over 2.5 million classrooms across the United States. Through its subsidiary Learning Services, the Company publishes an educational software catalog for teachers and schools marketing products from most educational software publishers, including the Company, under the Learning Services brand. The Company intends to continue to leverage its established position in the school market to expand its sales in the home market. The Company believes that the history of acceptance of its products in schools, coupled with its broad range of award-winning products, positions it to further enhance its market share position and brand awareness in the home market. International. The Company believes that the international consumer software markets are rapidly growing as a result of trends similar to those driving the North American market. The Company operates subsidiaries outside of North America in Germany, France, Holland, Japan, the United Kingdom and Ireland. In addition, the Company has distributors in major European, Latin American and Pacific Rim countries, as well as in Australia and South Africa. The Company's subsidiaries in Ireland and Germany generally coordinate manufacturing and distribution for all of the Company's sales in Europe, Latin America and the Pacific Rim. Generally, retail stores outside of North America are more reliant on distributors than retail stores in North America. As distribution environments differ from country to country, the Company tailors its distribution strategy accordingly. PRODUCT DEVELOPMENT The Company develops and publishes products through internal development as well as licensing. Approximately 83% of the Company's domestic revenues in 1997 were derived from products that have been internally developed. Through this dual product strategy approach, the Company is able to introduce new products while managing its research and development costs. During 1997, the Company launched a total of 53 new and upgraded North American premium education, reference and productivity products, of which 46 were developed internally. Internal Product Development. The Company's internal product development efforts are designed to result in efficient and timely product introductions by focusing on "core code" development. Where possible, the Company specifies, develops and manages (or purchases) one base of source code from which many products are created. Using one 7 8 base of source code permits the Company to maximize programming efficiency because the investment of time and capital in developing the base source code is shared among multiple products and additional programming time is minimized. As a result, production schedules are more predictable and development costs are lower since the underlying code for new programs has previously been tested and debugged and the software already documented. Even with these "core codes" the Company must continuously update and improve the content and the technology of its products in order to remain competitive. In certain instances, the Company's internally developed products contain components that have been developed by outside developers or authors and are licensed by the Company. The Company generally pays these outside developers/authors royalties based on a percentage of net sales or on a work-for-hire basis. The Company maintains principal research and development facilities and personnel in Framingham, MA; Fremont, CA; Knoxville, TN; Baltimore, MD and Minneapolis, MN. The Company's development efforts include product development, documentation and testing as well as the translation of certain of its products into foreign languages. The Company believes that its premium educational products require significant investments in product marketing and research and development in order to take advantage of new technologies that benefit educational software products and to remain competitive. In addition to expenses related to engineering and quality assurance, the Company's research and development expenses include costs associated with the identification and validation of educational content and engagement features and the development and incorporation of new technologies into new products. The Company's premium educational products require varying degrees of development time, frequently depending on treatment of the subject matter, the number of activities and the general complexity of the product. The typical length of research and development time ranges from 6 to 24 months with the first product in a new family generally requiring the longest period of development. The development and introduction of new products that operate on, and the adaptation of existing titles to new platforms or operating systems or that incorporate emerging technologies may require greater development time and expense and may generate less revenue per product as compared with recent introductions of new products or product adaptations. Most of the Company's educational products have been designed and developed internally by Company employees. The Company also uses third-party designers, artists and programmers in its research and development efforts and expects to continue to do so in the future. The Company believes that a mix of internal and external third-party resources, as well as potential acquisitions of products or technologies, is a cost-effective method of facilitating the development of new educational software products. Products that are developed using external third parties are generally owned or licensed exclusively by the Company and are marketed under the Company's various brand names. During 1997, the Company launched The American Girls Premier, which combined the Company's advanced proprietary technology with the well-known American Girls brand. Similarly, through its Creative Wonders products, including the Sesame Street line, the Company seeks to capitalize on brands that are trusted by parents and teachers for their educational value. Licensed Products. The Company supplements its development efforts by acquiring the rights to products on either an exclusive or non-exclusive basis, both through the purchase of products and under royalty-bearing licenses. Generally, the Company's license agreements provide for the payment of royalties based on a percentage of the Company's net sales of such products. The licensed products typically are repackaged under the Company's proprietary labels and sold through its distribution channels. The advantage of this distribution method to the outside software developers is that the Company is generally able to provide a significantly greater volume of sales than the software developer would be able to command itself. The Company leverages its broad distribution strength and reputation for successfully publishing products to attract outside developers/authors and further enhance its relationships with the software development community. Retail and direct response marketers benefit from this arrangement by having convenient access to a wide range of products offered by the Company. The Company's licensing of fully developed products allows for efficiencies because the cost of development is borne by the licensor. Licensing also reduces the financial and market risk to the Company from a product that is not well accepted by customers since the Company generally pays royalties based on actual net sales. 8 9 Both internally developed and licensed products under development are extensively tested by the Company's quality assurance department before being released for production. The department tests for defects, functionality, ease-of-use and compatibility the many of the popular PC and printer configurations that are available to consumers. The process of developing software products such as those offered by the Company is extremely complex and is becoming more complex and expensive over time. The Company's product development expense levels are based largely on its expectations regarding future sales, and, accordingly, operating results would be disproportionately adversely affected by a decrease in sales or failure to meet the Company's sales expectations due to delays in new product introductions, or lower than expected demand. If the Company does not accurately anticipate and successfully adapt its products to emerging platforms, environments and technologies, or new products are not introduced when planned or do not achieve anticipated revenues, the Company's operating results could be materially adversely affected. In addition, the Company believes that on-line or Internet products and services will become an increasingly important platform and distribution media; and as such the Company's failure to timely and successfully adapt to and utilize such technologies could materially and adversely affect its competitive position and its financial results. PRODUCTION The Company strives to minimize production costs, driving costs down as unit volumes and the rate of new title introductions increase through process efficiencies and economies of scale. Production of the Company's products involves the duplication of diskettes or CD-ROM disks and the printing and assembly of packaging, labels, user manuals and other purchased components. The Company subcontracts all of the manufacture and fulfillment of its products to third party vendors. In 1997, the production, assembly and distribution of the Company's North American products, with certain exceptions (including duplication of CD-ROM disks, school channel products and certain OEM products), was performed by two units of Bertelsmann AG (collectively, "BMG"). The Company believes that its existing production capacity is sufficient to handle anticipated increases in volume and titles into the foreseeable future. Manufacturing and assembly of the Company's international products take place primarily at the Company's facilities in Dublin, Ireland and to a lesser extent in Munich, Germany. TECHNICAL SUPPORT The Company provides a variety of technical support services to dealers, distributors, corporations and end-users. Users of the Company's products generally receive free telephone support for the life of the product (i.e. until the next version is released or manufacturing of the product is discontinued). This support is principally provided by the Company's Technical Support Center in Knoxville, TN. COMPETITION The consumer software industry is intensely and increasingly competitive and is characterized by rapid changes in technology and customer requirements. The Company competes for retail shelf space and general consumer awareness with a number of companies that market consumer software. The Company encounters competition from both established companies, including the largest companies in the industry and new companies that may develop comparable or superior products. A number of the Company's competitors and potential competitors possess significantly greater capital, marketing resources and brand recognition than the Company. Rapid changes in technology, product obsolescence and advances in computer software and hardware require the Company to develop or acquire new products and to enhance its existing products on a timely basis. The Company's marketplace has recently experienced a higher emphasis on on-line and Internet related services and content tailored for this new distribution channel. To the extent that demand increases for on-line products and content, the demand for the Company's existing products may change. There can be no assurance that the Company will be able to maintain market share or that the market for the Company's products will not to erode, and otherwise compete successfully in the future. Competitive pressures in the consumer software industry have resulted, and the Company believes are likely to continue to result, in more innovative channel marketing and advertising in the future. During 1997, the Company and many of its competitors began using rebate coupons in order to induce consumers to purchase their products. In addition, the Company uses various forms of print and television advertising to enhance brand and product awareness. The use of these methods of channel marketing and advertising is becoming more prevalent among the larger consumer software publishers. To the extent that the Company fails to match competitors' future channel marketing and advertising programs it could risk loss of market share and corresponding revenues and operating profits. Furthermore, during early 1997, the Company reduced the retail selling prices of many of its core educational products in order to remain 9 10 competitive in the market place. There can be no assurance that the Company's selling prices will not decline in the future or that the Company will not respond to such declines with additional price reductions or marketing programs. Such price reductions or marketing programs may reduce the Company's revenues and operating margins in the future. Large companies with substantial bases of intellectual property content in the motion picture and media industries, sophisticated product marketing and technical abilities and/or financial resources that may not need to realize an immediate profit or return on investment have increasingly entered the consumer software market. These competitors include: Microsoft, Disney, Mattel, Hasbro, IBM and Cendant Corporation (formerly CUC International Inc.). For example, technology companies have begun to acquire greater access to branded content, and content-oriented companies have begun to acquire greater technological capabilities. To the extent that competitors achieve a performance, price or distribution advantage, the Company could be adversely affected. Furthermore, increased consolidation of the consumer software market may impact future growth potential and performance. In the retail distribution channel resellers typically have a limited amount of shelf space and promotional resources. There is intense competition for high quality and adequate levels of shelf space and promotional support from retailers. To the extent that the number of consumer computer platforms and products increases, competition for shelf space may also increase. Mass merchants such as Wal-Mart are increasingly representing a larger portion of the Company's revenues. As these retailers achieve greater market share from the traditional software retailers, the Company may experience higher marketing costs and increased competition for shelf space, which could impact future sales and operating margins. Additionally, as technology evolves, the type and number of distribution channels will further change and new types of competitors, such as cable or telephone companies, may emerge. There can be no assurance that the Company will compete effectively in these channels. The retail channels of distribution available for products are subject to rapid changes as retailers and distributors enter and exit the consumer software market or alter their product inventory preferences. Other types of retail outlets and methods of product distribution may become important in the future. These new methods may include delivery of software using on-line services or the Internet, which will necessitate certain changes in the Company's business and operations including addressing operational challenges such as improving download time for pictures, images and programs, ensuring proper regulation of content quality and developing sophisticated security for transmitting payments. Should on-line distribution channels increase, the Company will be required to modify its existing technology platforms in order for its products to be compatible and remain competitive. It is critical to the success of the Company that, as these changes occur, it maintains access to those channels of distribution offering software in its market segments. In both the professional and home income tax preparation markets in Canada, there are relatively few barriers to entry for competitors. In Canada, there are numerous companies offering tax preparation software products for both the professional and home user. As a result, there is significant price and product competition in this market. Currently, the Company's tax products are generally designed to run on DOS and Windows operating systems, with certain professional packages running on the Macintosh system. The demand for and ability to develop successful packages to run in the Windows operating environment may affect the success of such products. PROPRIETARY RIGHTS AND LICENSES Consistent with industry practice, the Company does not have signed license agreements with the end-users of its products, and its products do not contain mechanisms to inhibit unauthorized copying. Instead, the Company relies on the copyright laws to prevent unauthorized distribution of its software. The Company also relies on a combination of trade secret, patent, trademark and other proprietary rights, laws and license agreements to protect its proprietary rights. Existing copyright laws afford only limited protection. It may be possible for unauthorized third parties to copy the Company's products or to obtain and use information the Company regards as proprietary. Policing unauthorized use and distribution of the Company's products is difficult, and while it is difficult to determine the extent to which such use or distribution exists, software piracy can be expected to be a persistent problem. These problems are particularly acute in certain international markets such as South America, the Middle East, the Pacific Rim and the Far East, and the laws of certain countries in which the Company's products are or may be distributed provide less protection than those of the United States. The Company periodically receives communications alleging or suggesting that its products may incorporate material covered by the copyrights, trademarks or other proprietary rights of third parties. With increased use of music, video and animation in CD-ROM products and the increased number of products on the market generally, the Company is 10 11 likely to experience an increase in the number of infringement claims asserted against it in the future. With respect to licensed products, the Company is generally indemnified against liability on these matters. The Company's policy is to investigate the factual basis of such communications and to resolve such matters promptly by enforcing its rights, negotiating licenses (if necessary) or taking other appropriate actions. In certain circumstances, litigation may be necessary to enforce the Company's proprietary rights, to protect copyrights, trademarks and trade secrets and other intellectual property rights owned by the Company or its licensors, to defend the Company against claimed infringements of the rights of others and to determine the scope and validity of the proprietary rights of the Company and others. Any such litigation, whether with or without merit, could be costly and could result in a diversion of management's attention, which could have an adverse effect on the Company's business, operating results or financial condition. Adverse determinations in litigation relating to any of the Company's products could result in the loss of the Company's proprietary rights, subject the Company to liabilities, require the Company to seek licenses from third parties or prevent the Company from selling particular products. HISTORY Corporate Background. The Company was founded and incorporated in California under the name MicroPro International Corporation in October 1978. In November 1986, it changed its state of incorporation from California to Delaware, and in May 1989, it changed its corporate name to WordStar International Incorporated. In February 1994, WordStar changed its name to SoftKey International Inc. in connection with a three-way business combination including the Company, SoftKey Software Products Inc. ("Former SoftKey") and Spinnaker Software Corporation ("Spinnaker") (the "Three-Party Combination"). The business of Former SoftKey prior to such transaction commenced in 1984 and focused originally on vertical software applications, or software packages designed for specific types of businesses. By 1993, Former SoftKey was generally engaged in the computer software and services businesses, operating in three business units: a publishing division, which acquired software application packages from various software developers and distributed them to end users; a tax division, which developed and distributed professional tax software products and also engaged in the computer processing of tax data; and a consulting division, which has been discontinued. After the Three-Party Combination, the Former SoftKey publishing division operations were consolidated with the operations of the Company and SoftKey continued to operate the businesses of the tax division. In 1995 and 1996, the Company acquired several educational software companies, including The Former Learning Company, Compton's, tewi Verlag GmbH, Edusoft S.A. and MECC. In October 1996, the Company changed its name to The Learning Company, Inc. to reflect its expanded emphasis on educational software. During 1997, the Company expanded its presence in education software with the acquisitions of Creative Wonders, Skills Bank, Learning Services, TEC Direct and Microsystems. EMPLOYEES At February 2, 1998, the Company had 1,525 full time employees. The Company believes that its success is highly dependent on its ability to attract and retain qualified employees. As necessary, the Company supplements its regular employees with temporary and contract personnel. No employees are covered by a collective bargaining agreement, and there have been no work stoppages. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS Financial Information pertaining to the Company's foreign and domestic operations is set forth in the Consolidated Financial Statements - Note 12, included in Part II, Item 8 and presented as a separate section of this report. FORWARD LOOKING STATEMENTS Certain of the information contained in this Annual Report on Form 10-K, including without limitation statements made under this Part I, Item 1, "Business" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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. 11 12 Important factors and assumptions that could cause the Company's actual results to differ materially from those included in the forward-looking statements made herein include the factors which are responsible for period-to-period fluctuations in the Company's operating results generally. These factors include without limitation the integration of operations resulting from acquisitions of companies, delays in customer purchases in anticipation of upgrades to existing products or release of competitive products, currency fluctuations, dealer and distributor order patterns and seasonality of buying patterns of customers and the historic and recurring pattern of Company sales by which a disproportionate percentage of a quarter's total sales occur in the last month and weeks of each quarter, making predictions of revenues and earnings especially difficult and resulting in substantial risk of variance of actual results from those foregoing at any time prior to near the quarter close. Additional factors and assumptions that could generally cause the Company's actual results to differ materially from those included in the forward-looking statements made herein include without limitation the Company's ability to develop and introduce new products or new versions of existing products, the timing of such new product introductions, expenses relating to the development and promotion of such new product introductions, changes in pricing policies by the Company or its competitors, projected and actual changes in platforms and technologies, timely and successful adaptation to such platforms or technologies, the accuracy of forecasts of consumer demand, product returns, market seasonality, changes or disruptions in the consumer software distribution channels, the effects of general economic conditions, the rate of growth in the consumer software industry, the impact of competitive products and pricing in the consumer software industry, the sufficiency of the Company's production capacity to meet future demand for its products and the Company's ability to continue to exploit new channels of distribution for its products. In the past the Company has grown partially by acquisition, some of which have been accounted for by the purchase method, resulting in large amounts of goodwill and amortization charges. The Company may enter into similar transactions in the future. Additional factors that may cause the Company's actual results to vary from those set forth in forward-looking statements are described elsewhere in the Annual Report on Form 10-K under the heading "Future Operating Results". Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such other assumptions to be realized, 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. ITEM 2. PROPERTIES FACILITIES The Company's headquarters are currently located in approximately 71,000 square feet of leased space in an office building in Cambridge, Massachusetts, where the Company's executive, operational, administrative and certain sales activities are currently conducted. The lease for the Cambridge facility expires in December 2001. The Company leases approximately 66,000 square feet of office and warehouse space in Fremont, California expiring from October 1999 to March 2003, which is primarily used for marketing and development of its educational products. The Company leases approximately 50,000 square feet of office space in Minneapolis, Minnesota, which is used primarily for its school sales operation, and the development of certain of its educational products. The Minneapolis lease expires in January 1999. The Company leases approximately 38,000 square feet of office space in Knoxville, Tennessee, which is primarily used for development of the Company's foreign language based products and for its technical support activities. The Knoxville leases expire in May 2000 and April 2001. The Company also leases various office, manufacturing and warehouse space in Framingham, Massachusetts; Eugene, Oregon; Baltimore, Maryland; Boulder, Colorado; and certain other states in which it operates. The Company's Canadian subsidiary, SoftKey Software Products Inc., owns land and a building with approximately 19,000 square feet of office space in Sherbrooke, Quebec, leases approximately 35,000 square feet of office space in Mississauga, Ontario, which expires in September 2000, and leases additional warehouse and office space in Mississauga, Ontario, Sherbrooke, Quebec, and Calgary, Alberta. The Company also leases various office, manufacturing and warehouse space in London, England; Dublin, Ireland; Munich, Germany; Amsterdam, Holland; Paris, France and certain other foreign countries in which it operates. The Company believes that its facilities, in general, are adequate for its present and currently foreseeable needs. All properties leased or owned by the Company are in suitable condition for the purposes for which they are used by the Company. 12 13 ITEM 3. LEGAL PROCEEDINGS On February 24, 1997, the Company terminated its business relationship with Stream International Inc. ("Stream"), and, on February 26, 1997, filed suit against Stream in Massachusetts Superior Court for Middlesex County, seeking injunctive relief and damages resulting from Stream's delayed and defective performance of its manufacturing and distribution obligations. Stream responded to the complaint by denying the Company's claims and asserting counterclaims for certain outstanding invoices and other matters. As of September 4, 1997 the parties settled the litigation. The Company had previously accrued for the anticipated settlement in its financial statements; accordingly, the settlement did not have a material impact on the Company's results of operations. The Company is subject to various other 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. 13 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's 1997 Annual Meeting of Stockholders was held on December 4, 1997. (b) The following directors were elected at the meeting, and no other directors' terms of office continued after the meeting: Lamar Alexander, Michael A. Bell, James C. Dowdle, Robert Gagnon, Kevin O'Leary, Charles L. Palmer, Michael J. Perik, Carolynn Reid-Wallace, Robert A. Rubinoff and Scott M. Sperling. (c) The first matter voted upon at the meeting was the election of Directors. Each of the nominees was elected as a director to serve until the Company's 1998 Annual Meeting and until his successor is elected and qualified. The votes for each of the nominees were reported as follows: Lamar Alexander For: 40,435,550 Withheld: 2,742,719 Michael A. Bell For: 40,434,418 Withheld: 2,743,851 James C. Dowdle For: 40,437,088 Withheld: 2,741,181 Robert Gagnon For: 40,440,973 Withheld 2,737,296 Kevin O'Leary For: 40,436,851 Withheld: 2,741,418 Charles L. Palmer For: 40,440,574 Withheld: 2,737,695 Michael J. Perik For: 40,434,702 Withheld: 2,743,567 Carolynn Reid-Wallace For: 40,437,162 Withheld: 2,741,107 Robert A. Rubinoff For: 40,440,118 Withheld: 2,738,151 Scott M. Sperling For: 36,916,091 Withheld: 6,262,178 The second matter voted upon at the meeting was the ratification of the Board's appointment of Coopers & Lybrand L.L.P. as independent public accountants for the fiscal year ended January 3, 1998. Such appointment was approved. The votes were reported as follows: Coopers & Lybrand L.L.P. For: 43,000,082 Against: 100,503 Abstain: 77,684 14 15 The third matter voted upon at the meeting was a proposal to approve the Company's 1996 Non-Employee Director Stock Option Plan. Such proposal was approved. The votes were reported as follows: Approval of the 1996 Non- For: 23,651,379 Employee Director Stock Against: 10,169,890 Option Plan Abstain: 149,009 Non-Votes: 9,207,991 The fourth matter voted upon at the meeting was a proposal to approve the Company's 1997 Employee Stock Purchase Plan. Such proposal was approved. The votes were reported as follows: Approval of the 1997 For: 32,759,045 Employee Stock Purchase Against: 1,096,471 Plan Abstain: 114,762 Non-Votes: 9,207,991 The fifth matter voted upon at the meeting was a proposal to approve the amendments to the Company's Long Term Equity Incentive Plan (the "LTIP"), to increase the number of shares issuable under the LTIP from 7,000,000 to 9,000,000 and to eliminate the Company's ability to grant options at below the fair market value of the common stock at the time of the grant. Such proposal was approved. The votes were reported as follows: Approval of the LTIP For: 21,328,251 Amendments Against: 12,510,047 Abstain: 131,980 Non-Votes: 9,207,991 The sixth matter voted upon at the meeting was a proposal to approve the issuance of an aggregate of 750,000 shares of Series A Convertible Participating Preferred Stock of the Company to affiliates of Thomas H. Lee Company, Bain Capital, Inc. and Centre Partners Management LLC. Such proposal was approved. The votes were reported as follows: Approval of Issuance of For: 30,071,671 Shares Against: 3,215,432 Abstain: 177,392 Non-Votes: 9,713,775 15 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange under the symbol "TLC." As of February 2, 1998, to the Company's knowledge, there were approximately 1,469 holders of record of the common stock. The Company has not paid cash dividends on its common stock and does not anticipate doing so in the foreseeable future. The following sets forth the quarterly high and low sales prices for the fiscal periods indicated. 1996 High LOW ---- --- First Quarter $27.75 $13.375 Second Quarter 30.3125 17.25 Third Quarter 22.375 15.25 Fourth Quarter 25.75 13.375 1997 High LOW ---- --- First Quarter $18.00 $ 5.75 Second Quarter 9.625 5.50 Third Quarter 15.75 8.5625 Fourth Quarter 20.50 13.78125 On December 30, 1997, the Company issued 424,010 shares of the Company's common stock to the former stockholders of TEC Direct, Inc. ("TEC Direct") in connection with the Company's acquisition of TEC Direct. On January 21, 1998, the Company issued an additional 5,723 shares of common stock to complete the acquisition. For such issuances the Company has relied upon the exemption from registration under Section 4(2) of the Securities Act of 1993 (the "Securities Act"). The basis for this exemption is satisfaction of the conditions of Rule 506 under the Securities Act in that the offers and sales satisfied all the terms and conditions of Rules 501 and 502 under the Securities Act, there were no more than 35 purchasers of securities from the Company, other than accredited investors, and each purchaser, either alone or with his purchaser representative, had such knowledge and experience in financial and business matters that he was capable of evaluating the merits and risks of the prospective investment. On December 5, 1997, the Company issued 750,000 shares of its Series A Convertible Participating Preferred Stock (the "Preferred Stock") to certain institutional investors in exchange for the surrender of the Company's 5-1/2% Convertible/Exchangeable Notes due 2000 in the aggregate principal amount of $150,000,000, which the investors purchased from Tribune Company in a private transaction. Each share of the Preferred Stock has an initial liquidation preference of $200 and is initially convertible into 20 shares of the Company's common stock, subject to adjustment in certain circumstances. For the issuance of the Preferred Stock, the Company relied on the exemption from registration under Section 4(2) of the Securities Act. The basis for this exemption is satisfaction of the conditions of Rule 506 of the Securities Act in that the offers and sales satisfied all the terms and conditions of Rules 501 and 502 under the Securities Act, there were no more than 35 purchasers of securities from the Company, other than accredited investors, and each purchaser, either alone or with its purchaser representative, had such knowledge and experience in financial and business matters that it was capable of evaluating the merits and risks of the prospective investment. 16 17 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below for the Years Ended December 31, 1997, 1996, 1995 and 1994, the six month period ended December 31, 1993 (the "Transition Period Ended December 31, 1993") and the Year Ended June 30, 1993 are derived from the Company's audited consolidated financial statements. The following selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto, included elsewhere in this report. OPERATING INFORMATION:
Transition Period Ended Year Ended Years Ended December 31, 30, December 31, June 30, -------------------------------------------------------------- ------------- ------------ 1997 1996 1995 1994 1993 1993 ----------- ----------- ------------ ----------- ------------- ------------ (In thousands, except share and per share data) Revenues $ 392,438 $ 343,321 $ 167,042 $ 121,287 $ 41,645 $ 109,704 Operating income (loss) (393,055) (381,312) (60,870) 25,741 (69,057) (56,981) Net income (loss) (475,667) (405,451) (65,960) 21,145 (73,258) (57,250) Net income (loss) per share: Basic $ (9.59) $ (9.94) $ (2.65) $ 1.13 $ (5.01) $ (4.36) Diluted $ (9.59) $ (9.94) $ (2.65) $ 1.07 $ (5.01) $ (4.36) Weighted average number of shares outstanding: Basic 49,613,000 40,801,000 24,855,000 20,462,000 14,618,000 13,129,000 Diluted 49,613,000 40,801,000 24,855,000 18,710,000 14,618,000 13,129,000
BALANCE SHEET INFORMATION:
December 31, --------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- -------- -------- ------- ------- (In thousands) Total assets $ 416,791 $793,518 $900,413 $90,815 $79,334 Total long-term obligations 360,221 574,928 561,101 21,859 24,687 Total stockholders' equity (deficit) (103,786) 104,937 214,519 37,485 (8,632)
17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto, and the information included elsewhere herein. All dollar amounts presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands, except share and per share amounts. GENERAL Business Combinations On February 4, 1994, the Company completed a three-way business combination (the "Three-Party Combination") among SoftKey Software Products Inc. ("Former SoftKey"), WordStar International Incorporated ("WordStar") and Spinnaker Software Corporation ("Spinnaker"). The Three-Party Combination was accounted for using the pooling-of-interests method of accounting. On February 4, 1994, WordStar changed its name to SoftKey International Inc. and on October 24, 1996 changed its name to The Learning Company, Inc. ("TLC" or the "Company"). On October 23, 1997, the Company acquired control of 100% of the equity interest in Creative Wonders L.L.C. ("Creative Wonders"), an educational software company that publishes among other titles, the Sesame Street line of products. The purchase price was a total of $37,799, including the value of employee stock options assumed by the Company and estimated transaction costs. The purchase price included cash payments totaling $33,883. The transaction was accounted for as a purchase. On September 19, 1997, the Company acquired Learning Services Inc. ("Learning Services"), a national school software catalog for teachers, in exchange for the issuance of 709,976 shares of common stock. On September 29, 1997, the Company acquired Skills Bank Corporation ("Skills Bank"), a leader in developing language, mathematics and reading software products for adult, adolescent and K to 12 students in exchange for the issuance of 1,069,286 shares of common stock. On October 2, 1997, the Company acquired Microsystems Software, Inc. ("Microsystems"), a leading developer of Internet filtering software, in exchange for the issuance of 955,819 shares of common stock. On December 30, 1997, the Company acquired TEC Direct, Inc. ("TEC Direct"), an educational consumer software catalog, in exchange for the issuance of 429,733 shares of common stock. Each of these transactions was accounted for using the pooling-of-interests method of accounting. The consolidated financial statements of the Company for the years prior to December 31, 1997 included in this report do not include the results and balances of these companies as they were determined to be immaterial to the consolidated financial statements for those periods. On May 17, 1996, the Company acquired Minnesota Educational Computing Corporation (MECC) ("MECC"), a publisher and developer of high quality educational software for children sold to consumers and schools, in exchange for 9,214,007 shares of common stock. The total purchase price was $284,631, including estimated transaction costs, the value of stock options assumed and deferred income taxes related to certain identifiable intangible assets acquired. In the transaction, approximately 1,048,000 MECC employee stock options were converted into options to purchase approximately 1,198,000 shares of TLC common stock. The transaction was accounted for as a purchase. On August 12, 1996, the Company acquired Edusoft S.A. ("Edusoft"), an educational software company located in Paris, France, in exchange for the issuance of 752,275 shares of common stock. The total purchase price was $13,313, including estimated transaction costs. In addition, certain stockholders are eligible to earn additional purchase price dependent upon future operating results and certain other conditions. The amount may be settled annually in shares of the Company's common stock, the number of which is to be determined on a volume-weighted average of the closing stock price following the close of each fiscal year. The transaction was accounted for as a purchase. On December 28, 1995, the Company purchased Compton's NewMedia, Inc. and Compton's Learning Company (collectively, "Compton's"), developers and publishers of educational and reference multimedia software titles and each a former wholly-owned subsidiary of Tribune Company. In connection with the acquisition, the Company issued a total of 5,052,697 shares of common stock, which included 587,036 shares to settle $14,000 of intercompany debt to Tribune Company and executed a promissory note to Tribune Company for $3,000 in cancellation of certain remaining intercompany indebtedness. The total purchase price was $104,394, including estimated transaction costs, settlement of certain intercompany debt to Tribune Company, deferred income taxes related to certain identifiable intangible assets 18 19 acquired and assumption of the fair value of net liabilities of Compton's. The $3,000 promissory note was repaid in 1996 by the issuance of 158,099 shares of common stock. The transaction was accounted for as a purchase. On December 22, 1995, the Company acquired control of The Learning Company ("The Former Learning Company"), a leading developer of education software products for use at home and school. Under the terms of the merger agreement, the Company acquired, in a two-step business combination, all of the outstanding common stock of The Former Learning Company for total consideration of $684,066, including estimated transaction costs, value of stock options assumed and deferred income taxes related to certain identifiable intangible assets acquired. Approximately $543,163 of the purchase price was settled in cash. Approximately 1.1 million unvested Former Learning Company stock options were assumed and converted into stock options to purchase 3,123,000 shares of TLC common stock, based on the merger consideration of $67.50 per share, and were vested on or before January 26, 1996. The transaction was accounted for as a purchase. On August 31, 1995, the Company acquired all of the issued and outstanding capital stock of Future Vision Holding, Inc. ("Future Vision"), a multimedia software company, in exchange for 1,088,149 shares of common stock. The transaction was accounted for using the pooling-of-interests method of accounting. On July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi"), a German software publisher and distributor, for a combination of cash and stock. One of the former stockholders of tewi is eligible to receive additional consideration for the purchase up to a maximum of DM 1,080 in each of fiscal 1996 and 1997 based upon achievement of certain revenue and profitability goals. The amount may be settled annually in shares of the Company's common stock, the number of which to be determined based on a volume-weighted average of the closing stock price following the closing of each fiscal year. The transaction was accounted for as a purchase. Fiscal Periods On January 27, 1994, the Company changed its fiscal year end to the 52 or 53 weeks ending on or after December 31. For clarity of presentation herein, all references to the Year Ended December 31, 1997 relate to the period January 5, 1997 to January 3, 1998. All references to the Year Ended December 31, 1996 relate to the period January 7, 1996 to January 4, 1997; all references to the Year Ended December 31, 1995 relate to the period January 1, 1995 to January 6, 1996. Period-to-Period Comparisons A variety of factors may cause period-to-period fluctuations in the Company's operating results, including the integration of operations resulting from acquisitions of companies, revenues and expenses related to the introduction of new products or new versions of existing products, delays in customer purchases in anticipation of upgrades to existing products, new or larger competitors in the marketplace, currency fluctuations, dealer and distributor order patterns and seasonality of buying patterns of customers. Historical operating results are not indicative of future operating results and performance. This is particularly true of historical data presented herein, certain of which reflects the results of TLC prior to its acquisitions of The Former Learning Company, MECC and Compton's and the other more recent acquisitions. 0 19 20 Summary of Results The following table summarizes the audited results of operations of the Company for the periods shown. Reference is made to the Consolidated Financial Statements included in this report and on which the following table is based.
Years Ended December 31, ------------------------------------------- 1997 1996 1995 --------- --------- --------- Revenues $ 392,438 $ 343,321 $ 167,042 Operating loss (393,055) (381,312) (60,870) Net loss (475,667) (405,451) (65,960) Net loss per share (basic and diluted) $ (9.59) $ (9.94) $ (2.65)
Operating loss includes amortization, merger and other charges of $515,016, $501,330 and $103,172 in the Years Ended December 31, 1997, 1996 and 1995, respectively. RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenues Revenues by distribution channel for the Years Ended December 31, 1997 and 1996 are as follows:
Year Ended Year Ended December 31, % of total December 31, % of total 1997 revenues 1996 revenues ------------ ---------- ------------ ---------- Distribution Channel - -------------------- Retail $179,255 46 $174,812 51 OEM 27,286 7 27,855 8 School 48,666 12 21,701 6 Direct response 43,309 11 38,548 11 International 74,179 19 57,684 17 Tax software and services 19,743 5 22,721 7 -------- --- -------- --- $392,438 100 $343,321 100 ======== === ======== ===
Total revenues increased 14% in the Year Ended December 31, 1997 as compared to the Year Ended December 31, 1996 primarily due to the introduction of new educational software products by the Company such as Reader Rabbit's Toddler, Reader Rabbit's Preschool, Reader Rabbit's Kindergarten and Reader Rabbit's 1st Grade, The Clue Finders' 3rd Grade Adventures, Oregon Trail 3rd Edition and The American Girls Premiere. Retail sales during the Year Ended December 31, 1997 grew due to the introduction of new and upgraded products by the Company. The Company believes that the increasing availability of PCs at lower prices have contributed to the increase in retail revenues. OEM sales declined due to lower demand from hardware manufacturers but this decline was offset by the revenues derived from the acquisition of Microsystems. School revenues increased primarily as a result of sales from the acquisitions of Skills Bank and Learning Services and due to the introduction of new and upgraded school software titles such as Oregon Trail 3rd Edition. Direct response sales increased due to the continued expansion of the out-bound tele-sales channel during 1997. The increase in direct response revenues was offset by a decline in solo direct mail revenues due to the effect of the Internet and a shift in the Company's product strategy from productivity and reference products to educational products, which historically have had a lower response rate in the mail. The international business continued to expand due to the introduction of 631 new localized and translated titles during the Year Ended December 31, 1997, and due to the effect of a full year's results of Edusoft in France and Domus in Holland, which were acquired in August and September of 1996, respectively. In addition, the Company entered into several 20 21 international license and distribution transactions during the Year Ended December 31, 1997 that increased revenues. Revenues from tax software and services declined due to fluctuations in the Canadian dollar exchange rates and the timing of delivery of certain products. The Company expects that its future revenue growth will depend on, among other things, its ability to introduce new and upgraded products to the marketplace, the extent of competition, unit pricing trends, the rate of proliferation of personal computers into the home market and the demand for its consumer software products along with the Company's respective share in the consumer software market. Unit pricing will be affected by the extent of competition in the consumer software industry, which is expected to increase. In addition, the Company's ability to develop products for new platforms and introduce titles into new distribution channels will impact future revenues and growth rates. The consumer software industry has experienced continued consolidation of formerly independent companies. To the extent that these companies gain greater market share than the Company, future results will be affected negatively. During 1997, the Company and many of its competitors began using rebate coupons as an incentive to consumers to purchase products and expand revenues. In addition, the Company uses various forms of print and television media advertising to enhance brand and product awareness. The use of these methods of channel marketing and advertising is becoming more prevalent among the larger consumer software companies. To the extent that the Company competes with companies larger than itself having more financial resources, it may not be able to adequately match future channel marketing and advertising programs, which may in turn result in loss of market share and corresponding revenues and operating profits. Costs and Expenses The Company's costs and expenses and the respective percentages of revenues for the Year Ended December 31, 1997 as compared to the Year Ended December 31, 1996 are as follows:
Year Ended Year Ended December 31, % of total December 31, % of total 1997 revenues 1996 revenues ------------ ---------- ------------ ---------- Costs of production $111,703 28 $ 91,045 27 Sales and marketing 86,621 22 67,690 20 General and administrative 31,135 8 28,550 8 Development and software costs 41,018 10 36,018 10 Amortization, merger and other charges 515,016 131 501,330 146 -------- --- -------- --- $785,493 199 $724,633 211 ======== === ======== ===
Total costs and expenses decreased as a percentage of revenues to 199% in the Year Ended December 31, 1997 as compared with 211% in the Year Ended December 31, 1996. The negative percentage of revenues was caused primarily by the effect of the amortization, merger and other charges. Costs of production includes the cost of manuals, packaging, diskettes and CD-ROM discs, 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 to 28% in the Year Ended December 31, 1997 as compared to 27% in the Year Ended December 31, 1996. The increase in costs of production as a percentage of revenues was caused by a reduction in the retail selling prices of certain of the Company's products during the year. The Company expects that costs of production as a percentage of revenues may continue to increase in the foreseeable future. Sales and marketing costs increased to 22% of revenues in the Year Ended December 31, 1997 as compared to 20% of revenues in the Year Ended December 31, 1996. The increase as a percentage of revenues was a result of increased spending on coupon rebate programs in the retail channel, higher channel marketing costs and increased spending for print and television media advertising. General and administrative costs as a percentage of revenues were constant between years. The increase in expenses was due to the 1997 acquisitions. 21 22 Development and software costs were constant as a percentage of revenues. Overall dollars spent increased in the Year Ended December 31, 1997 as compared to the Year Ended December 31, 1996 as a result of the higher cost to develop titles in the Reader Rabbit multi-subject series as well as The Clue Finders' Adventures and Compton's Interactive Encyclopedia, which each have a higher proportion of animation, graphics and online content than products developed in prior years. In addition, the Company has begun to develop MMX, DVD and Internet Applet platform based technologies, which are more expensive to develop than traditional software code. The Company expects that as technologies become more complex it will spend an increasing percentage of its revenues on research and development. Amortization, merger and other charges decreased as a percentage of revenues to 131% in the Year Ended December 31, 1997 as compared to 146% in the Year Ended December 31, 1996. The amortization, merger and other charges includes, among other things, the amortization of goodwill and other acquired intangible assets from the acquisitions of The Former Learning Company, Compton's, Creative Wonders and MECC plus certain of the European acquisitions. In addition, the amortization, merger and other charges for the Year Ended December 31, 1997 include certain exit and restructuring costs related to centralizing certain administrative functions of the acquisitions and employee severance. The change in dollar amount is also due to inclusion of a full year of amortization of the goodwill and intangible assets resulting from the acquisition of MECC, whereas the prior year included amortization from May 17, 1996, the acquisition date, to the end of that year. In addition, the amortization, merger and other charges includes a charge for incomplete technology in the Year Ended December 31, 1997 of $1,050 related to the acquisition of Creative Wonders and in the Year Ended December 31, 1996 includes a charge for incomplete technology of $56,688 related to the acquisition of MECC. 22 23 Amortization, merger and other charges are as follows:
Years Ended December 31, --------------------------------- 1997 1996 -------- -------- Amortization of goodwill and other intangible assets $457,393 $434,866 Exit and restructuring costs 48,571 4,260 Charge for incomplete technology 1,050 56,688 Provision for earn-outs 5,497 2,917 Professional fees and other costs 2,505 2,599 -------- -------- $515,016 $501,330 ======== ========
The increase in amortization of goodwill and other intangible assets in the Year Ended December 31, 1997 as compared to the Year Ended December 31, 1996 related primarily to a full year of amortization of goodwill and other intangible assets resulting from the acquisitions of MECC in May 1996 and a full year of amortization of goodwill and other intangible assets resulting from the European acquisitions of Edusoft and Domus in August and September of 1996. During 1997, the amortization of the goodwill and other intangible assets related to the acquisitions of The Former Learning Company and Compton's was completed. Exit and restructuring costs related to charges for employee severance, discontinued products, termination of certain supplier relationships and other charges related to the acquisitions. The charge increased in the Year Ended December 31, 1997 as compared to the Year Ended December 31, 1996 as a result of the 1997 acquisitions and related changes in strategy related to the school channel and discontinued product. The charge for incomplete technology for the Year Ended December 31, 1997 related to products being developed by Creative Wonders and for the Year Ended December 31, 1996 related to products being developed by MECC, in each case which the Company believes had not yet reached technological feasibility and had no future alternative use at the date of acquisition and for which additional development was required to complete the software technology and products. The Company engaged a nationally recognized valuation firm to determine the value of the complete, incomplete technology and other identifiable intangible assets. The provision for earn-outs related to additional payments which were earned by the former owners of certain acquisitions completed in 1996 and 1995. The earn-out requirements are based upon meeting certain financial and other goals and are recorded when those conditions are met. The amounts due are payable in shares of the Company's common stock and are due prior to December 31, 1998. Professional fees related to the investment banking, legal and accounting costs for the acquisitions. Interest Expense Interest expense decreased to a net expense of $21,378 in the Year Ended December 31, 1997 as compared to a net expense of $24,139 in the Year Ended December 31, 1996 as a result of the repurchase of certain of the Senior Convertible Notes, offset by the interest costs associated with the sale of certain trade accounts receivable and by borrowings throughout the year under the bank line of credit. 23 24 RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues Revenues by distribution channel for the Years Ended December 31, 1996 and 1995 are as follows:
Year Ended Year Ended December 31, % of total December 31, % of total 1996 revenues 1995 revenues ------------ ---------- ------------ ---------- Distribution Channel - -------------------- Retail $174,812 51 $ 75,734 45 OEM 27,855 8 20,021 12 School 21,701 6 -- -- Direct response 38,548 11 26,203 16 International 57,684 17 25,631 15 Tax software and services 22,721 7 19,453 12 -------- --- -------- --- $343,321 100 $167,042 100 ======== === ======== ===
Total revenues increased 106% in the Year Ended December 31, 1996 as compared to the Year Ended December 31, 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 sales of new and upgraded products launched by the Company during the year. 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 Wal-Mart, Office Depot, Kmart and OfficeMax and sales from new and upgraded products. International sales increased primarily as a result of the acquisition of Edusoft in 1996, a full year of sales from tewi which was acquired in July 1995 and an increase in the number of translated foreign language versions of the Company's products available for sale in the international markets. Original equipment manufacturer ("OEM") revenues increased due to the availability of new product offerings for this channel and an increased demand for multi-language titles. 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 response channel. Direct response revenues also increased as a result of the introduction of an outbound telephone sales program during 1996. Prior to the acquisitions of The Former Learning Company and MECC, the Company did not participate in the school channel. Revenues from tax software and services increased for the Year Ended December 31, 1996 as compared to the Year Ended December 31, 1995 as a result of earlier delivery of product to the Company's customers. Costs and Expenses The Company's costs and expenses and the respective percentages of revenues for the Year Ended December 31, 1996 as compared to the Year Ended December 31, 1995 are as follows:
Year Ended Year Ended December 31, % of total December 31, % of total 1996 revenues 1995 revenues ------------ ---------- ------------ ---------- Costs of production $ 91,045 27 $ 53,070 32 Sales and marketing 67,690 20 38,370 23 General and administrative 28,550 8 20,813 12 Development and software costs 36,018 10 12,487 7 Amortization, merger and other charges 501,330 146 103,172 62 -------- --- -------- --- $724,633 211 $227,912 136 ======== === ======== ===
Total costs and expenses increased as a percentage of revenues to 211% in the Year Ended December 31, 1996, as compared with 136% in the Year Ended December 31, 1995. This increase as a percentage of revenues was caused primarily by the charges for incomplete technology, the amortization of goodwill and acquired technology resulting from the acquisitions of The Former Learning Company, Compton's and MECC, offset by the reduction in general and 24 25 administrative costs, sales and marketing costs and costs of production as a percentage of revenues 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 and CD-ROM discs, 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 to 27% in the Year Ended December 31, 1996 as compared to 32% in the Year Ended December 31, 1995. The decrease in costs of production as a percentage of revenues was caused by reduced prices on the cost to manufacture product due to increased unit volumes, changes in the production components, the impact from The Former Learning Company and MECC having historically higher gross margin selling products than the Company prior to the acquisitions. In addition, during 1996 the Company experienced an increase in revenues in the OEM, school and direct response channels, all of which typically experience higher gross margins than the Company's traditional retail box product sales channel. As well, the Company has seen an increase in sales of its Value line of products, which, due to the nature of the low cost packaging in a jewel case, also generate higher gross margins. Sales and marketing expenses decreased to 20% of revenues in the Year Ended December 31, 1996 as compared to 23% of revenues in the Year Ended December 31, 1995. The percentage decrease was a result of the Company reducing both fixed costs and employee headcount of its combined operations following the acquisitions in late 1995 and May 1996. General and administrative expenses decreased to 8% of revenues in the Year Ended December 31, 1996 as compared to 12% in the Year Ended December 31, 1995. This is primarily the result of a general reduction in overhead costs and employee headcount following the acquisitions in 1995 and 1996. Development and software costs increased to 10% of revenues for the Year Ended December 31, 1996 as compared to 7% in the Year Ended December 31, 1995. The increase is a result of a higher proportion of internally developed products from The Former Learning Company, Compton's and MECC than developed by the Company prior to these acquisitions. Amortization, merger and other charges increased to 146% of revenues in the Year Ended December 31, 1996 as compared to 62% in the Year Ended December 31, 1995. The increase results from the amortization of the goodwill and other intangible assets arising on the acquisitions of The Former Learning Company and Compton's for a full year in the Year Ended December 31, 1996 as compared to less than a month in the Year Ended December 31, 1995, and from the amortization of goodwill and other intangible assets and the charge for incomplete technology arising from the acquisition of MECC in May 1996. Amortization, merger and other charges are as follows:
Years Ended December 31, ------------------------ 1996 1995 -------- -------- Amortization of goodwill and other intangible assets $434,866 $ 31,968 Charge for incomplete technology 56,688 60,483 Employee severance costs 4,260 1,304 Provision for earn-outs 2,917 -- Professional fees and other costs 2,599 6,784 Provision for litigation -- 2,633 -------- -------- $501,330 $103,172 ======== ========
The increase in amortization of goodwill and other intangible assets in the Year Ended December 31, 1996 as compared to the Year Ended December 31, 1995 relates primarily to the amortization resulting from acquisitions of MECC in May 1996 and a full year of amortization of goodwill arising from The Former Learning Company and Compton's, which were acquired in December 1995. Goodwill and other intangible assets are primarily being amortized on a straight-line basis over two years. The charge for incomplete technology for the Year Ended December 31, 1996 relates to products being developed by MECC and in the Year Ended December 31, 1995 for products developed by The Former Learning Company and 25 26 Compton's which the Company believes had not yet reached technological feasibility at the date of acquisition and for which additional development was required to complete the software technology and products. Employee severance costs in each year related to severance paid to employees of the Company terminated in connection with the acquisitions. The provision for earn-outs relates to additional payments which may be earned by the former owners of certain international acquisitions purchased in 1996 and 1995. The earn-out requirements are based upon meeting certain financial and other goals and will be recorded when those conditions are met. Professional fees and other costs decreased in the Year Ended December 31, 1996 as compared to the Year Ended December 31, 1995 due to decreased charges related to the investment banking, legal and accounting costs. Interest Income (Expense) Interest income (expense) increased to a net expense of $24,139 in the Year Ended December 31, 1996 as compared to interest income of $705 in 1995 as a result of increased interest expense arising from the Senior Convertible Notes issued by the Company in 1995. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased from $110,120 at December 31, 1996 to $95,137 at December 31, 1997. This decrease was attributable to the repurchase of $28,000 of 5-1/2% Senior Convertible Notes due 2000 (the "Senior Convertible Notes") offset by cash generated from operations of $90,074. The Company also paid $33,500 during the year to acquire control of Creative Wonders, which was offset by the net proceeds of $57,462 from the issue of the special warrants in Canada. Included as a use of cash from operating activities is $25,115 of interest related to the Senior Convertible Notes and the 5-1/2% Senior Convertible/Exchangeable Notes due 2000 formerly held by Tribune Company (the "Private Notes"). 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 $50,000 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. During the Year Ended December 31, 1997, the Company repurchased $28,000 of Senior Convertible Notes. As of February 2, 1998, the Company has outstanding $293,650 long-term principal amount Senior Convertible Notes. The Senior Convertible Notes will be redeemable by the Company on or after November 2, 1998 at declining redemption prices and are due on November 2, 2000. 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 December 5, 1997, the Company issued an aggregate of 750,000 shares of Series A Convertible Participating Preferred Stock (the "Preferred Stock") to an investor group. The Preferred Stock was issued in exchange for $150,000 principal amount of the Private Notes, which the investor group purchased from Tribune Company in a private transaction. Each share of the Preferred Stock has an initial liquidation preference of $200 and is initially convertible into 20 shares of common stock, subject to adjustment. The Preferred Stock is non-redeemable, bears no dividend, is subject to restrictions on resale for a period of at least eighteen months and is manditorily convertible into common stock upon satisfaction of certain conditions. The retirement of the Private Notes will reduce the Company's future annual interest expense by $8,250. On November 6, 1997, the Company's Canadian subsidiary, SoftKey Software Products Inc. ("SoftKey"), issued 4,072,000 special warrants in a private placement in Canada for net proceeds of $57,462 . Each special warrant is exercisable without additional payment for one exchangeable non-voting share of SoftKey (an "Exchangeable Share"). The Exchangeable Shares are exchangeable at the option of the holder on a one-for-one basis for common stock of the Company. The proceeds of the private placement were used to acquire a 100% equity interest in Creative Wonders for $33,500 and the remainder was used for general corporate purposes. 26 27 The Company has in place a revolving line of credit (the "Line") with Fleet Bank to provide for a maximum availability of $50,000, of which $35,000 is outstanding at December 31, 1997. Borrowings under the Line become due on July 1, 1999 and bear interest at the prime rate (8 1/2% at December 31, 1997). 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 Line is guaranteed by the Company. 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 up to $75,000 on a revolving basis during a five year period ending September 30, 2002. The Company acts as servicing agent for the sold receivables in the collection and administration of the accounts. On October 23, 1997, the Company acquired control of in Creative Wonders for a total purchase price of approximately $37,799, which included $33,883 of cash ($33,500 of which had been paid at year end), the value of employee stock options assumed by the Company and estimated transaction costs. 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 U.S. dollar. The Company conducts portions of its business in currencies other than U.S. dollar. The Company does not expect that it will incur any significant risk of currency translation loss due to fluctuations in those other currencies as the amounts are not material. The Company has expensed all costs incurred in connection with Year 2000 system conversions. The amounts incurred and expected to be incurred are not material. At the present time, the Company expects that its cash and cash equivalents and 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. In addition, the Company's remaining long-term portion of the Senior Convertible Notes totaling $293,650, mature in November 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. 27 28 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 elsewhere in this Annual Report on Form 10-K. INTENSE COMPETITIVE ENVIRONMENT The consumer software industry is intensely and increasingly competitive and is characterized by rapid changes in technology and customer requirements. The Company competes for retail shelf space and general consumer awareness with a number of companies that market consumer software. The Company encounters competition from both established companies, including the largest companies in the industry, and new companies that may develop comparable or superior products. A number of the Company's competitors and potential competitors possess significantly greater capital, marketing resources and brand recognition than the Company. Rapid changes in technology, product obsolescence and advances in computer software and hardware require the Company to develop or acquire new products and to enhance its existing products on a timely basis. The Company's marketplace has recently experienced a higher emphasis on online and Internet related services and content tailored for this new delivery vehicle. To the extent that demand increases for online products and content, the demand for the Company's existing products change. There can be no assurance that the Company will be able to successfully maintain market share and otherwise compete successfully in the future. Competitive pressures in the software industry have resulted, and the Company believes may continue to result, in pressure to reduce the prices of its products or risk loss of market share. In response to such competitive pressures during early 1997 the Company reduced the retail selling price of certain of its educational products. There can be no assurance that Company's product selling prices will not continue to decline in the future or that the Company will not respond to such declines with additional price reductions. Such price reductions may reduce the Company's revenues and operating margins in the future. During 1997, the Company and many of its competitors began using rebate coupons in order to induce consumers to purchase their products. In addition, the Company uses various forms of prints and television advertising to enhance brand and product awareness. The use of these methods of channel marketing and advertising is becoming more prevalent among the larger consumer software publishers. To the extent that the Company fails to match competitors' future channel marketing and advertising programs, it could risk loss of market share and corresponding revenues and operating profits. Large companies with substantial bases of intellectual property content in the motion picture and media industries, sophisticated product marketing and technical abilities and/or financial resources that may not need to realize an immediate profit or return on investment have increasingly entered or announced their intention to enter the consumer software market. These competitors include Microsoft, Disney, Mattel, Hasbro and Cendant Corporation (formerly CUC International Inc.). For example, technology companies have begun to acquire greater access to content, and content-oriented companies have begun to acquire greater technological capabilities. To the extent that competitors achieve a performance, price or distribution advantage, the Company could be adversely affected. Furthermore, increased consolidation of the consumer software market may impact future growth potential and performance. In the retail distribution channel resellers typically have available a limited amount of shelf space and promotional resources. There is intense competition for high quality and adequate levels of shelf space and promotional support from retailers. To the extent that the number of consumer computer platforms and products increases, this competition for shelf space may also increase. The Company also competes for shelf space against non-educational and reference category publishers such as games. To the extent that these vendors acquire greater shelf space, the Company's position may be reduced. Mass merchants such as Wal-Mart and Kmart are increasingly becoming a larger portion of the Company's sales. As these retailers achieve greater market share from the traditional software retailers, the Company may experience higher marketing costs and increased competition for shelf space, which could impact future sales and operating margins. Additionally, as technology changes, the type and number of distribution channels will further change and new types of competitors, such as cable or telephone companies, are likely to emerge. There can be no assurance that the Company will compete effectively in these channels in the future. The retail channels of distribution available for products are subject to rapid changes as retailers and distributors enter and exit the consumer software market or alter their product inventory preferences. Other types of retail outlets and methods of product distribution may become important in the future. These new methods may include delivery of software using online services or the Internet which will necessitate certain changes in the Company's business and 28 29 operations including addressing operational challenges such as improving download time for pictures, images and programs, ensuring proper regulation of content quality and developing sophisticated security for transmitting payments. Should on-line distribution channels increase, the Company will be required to modify its existing technology platforms in order for its products to be compatible and remain competitive. It is critical to the success of the Company that, as these changes occur, it maintain access to those channels of distribution offering software in its market segments. NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE The Company operates in a highly competitive and technology driven environment. The consumer software industry is undergoing substantial change and is subject to a high level of uncertainty. Software companies must continue to develop or acquire new products or upgrade existing products on a timely basis to sustain revenues and profitable operations. Factors contributing to the short life span of PC software have included rapid technological change and an expanded demand for content-rich products. Software companies must continue to create or acquire innovative new products reflecting technological changes in hardware and software and translate current products into newly accepted hardware and software formats, in order to gain and maintain a viable market for their products. PC hardware, in particular, is steadily advancing in power and function, expanding the market for increasingly complex and flexible software products. This has also resulted in longer periods necessary for research and development of new products and a greater degree of unpredictability in the time necessary to develop products. Furthermore, the rapid changes in the market and the increasing number of new products available to consumers have increased the degree of consumer acceptance risk with respect to any specific title that the Company may publish. It is expected that this trend will continue and may become more pronounced in the future. Similarly, the Company's product-content focus and enhanced presence in the educational and reference software market have required and will continue to require the Company to evaluate and adopt appropriate development and marketing strategies and methods, which may differ from those historically employed by the Company and subject the Company to the risks and competitive pressures associated with those new strategies. The Company's rights to license many of its software products are non-exclusive and, generally, of limited duration, and there is no assurance the Company will be able to continue to obtain new products from developers or to maintain or expand its market share in the event that a competitor offers the same or similar software products. If the Company is unable to develop or acquire new products in a timely manner as revenues decrease from products reaching the end of their natural life cycle, the Company's results of operations will be adversely affected. Certain of the Company's products, such as The American Girls Premiere and the Sesame Street line of products, among others, include branded content licensed from third parties. This content is licensed pursuant to agreements with terms of finite duration and which may contain restrictions on the Company's ability to develop future products without the consent of the applicable licensor. If the Company is not able to develop future products under these agreements or enter into alternative arrangements with the same or additional licensors, the Company's operating results could be adversely affected. DEPENDENCE ON MAJOR SUPPLIER In 1997, the production, assembly and distribution of the Company's North American line of products was performed by two units of Bertelsmann AG (collectively, "BMG"), (with the exception of school channel products and certain OEM products). The Company believes that its existing production capacity is sufficient to handle anticipated increases in volume and titles into the foreseeable future. Although the Company believes that suitable alternative suppliers exist, there can be no assurance that any termination or modification of its arrangement with BMG would not result in a short-term business interruption for the Company. EFFECT OF NEW ACCOUNTING PRONOUNCEMENT For the Year Ended December 31, 1997, the Company adopted Statement of Accounting Standards No. 128 ("FAS 128"), which requires the presentation of basic and diluted earnings per share, which replaces primary and fully diluted earnings per share. Earnings per share have been restated for all periods presented to reflect the adoption of FAS 128. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding during the period, plus the diluted effect of common stock equivalents. Common stock equivalent shares consist of convertible 29 30 debentures, preferred stock, stock options and warrants. The dilutive computations do not include potential common stock equivalents for the years ended December 31, 1997, 1996 and 1995 as their inclusion would be antidilutive. The Financial Accounting Standards Board recently issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, which supersedes SOP No. 91-1, the existing pronouncement on this subject, in its final form. The most significant changes to SOP No. 91-1, relate to multiple deliverables and "when and if available" products. The adoption of this new standard is not expected to have a material effect on the Company's financial statements. The SOP is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company will adopt the new standards for its fiscal year ending December 31, 1998. In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income which establishes standards for reporting and display of comprehensive income and its components (revenue expenses, gains and losses) in a full set of general purpose financial statements. Management has not yet evaluated the effects of this change on its reporting of income. The Company will adopt SFAS No. 130 for its fiscal year ending December 31, 1998. 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. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements set forth on page 31 hereof. 30 31 THE LEARNING COMPANY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants.............................................32 Consolidated Balance Sheets as of December 31, 1997 and 1996 ................ 33 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995.........................................34 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1997, 1996 and 1995.............................35 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.........................................36 Notes to Consolidated Financial Statements....................................38 Financial Statement Schedule of Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995.....................55 31 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of The Learning Company, Inc.: We have audited the accompanying consolidated balance sheets of The Learning Company, Inc. as of January 3, 1998 and January 4, 1997 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three fiscal years in the period ended January 3, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Learning Company, Inc. as of January 3, 1998 and January 4, 1997 and the related consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended January 3, 1998 in conformity with generally accepted accounting principles. In connection with our audits of the financial statements referred to above, we have also audited the related financial statement schedule of valuation and qualifying accounts. In our opinion, this financial statement schedule for each of the three fiscal years in the period ended January 3, 1998, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 9, 1998 (except as to Note 12 which is as of March 6, 1998) 32 33 THE LEARNING COMPANY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31, December 31, 1997 1996 ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 95,137 $ 110,120 Accounts receivable, less allowances of $29,226 and $15,191, respectively 99,677 79,610 Inventories 29,600 15,894 Other current assets 32,590 20,349 ----------- --------- 257,004 225,973 ----------- --------- Fixed assets and other, net 32,306 22,975 Goodwill and other intangible assets, net 127,481 544,570 ----------- --------- $ 416,791 $ 793,518 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses $ 94,060 $ 66,658 Line of credit 35,150 25,000 Merger related accruals 12,533 10,667 Current portion of long-term obligations 10,717 8,083 Purchase price payable 7,896 3,245 ----------- --------- 160,356 113,653 ----------- --------- LONG-TERM OBLIGATIONS: Long-term debt 294,356 332,930 Related party debt -- 150,000 Accrued and deferred income taxes 59,746 86,920 Other 6,119 5,078 ----------- --------- 360,221 574,928 ----------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 7) STOCKHOLDERS' EQUITY (DEFICIT): Series A Preferred Stock, $.01 par value - Authorized 750,000 shares, issued and outstanding 750,000 shares at December 31, 1997 (liquidation value of $150,000) 8 -- Common stock, $0.01 par value - Authorized - 120,000,000 shares; issued and outstanding 48,868,659 and 44,379,781 shares at December 31, 1997 and 1996, respectively 489 444 Special voting stock - Authorized and issued - one share representing the voting rights of 1,478,929 and 1,551,428 outstanding Exchangeable Shares (for common stock) at December 31, 1997 and 1996, respectively -- -- Additional paid-in-capital 1,012,273 733,229 Accumulated deficit (1,099,907) (618,047) Cumulative translation adjustment (16,649) (10,689) ----------- --------- (103,786) 104,937 ----------- --------- $ 416,791 $ 793,518 =========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 33 34 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Years Ended December 31, ----------------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- REVENUES $ 392,438 $ 343,321 $ 167,042 COSTS AND EXPENSES: Costs of production 111,703 91,045 53,070 Sales and marketing 86,621 67,690 38,370 General and administrative 31,135 28,550 20,813 Development and software costs 41,018 36,018 12,487 Amortization, merger and other charges 515,016 501,330 103,172 ----------- ----------- ----------- Total operating expenses 785,493 724,633 227,912 ----------- ----------- ----------- OPERATING LOSS (393,055) (381,312) (60,870) ----------- ----------- ----------- INTEREST INCOME (EXPENSE): Interest income 1,104 2,564 6,020 Interest expense (22,482) (26,703) (5,315) ----------- ----------- ----------- Total interest income (expense) (21,378) (24,139) 705 ----------- ----------- ----------- LOSS BEFORE TAXES (414,433) (405,451) (60,165) PROVISION FOR INCOME TAXES 61,234 -- 5,795 ----------- ----------- ----------- NET LOSS $ (475,667) $ (405,451) $ (65,960) =========== =========== =========== NET LOSS PER SHARE: Basic and Diluted $ (9.59) $ (9.94) $ (2.65) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic and Diluted 49,613,000 40,801,000 24,855,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 34 35 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
Series A Total Preferred Common Stock Additional Cumulative Stockholders' -------------- --------------- Paid-In Accumulated Translation Treasury Equity Shares Amount Shares Amount Capital Deficit Adjustment Stock (Deficit) ------ ------ ------ ------ ----------- ----------- ----------- -------- ------------- BALANCE, DECEMBER 31, 1994 -- $-- 16,697 $167 $ 191,390 $ (142,792) $ (9,651) $(1,629) $ 37,485 Acquisition of Future Vision -- -- 1,135 11 8,455 (3,608) -- -- 4,858 Acquisition of tewi -- -- 99 1 3,639 -- -- -- 3,640 Acquisition of The Former Learning Company -- -- -- -- 43,369 -- -- -- 43,369 Acquisition of Compton's -- -- 5,053 51 86,634 -- -- -- 86,685 Other acquisitions -- -- 262 3 2,673 (236) -- -- 2,440 Sale of common stock -- -- 2,713 27 73,584 -- -- -- 73,611 Stock issued under exercise of options and warrants -- -- 1,898 19 28,171 -- -- -- 28,190 Treasury stock retirement -- -- -- -- (1,629) -- -- 1,629 -- Conversion of Exchangeable Shares to common stock -- -- 2,508 25 (25) -- -- -- -- Translation adjustments -- -- -- -- -- -- 201 -- 201 Net loss -- -- -- -- -- (65,960) -- -- (65,960) --- --- ------ ---- ---------- ----------- -------- ----- --------- BALANCE, DECEMBER 31, 1995 -- -- 30,365 304 436,261 (212,596) (9,450) -- 214,519 Acquisition of MECC -- -- 9,214 92 240,670 -- -- -- 240,762 Other acquisitions -- -- 899 9 15,247 -- -- -- 15,256 Conversion of debt to common stock -- -- 158 2 3,051 -- -- -- 3,053 Stock issued under exercise of options -- -- 3,198 32 24,985 -- -- -- 25,017 Conversion of Exchangeable Shares to common stock -- -- 45 -- -- -- -- -- -- Stock issued for settlement of expenses -- -- 500 5 13,015 -- -- -- 13,020 Translation adjustments -- -- -- -- -- -- (1,239) -- (1,239) Net loss -- -- -- -- -- (405,451) -- -- (405,451) --- --- ------ ---- ---------- ----------- -------- ----- --------- BALANCE, DECEMBER 31, 1996 -- -- 44,379 444 733,229 (618,047) (10,689) -- 104,937 Issuance of Series A Preferred Stock 750 8 -- -- 202,025 -- -- -- 202,033 Issuance of special warrants -- -- -- -- 57,462 -- -- -- 57,462 Conversion of Exchangeable Shares to common stock -- -- 73 -- -- -- -- -- -- Stock issued under exercise of stock options -- -- 1,116 11 8,959 -- -- -- 8,970 Stock issued to settle earn-outs -- -- 135 2 2,021 -- -- -- 2,023 Other acquisitions -- -- 3,165 32 8,577 (6,193) -- -- 2,416 Translation adjustments -- -- -- -- -- -- (5,960) -- (5,960) Net loss -- -- -- -- -- (475,667) -- -- (475,667) --- --- ------ ---- ---------- ----------- -------- ----- --------- BALANCE, DECEMBER 31, 1997 750 8 48,868 $489 $1,012,273 $(1,099,907) $(16,649) $ -- $(103,786) === === ====== ==== ========== =========== ======== ===== =========
The accompanying notes are an integral part of these consolidated financial statements 35 36 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, ------------------------------------------------- 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(475,667) $(405,451) $ (65,960) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 531,206 451,133 29,802 Charge for incomplete technology 1,050 56,688 60,483 Provision for returns and doubtful accounts 67,773 38,112 22,358 Provision for income taxes 61,234 -- -- Change in assets and liabilities (net of acquired assets and liabilities): Accounts receivable (89,396) (91,413) (39,811) Inventories (10,954) 3,332 (4,441) Other current assets (2,035) 4,203 8,865 Other long-term assets (8,625) (4,308) 11,990 Accounts payable and accrued expenses 15,488 13,359 9,942 Other long-term obligations -- -- (2,294) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 90,074 65,655 30,934 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Businesses acquired, net of cash on-hand (55,592) 21,518 (547,889) Purchases of property and equipment, net (4,685) (4,939) (7,811) Software development costs (27,299) (12,344) (2,410) Merger related accruals (53,021) (38,091) (7,341) Payments to stockholders of The Former Learning Company -- (25,025) -- --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (140,597) (58,881) (565,451) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of stock, options and warrants 8,970 27,905 106,616 Borrowings under line of credit 10,150 25,000 3,150 Payments on term notes -- (4,832) (8,815) Payments on capital lease obligations (2,676) (1,874) (1,008) Sale (repurchase) of senior notes (28,000) (18,350) 500,000 Costs incurred to issue Series A Preferred Stock (10,701) -- -- Proceeds from issue of special warrants 57,462 -- -- Other 1,821 (1,092) -- --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 37,026 26,757 599,943 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON NET CASH (1,486) (1,243) 201 --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (14,983) 32,288 65,627 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 110,120 77,832 12,205 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 95,137 $ 110,120 $ 77,832 ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 36 37 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 -------- -------- ------- SUPPLEMENTAL SCHEDULING OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of Series A Preferred Stock to retire debt $202,033 $ -- $ -- Common stock issued to settle earn-out agreements 2,023 -- -- Common stock issued to acquire MECC -- 221,319 -- Increase in APIC due to value of in-the-money employee stock options acquired in connection with acquisitions 2,969 19,444 43,369 Common stock issued for acquisitions -- 15,255 95,292 Conversion of debt to equity -- 3,053 3,471 Common stock issued for settlement of expenses -- 10,132 111 Equipment acquired under capital leases -- 1,262 627 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid (refunded) during period for: Interest paid $ 29,876 $ 28,466 $ 524 Income taxes paid (refunded) 1,583 (7,886) (12)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 37 38 THE LEARNING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Business The Learning Company, Inc. ("TLC" or the "Company") develops, publishes and markets consumer software in the education and reference category and, to a lesser extent, productivity, lifestyle and entertainment categories. The Company sells its products in the retail channel through mass merchants, consumer electronic stores, price clubs, office supply stores, software specialty stores and distributors; to original equipment manufacturers ("OEMs"); to schools and to end-users through direct response methods. The Company also develops and distributes income tax software products and offers computerized processing of income tax returns in Canada. The Company's principal market is in the United States and Canada. The Company has international operations in Germany, Ireland, France, Holland, the United Kingdom, Japan and Australia. On October 24, 1996, SoftKey International Inc. changed its name to The Learning Company, Inc. The Company's fiscal year is the 52 or 53 weeks ending on or after December 31. For clarity of presentation herein, all references to December 31, 1997 relate to balances as of January 3, 1998, references to December 31, 1996 relate to balances as of January 4, 1997, the period from January 5, 1997 to January 3, 1998 is referred to as the "Year Ended December 31, 1997", the period from January 7, 1996 to January 4, 1997 is referred to as the "Year Ended December 31, 1996" and the period from January 1, 1995 to January 6, 1996 is referred to as the "Year Ended December 31, 1995". Basis of Presentation 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. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform with the current year presentation. Revenue Recognition Revenues are primarily derived from the sale of software products and from software licensing and royalty arrangements. The Company recognizes revenue in accordance with the Statement of Position ("SOP") No. 91-1, Software Revenue Recognition. The Financial Accounting Standards Board recently issued SOP No. 97-2, Software Revenue Recognition. The most significant changes to SOP No. 91-1, relate to multiple deliverables and "when and if available" products. The new SOP No. 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997 and will be adopted by the Company for the fiscal year ending December 31, 1998. The adoption of this new standard is not expected to have a material effect on the Company's financial statements. Revenues from the sale of software products are recognized upon shipment, provided that no significant obligations remain outstanding and collection of the receivable is probable. Costs related to insignificant post shipment obligations are accrued when revenue is recognized for the sale of the related products. Allowances for estimated returns are provided at the time of sale and charged against revenues. The Company evaluates the adequacy of allowances for returns and doubtful accounts primarily based upon its evaluation of historical and expected sales experience and by channel of distribution. The estimates determined for reserves for returns and allowances are based upon information available at the reporting date. To the extent the future market, sell-through experience, customer mix, channels of 38 39 distribution, product pricing and general economic conditions change, the estimated reserves required for returns and allowances may also change. Revenues from royalty and license arrangements are recognized as earned based upon performance or product shipments. Cash Equivalents Cash equivalents are valued at cost, which approximates market value, and consist principally of commercial paper, bankers' acceptances, short-term government securities and money market accounts. The Company considers all such investments having maturities at purchase of less than 90 days to be cash equivalents. At year end approximately $20,000 of cash is restricted under compensating balances required under the receivables purchase agreement with the Company's bank. Accounting for Transfers and Servicing Financial Assets The Company follows Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("FAS 125"). FAS 125 applies a control-oriented, financial-components approach to financial asset transfer transactions whereby the Company (1) recognizes the financial and servicing assets it controls and the liabilities it has incurred, (2) derecognizes financial assets when control has been surrendered, and (3) derecognizes liabilities once they are extinguished. 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 of up to $75,000 on a revolving basis during a five year period ending September 30, 2002. The Company acts as servicing agent for the sold receivables in the collection and administration of the accounts. 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. December 31, --------------------- 1997 1996 ------- ------- Components $ 4,243 $ 1,213 Finished goods 25,357 14,681 ------- ------- $29,600 $15,894 ======= ======= Property and Equipment Property and equipment are stated at the lower of cost, net of accumulated depreciation or net realizable value. Depreciation is calculated using accelerated and straight-line methods over the following useful lives: Building 40 years Computer equipment 3-5 years Furniture and fixtures 3-5 years Leasehold improvements Shorter of the life of the lease or the estimated useful life Betterments and major renewals are capitalized and included in property, plant, and equipment accounts while expenditures for maintenance and repairs and minor renewals are charged to expense. When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in income. Goodwill and Intangible Assets The excess cost over the fair value of net assets acquired, goodwill, 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 39 40 amortized on a straight-line basis over its estimated useful life of 40 years (balance of $22,341 at the end of fiscal 1997 and $23,352 at the end of fiscal 1996). The cost of identified intangible assets is generally amortized on a straight-line basis over their estimated useful lives of 2 to 10 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. The Company determines whether an impairment has occurred based on gross expected future cash flows and measures the amount of the impairment based on the related future estimated discounted cash flows. The cash flow estimates that are used to determine the amount of an impairment, if any, contain management's best estimates, using appropriate and customary assumptions and projections at the time. Goodwill and other intangible assets have been presented net of accumulated amortization of $905,425 at the end of fiscal 1997 and $444,967 at the end of fiscal 1996.
Description Estimated ----------- useful life in Net balance years at December 31, -------------- ---------------------------- 1997 1996 -------- -------- Goodwill 2 to 40 $ 55,199 $397,459 Acquired technology 2 16,662 126,763 Brands and related content rights 7 to 10 51,453 10,061 Deferred financing costs 5 3,828 9,423 Other intangible assets 3 339 864 -------- -------- $127,481 $544,570 ======== ========
Development and Software Costs Development and software costs are expensed as incurred. Development costs for new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. Capitalized software development costs on a product-by-product basis are being amortized using the straight-line method over the remaining estimated economic life of the product, which is generally twelve months beginning when launched, which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product. Income Taxes Deferred tax liabilities and assets are determined based on the differences between the financial statement basis and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. FAS 109 also requires a valuation allowance against net deferred tax assets if based upon the available evidence it is more likely than not that some or all of the deferred tax assets will not be realized. Foreign Currency The functional currency of each foreign subsidiary is the local currency. Accordingly, assets and liabilities of foreign subsidiaries are translated to U.S. dollars at period end exchange rates. Revenues and expenses are translated using the average rates during the period. The effects of foreign currency translation adjustments have been accumulated and are included as a separate component of stockholders' equity (deficit). Computation of Earnings Per Share For the year ended December 31, 1997, the Company adopted Statement of Accounting Standards No. 128 ("FAS 128"), which requires the presentation of Basic and Dilutive earnings per share, which replaces primary and fully diluted earnings per share. Earnings per share have been restated for all periods presented to reflect the adoption of FAS 128. 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 equivalent shares consist of convertible debentures, preferred stock, stock options and warrants. The dilutive computations do not include common stock equivalents for the years ended December 31, 1997, 1996 and 1995 as their inclusion would be antidilutive. 40 41 (2) BUSINESS COMBINATIONS Creative Wonders On October 23, 1997, the Company acquired control of Creative Wonders, L.L.C. ("Creative Wonders"), an educational software company that publishes, among other titles, the Sesame Street line of products. The purchase price was a total of $37,799 including the value of employee stock options assumed and estimated transaction costs. The purchase price included cash payments of $33,883. Other 1997 Combinations On September 19, 1997, the Company acquired Learning Services Inc. ("Learning Services"), a national school software catalog for teachers, in exchange for the issuance of 709,976 shares of common stock. On September 29, 1997, the Company acquired Skills Bank Corporation ("Skills Bank"), a developer of educational and remedial software products for adult, adolescent and K to 12 students, in exchange for the issuance of 1,069,286 shares of common stock. On October 2, 1997, the Company acquired Microsystems Software, Inc. ("Microsystems"), a developer of Internet filtering software, in exchange for the issuance of 955,819 shares of common stock. On December 30, 1997, the Company acquired TEC Direct, Inc. ("TEC Direct"), an educational consumer software catalog, in exchange for the issuance of 429,733 shares of common stock. Each of these transactions was accounted for using the pooling-of-interests method of accounting. The consolidated financial statements of the Company for the years prior to December 31, 1997 do not include the results and balances of these companies as they were deemed to be immaterial to the consolidated financial statements for those periods. MECC On May 17, 1996, the Company acquired Minnesota Educational Computing Corporation (MECC) ("MECC"), a publisher and developer of high quality children's educational software sold to consumers and schools, in exchange for 9,214,007 shares of the Company's common stock. The total purchase price was $284,631, including estimated transaction costs, value of stock options assumed and deferred income taxes related to certain identifiable intangible assets acquired. Approximately 1,048,000 MECC employee stock options were converted into stock options to purchase approximately 1,198,000 shares of TLC common stock. This transaction was accounted for as a purchase. Compton's On December 28, 1995, the Company acquired Compton's New Media, Inc. and Compton's Learning Company (collectively, "Compton's"), developers and publishers of multimedia software titles. In and in connection with the acquisition, the Company issued a total of 5,052,697 shares of the Company's common stock, which included 587,036 shares of common stock to settle $14,000 of intercompany debt due to Tribune Company and executed a promissory note for $3,000 in cancellation of the remaining intercompany debt. The total purchase price was $104,394, including estimated transaction costs, deferred income taxes related to certain identifiable intangible assets acquired, settlement of certain intercompany debt to Tribune Company and the fair value of net liabilities assumed. The promissory note was repaid in 1996. This transaction was accounted for as a purchase. The Learning Company On December 22, 1995, the Company acquired control of The Learning Company (the "The Former Learning Company"), a leading developer of educational software products for use at home and school. Under the terms of the merger agreement, the Company acquired, in a two-step business combination, all of the outstanding shares of The Former Learning Company for total consideration of approximately $684,066, including the value of stock options assumed, estimated transaction related costs and deferred income taxes related to certain identifiable intangible assets acquired. Approximately 1.1 million unvested employee stock options of The Former Learning Company were converted into options to purchase 3,123,000 shares of the Company's common stock, based on the merger consideration of $67.50 per share and were vested on or before January 26, 1996. Approximately $543,163 of the purchase price was settled in cash. This transaction was accounted for as a purchase. 41 42 tewi Verlag GmbH On July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi"), a publisher and distributor of CD-ROM software and computer-related books, located in Munich, Germany. The purchase price was settled by a combination of cash and issuance of common stock. The Company issued 99,045 shares of common stock valued at $3,640 and may issue additional shares of common stock to a former shareholder of tewi pursuant to an earn-out agreement. The Company paid cash consideration of $12,688 for tewi. The additional shares issuable under the earn-out agreement have been treated as contingent consideration and will be recorded if and when certain future conditions are met. During 1997 and 1996, $498 and $540, respectively, of consideration related to the contingent consideration was earned and recorded as expense by the Company. This transaction was accounted for as a purchase. The purchase price for the 1997 acquisition of Creative Wonders has been allocated based on fair values as follows: Purchase price $ 37,799 Less: fair value of net liabilities assumed (7,257) -------- Excess to allocate 45,056 Less: excess allocated to Incomplete technology 1,050 Brands and related content rights 44,006 -------- Goodwill $ -- ======== The purchase price for the 1996 acquisitions has been allocated based on fair values as follows:
MECC Others Total --------- --------- --------- Purchase Price $ 284,631 $ 15,681 $ 300,312 Less: fair value of net tangible assets (liabilities) 13,990 (15,424) (1,434) --------- --------- --------- 270,641 31,105 301,746 Excess to allocate to: Less: excess to allocate Incomplete technology 56,688 -- 56,688 Completed technology 88,501 285 88,786 Brands and related content rights 894 -- 894 --------- --------- --------- 146,083 285 146,368 --------- --------- --------- Goodwill $ 124,558 $ 30,820 $ 155,378 ========= ========= =========
42 43 The Company engaged a nationally recognized independent appraiser to express an opinion with respect to the estimated fair value of a substantial portion of the assets acquired, to serve as a basis for the allocation of the purchase price for Creative Wonders and MECC. 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 value of certain completed technology was based upon comparable fair values in the open market. The value of software technology and products under development not considered to have reached technological feasibility and having no future alternative use was expensed on acquisition. Unaudited pro forma results of operations for the transactions accounted for using the purchase method of accounting as though the acquisitions had occurred at the beginning of the Years Ended December 31, 1996 and 1995 are below. The pro forma adjustments detailed below include the effect of amortization of intangible assets and goodwill related to the acquisitions over their estimated useful lives of two years and the interest expense related to the issue of the $500,000 of debt for the period prior to 1995 and 1996 acquisitions or issuance, net of any related income tax effects. Pro forma results for the 1997 acquisitions were immaterial.
The Former Year Ended Learning Pro forma Pro forma December 31, 1996 TLC tewi Compton's Company MECC Adjustment Combined - ------------------------ ------------------------------------------------------------------------------------------------- Revenues $343,321 $ -- $ -- $ -- $ 7,800 $ -- $ 351,121 Operating loss (381,312) -- -- -- (9,212) (41,128) (431,652) Net loss (405,451) -- -- -- (7,021) (34,009) (446,481) Net loss per share (9.94) -- -- -- -- -- (10.12) Year Ended December 31, 1995 - ------------------------ Revenues $167,042 $ 3,720 $ 23,204 $60,698 $33,815 $ -- $ 288,479 Operating loss (60,870) (3,589) (13,904) 10,874 6,079 (428,239) (489,649) Net loss (65,960) (3,643) (9,626) 7,398 5,070 (398,195) (464,956) Net loss per share (2.65) -- -- -- -- -- (12.01)
Future Vision Holding, Inc. On August 31, 1995, the Company acquired all of the issued and outstanding capital stock of Future Vision Holding, Inc. ("Future Vision"), a multimedia software company, in exchange for the issuance of 1,088,149 shares of common stock of the Company. This acquisition has been accounted for using the pooling-of-interests method of accounting. The financial statements for periods prior to the Year Ended December 31, 1995 do not include amounts for this acquisition as they were deemed to be immaterial to the consolidated financial statements for those periods. 43 44 (3) FIXED ASSETS AND OTHER December 31, ------------------------- 1997 1996 -------- -------- Building, land and leasehold improvements $ 6,127 $ 4,516 Computer equipment 30,707 26,362 Furniture and fixtures 7,820 9,062 -------- -------- 44,654 39,940 Less: accumulated depreciation and amortization (24,065) (22,273) -------- -------- 20,589 17,667 Other 11,717 5,308 -------- -------- $ 32,306 $ 22,975 ======== ======== Included in computer equipment is equipment under capital lease of $1,952 and $2,207 at December 31, 1997 and 1996, respectively. Depreciation expense was $4,966, $6,491 and $6,767 in each of the Years Ended December 31, 1997, 1996 and 1995, respectively. (4) LINE OF CREDIT TLC Multimedia, Inc., a wholly-owned subsidiary of the Company, has a revolving line of credit (the "Line"), to provide for a maximum availability of $50,000, of which $35,150 was utilized at December 31, 1997. Borrowings under the Line become due on July 1, 1999 and bear interest at the prime rate (8 1/2% at December 31, 1997). The Line is subject to certain financial covenants, is secured by a general security interest in the assets of The Learning Company, Inc. and certain other subsidiaries of the Company and by a pledge of the stock of certain of its subsidiaries. The Line is guaranteed by the Company. (5) LONG-TERM DEBT December 31, -------------------------- 1997 1996 -------- -------- Senior Convertible Notes $303,650 $331,650 Obligations under capital leases 1,423 2,099 -------- -------- 305,073 333,749 Less: current portion (10,717) (819) -------- -------- $294,356 $332,930 ======== ======== The Company has outstanding $303,650 principal amount 5 1/2% Senior Convertible Notes due 2000 (the "Notes"), which are unsecured. The Notes will be redeemable by the Company on or after November 2, 1998 at redemption prices of 102.2% on November 2, 1998, 101.1% on November 1, 1999 and 100% on or after November 1, 2000 and are convertible into common stock at a price of $53 per share. Interest is payable on the Notes semi-annually on May 1 and November 1 each year. The long-term principal portion of the Notes declined by a total of $38,000 and $18,350 during the years Ended December 31, 1997 and 1996, respectively. Current portion of long-term debt includes $10,000 of the Notes as the Company intends to repurchase the amount before December 31, 1998. 44 45 (6) RELATED PARTY TRANSACTIONS On December 28, 1995, Tribune Company made an investment in the Company in the form of $150,000 principal amount 5 1/2% Senior Convertible/Exchangeable Notes due 2000 (the "Private Notes"). The Private Notes were redeemable by the Company on or after November 2, 1998 at redemption prices of 102.2% on November 2, 1998, 101.1% on November 1, 1999 and 100% on November 1, 2000 and were convertible into common stock at a price of $53 per share. The Private Notes were sold during 1997 in a private transaction to an investor group prior to issuance by the Company of 750,000 shares of Series A Convertible Participating Preferred Stock (the "Preferred Stock") and were surrendered by the investor group for issue of the Preferred Stock. In connection with the issuance of the Preferred Stock, the Company paid a transaction fee to the investor group totaling $1,845, of which $1,125 was paid to one of the investors where a director of the Company is an officer. The loss resulting from the exchange of the Private Notes for the Preferred Stock, net of tax benefit, was immaterial. (7) COMMITMENTS AND CONTINGENCIES Lease Obligations The Company leases office facilities and equipment under operating and capital leases. Rental expense for operating leases was approximately $4,523, $3,234 and $2,308 and for the Years Ended December 31, 1997, 1996 and 1995, respectively. Future annual payments under capital and operating leases are as follows: Capital Operating Leases Leases ------- -------- 1998 $ 788 $ 7,424 1999 601 6,280 2000 142 5,467 2001 2 4,643 2002 2 909 Thereafter -- 8,070 ------ ------- 1,535 $32,793 ======= Less: interest (112) Less: current portion (717) ------ $ 706 ====== (8) COMMON AND PREFERRED STOCK Common Stock The Company has reserved 19,279,847 shares of its common stock for issuance related to the Exchangeable Shares, employee stock options and warrants at year end. The Exchangeable Shares are represented by the one share of Special Voting Stock. In addition, the Company has reserved a total of 20,729,245 shares of its common stock for issuance related to the Notes and the Preferred Stock at year end. Exchangeable Shares On February 4, 1994, the Company completed a three-way business combination (the "Three-Party Combination") among SoftKey Software Products Inc. ("Former SoftKey"), WordStar International Incorporated ("WordStar") and Spinnaker Software Corporation ("Spinnaker"). In connection with the Three-Party Combination, Former SoftKey stockholders were entitled to elect to receive shares of the Company's common stock or Exchangeable Non-Voting Shares (the "Exchangeable Shares") of SoftKey Software Products Inc. ("SoftKey Software"), the successor by amalgamation to Former SoftKey. The Company also issued a special voting share (the "Voting Share") which has a number of votes equal to the number of Exchangeable Shares outstanding. The holder of the Voting Share is not entitled to dividends and shall vote with the common stockholders as a single class. The Exchangeable Shares may be exchanged 45 46 for the Company's common stock on a one-for-one basis until February 4, 2005, at which time any outstanding Exchangeable Shares automatically convert to shares of the Company's common stock. At year end there were 1,478,929 Exchangeable Shares outstanding and not held by the Company and its subsidiaries. On November 6, 1997, SoftKey Software issued in a private placement 4,072,000 special warrants for net proceeds of $57,462, each of which is exercisable without additional payment for one Exchangeable Share. Preferred Stock On December 4, 1997, the Company issued an aggregate of 750,000 shares of Series A Convertible Participating Preferred Stock (the "Preferred Stock") to an investor group in exchange for the Private Notes. Each share of the Preferred Stock has an initial liquidation preference of $200 and is initially convertible into 20 shares of common stock, or 15,000,000 shares of common stock in the aggregate on an as-converted basis, subject to adjustment for certain minimum returns on investment. The Preferred Stock is non-redeemable, bears no dividend, is subject to restrictions on resale for a period of at least eighteen months and is manditorily convertible into common stock upon satisfaction of certain conditions. The Company obtained an independent appraisal from a nationally recognized appraisal firm on the value of the Preferred Stock. Using the independent appraisal, the Company estimated the extraordinary loss for financial reporting purposes to be approximately $61,000. The Company also estimated that the resulting benefit for income tax purposes was approximately $61,000. As a result, the extraordinary loss, net of tax, was determined to be immaterial. (9) STOCK OPTIONS AND WARRANTS Stock Option Plans 1990 Long-Term Equity Incentive Plan The Company has a Long-Term Equity Incentive Plan (the "LTIP"). The LTIP allows for incentive stock options, non-qualified stock options and various other stock awards. Administration of the LTIP is conducted by the Company's Compensation Committee of the Board of Directors. The Compensation Committee determines the amount and type of option or award and terms and conditions and vesting schedules (generally 3 years) of the award or option. The maximum term of an option is 10 years. Upon a change of control, as defined, awards and options then outstanding become fully vested, subject to certain limitations. On December 4, 1997, the stockholders of the Company approved an amendment to increase the maximum number of shares of common stock issuable under the LTIP to 9,000,000 from 7,000,000. The total number of shares of common stock reserved for issuance under the LTIP at year end was 6,538,716 shares, 2,039,645 of which remained available for grant. 1996 Non-Qualified Stock Option Plan The Company initiated a non-qualified stock option plan (the "1996 Plan") that was approved by the Company's Board of Directors on February 5, 1996. The 1996 Plan allows for non-qualified stock options and various other stock awards. Administration of the 1996 Plan is conducted by the Company's Compensation Committee of the Board of Directors. The administrator determines the amount and type of option or award and terms and conditions and vesting schedules (generally 3 years) of the award or option. The maximum term of an option is 10 years. Upon a change of control, as defined, awards and options then outstanding become fully vested, subject to certain limitations. The maximum number of shares issuable under the 1996 Plan is 5,000,000. The total number of shares of common stock reserved under the 1996 Plan at year end was 4,612,949 shares, 585,183 of which remained available for grant. 1994 Non-Employee Director Stock Option Plans On April 26, 1994, the Board of Directors approved a non-employee director stock option plan (the "1994 Non-Employee Director Plan"). The 1994 Non-Employee Director Plan provides for an initial grant of 20,000 options at fair market value to be issued to each non-employee director who first became a director of the Company after February 1, 1994 ("Initial Grants"). During the Year Ended December 31, 1995, a further 100,000 options were granted to each of 46 47 the non-employee directors. During the Year Ended December 31, 1996, a further 26,667 options were granted to each of the non-employee directors. The maximum number of common shares issuable under the 1994 Non-Employee Director Plan is 500,000, all of which were granted at year end. Options granted to non-employee directors as Initial Grants were 100% exercisable at the time of grant and options issued as subsequent grants become exercisable over a three-year period. All such options are exercisable for a period of 10 years from date of grant. 1996 Non-Employee Director Stock Option Plan On July 31, 1996, Board of Directors approved the Company's 1996 Non-Employee Director Option Plan (the "1996 Non-Employee Director Plan"), which was approved by stockholders on December 4, 1997. Under the 1996 Non-Employee Director Plan, certain directors who are not officers or employees of the Company or any affiliate of the Company (the "Non-Employee Directors") are eligible to receive stock options. The 1996 Non-Employee Director Plan provides that each Non-Employee Director who became a director after May 16, 1996, but prior to August 16, 1996 ( the "Effective Date") was entitled to receive a non-statutory stock option (the "Initial Option") to purchase 50,000 shares of common stock on the Effective Date. The 1996 Non-Employee Director Plan further provides that each Non-Employee Director who becomes a director after the Effective Date is entitled to receive the Initial option to purchase 50,000 shares of common stock on the date that he or she first becomes a member of the Board of Directors. In addition, the 1996 Non-Employee Director Plan provides that each Non-Employee Director is entitled to receive a non-statutory option to purchase 25,000 shares of common stock upon initial appointment to a committee of the Board of Directors (the "Committee Option"). The Board of Directors may also grant additional non-statutory options (the "Discretionary Options") to Non-Employee Directors in its or the Committee's sole discretion. Initial options, Committee Options and Discretionary Options are exercisable in eight quarterly installments, with the first of such installments becoming exercisable three months after the date grant (provided that, for each such installment, the optionee continues to serve as a director). The total number of shares of common stock reserved for issuance under the 1996 Non-Employee Director Plan as of year end was 500,000, 100,000 of which remain available for grant. 47 48 The following table summarizes the stock option activity under the LTIP, the 1996 Plan, the 1996 Non-Employee Director Plan and the 1994 Non-Employee Director Plan:
December 31, 1997 December 31, 1996 December 31, 1995 --------------------------- --------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- -------- ---------- -------- ---------- -------- Beginning 10,077,951 $17.22 6,663,769 $14.30 2,599,980 $11.62 Assumed in acquisitions 716,856 4.78 1,197,852 8.39 3,123,938 8.10 Granted 6,617,773 10.57 7,202,103 17.79 2,446,996 25.72 Exercised (1,116,050) 8.03 (3,198,476) 7.73 (1,394,035) 28.76 Canceled (5,621,075) 17.61 (1,787,297) 19.77 (113,110) 19.81 ---------- ------ ---------- ------ ---------- ------ Ending 10,675,455 $12.96 10,077,951 $17.22 6,663,769 $14.30 ========== ====== ========== ====== ========== ======
The following table summarizes information about stock options outstanding at year end:
Options Outstanding Options Exercisable ---------------------------------------- --------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Outstanding Contractual Exercise Exercisable Exercise Range of Exercise Prices at 12/31/97 Life Price at 12/31/97 Price - ------------------------ ----------- ----------- -------- ----------- -------- $ 0.05 - $ 9.8750 2,496,383 8.66 $ 7.17 769,409 $ 6.63 10.21 - 15.8750 4,156,021 7.86 10.58 2,865,111 10.62 16.0625 - 28.750 4,023,051 7.45 19.00 1,344,569 23.09 - -------- -------- ---------- ---- ------ --------- ------ $ 0.05 - $ 28.750 10,675,455 7.89 $12.96 4,979,089 $13.37 ======== ======== ========== ==== ====== ========= ======
Options to purchase 4,979,089, 4,035,729 and 1,697,054 shares of common stock were exercisable at December 31, 1997, 1996 and 1995, respectively. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for its plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, no compensation expense has been recognized for the stock option plans as calculated under SFAS 123. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net loss and basic and diluted net loss per share would have been increased to the pro forma amounts indicated below:
1997 1996 1995 ---------- ---------- --------- Net loss - as reported $(475,667) $(405,451) $(65,960) Net loss - pro forma (511,575) (430,765) (80,670) Net loss per share - as reported (9.59) (9.94) (2.65) Net loss per share - pro forma (10.07) (10.56) (3.25)
The above compensation cost does not include the fair value of the stock options assumed in connection with the acquisitions, as the fair value of such options have been included in the purchase price of the acquired companies. 48 49 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995:
1997 1996 1995 ------ ------ ------ Dividend yield -- -- -- Expected volatility .7500 .7857 .6827 Risk free interest rate 6.00% 5.47% 5.31% Expected lives 4 yrs 4 yrs 4 yrs Weighted average grant-date fair value of options granted $10.57 $10.79 $15.61
The effects of applying SFAS 123 in this disclosure are not indicative of future amounts. Additional grants in future years are anticipated. On March 13, 1997, in order to continue to provide a competitive employment environment for staff retention and hiring, the Company instituted an Option Exchange Program under which certain employees (other than employees who are directors) with options exercisable at $10.40 per share or higher were given the opportunity to exchange such options for options with an exercise price of $10.40 per share. A total of 3,627,020 employee stock options were exchanged and are included in the cancelled and re-granted employee stock options in the above table. 1997 Employee Stock Purchase Plan On December 4, 1997, the Company's stockholders approved the 1997 Employee Stock Purchase Plan, which provides for six offerings, one beginning every six months commencing December 1, 1997 until and including November 30, 2000, that provides certain eligible employees with the opportunity to purchase shares of the Company's common stock at a price of 85% of the price listed on the New York Stock Exchange at various specified purchase dates. A maximum of 1,000,000 shares of common stock has been authorized for issuance under the 1997 Employee Stock Purchase Plan. Warrants On November 6, 1997, the Company's Canadian subsidiary, SoftKey Software issued in a private placement in Canada 4,072,000 special warrants for net proceeds of approximately $57,462. Each special warrant is exercisable without additional payment for one Exchangeable Share and automatically was exercised in accordance with their provisions subsequent to year end. 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. On July 31, 1995, the Company announced that it would redeem all of its 2,925,000 publicly traded warrants for $0.10 per warrant on August 31, 1995 in accordance with the terms and conditions of the warrants. Holders of such warrants received in exchange for the warrants an aggregate of 289,959 shares of common stock. The remaining 25,410 warrants were redeemed by the Company. 49 50 (10) AMORTIZATION, MERGER AND OTHER CHARGES During the Year Ended December 31, 1997, the Company completed the acquisition of Creative Wonders using the purchase method of accounting and the acquisitions of Learning Services, Skills Bank, TEC Direct and Microsystems using the pooling-of-interests method of accounting. During the year ended December 31, 1996 the Company completed the acquisitions of MECC and Edusoft S.A. using the purchase method. During the Year Ended December 31, 1995, the Company completed the acquisitions of The Former Learning Company, Compton's and tewi using the purchase method of accounting and Future Vision using the pooling-of-interest method of accounting. Amortization, merger and other charges were expensed as incurred or were recorded when it became probable that the transaction would occur and the expense could be reasonably estimated. Amortization, merger and other related charges are as follows:
Years Ended December 31, -------------------------------------------------- 1997 1996 1995 -------- -------- -------- Amortization of goodwill and other intangible assets $457,393 $434,866 $ 31,968 Exit and restructuring costs 48,571 4,260 1,304 Charge for incomplete technology 1,050 56,688 60,483 Provision for earn-outs 5,497 2,917 -- Professional fees and other costs 2,505 2,599 9,417 -------- -------- -------- $515,016 $501,330 $103,172 ======== ======== ========
The amortization of goodwill and other intangible assets in 1997, 1996 and 1995 represents primarily the amortization of the goodwill and acquired intangible assets in connection with the acquisitions of Creative Wonders, MECC, The Former Learning Company and Compton's. Exit and restructuring costs related to charges during the year for employee severance, discontinued products, termination of certain supplier relations and other charges related to the Company's acquisition strategy and integration of the acquired Companies. The charge has increased in the Year Ended December 31, 1997 as compared to the Year Ended December 31, 1996 due to the change in strategy related to the school channel and product discontinuation due primarily to the 1997 acquisitions. A total of 59 employees were terminated in the areas of development, marketing, operations, sales and administration as part of the integration process. Employee severance costs in the Year Ended December 31, 1996 related to termination of employees of the Company in connection with the acquisitions of The Former Learning Company and MECC and the related changes in strategy. A total of 108 employees were terminated in the areas of operations, marketing, sales, technical support and product development. Employee severance costs in the Year Ended December 31, 1995 related to termination of employees in connection with the acquisitions of Future Vision and certain severances related to changes in the Company's operations related to the acquisitions and changes in strategy. A total of 63 employees were terminated in the areas of operations, product development and administration. The exit and restructuring costs related to the Year Ended December 31, 1997 are expected to be paid by December 31, 1998. The charge for incomplete technology in the Year Ended December 31, 1997 related to products being developed by Creative Wonders, in the Year Ended December 31, 1996 related to products being developed by MECC and in the Year Ended December 31, 1995 related to products being developed by The Former Learning Company and Compton's. In each case the Company believes the products in development had not reached technological feasibility at the date of acquisition, had no alternative future use and additional development would be required to complete the software technology. The Company engaged a nationally recognized valuation firm to determine the value of the complete and incomplete technology and other identifiable intangible assets. The provision for earn-outs related to the amounts earned by the former owners of certain acquisitions based upon the achievement of certain revenue and operating goals achieved. These amounts are expected to be paid in common stock of the Company prior to December 31, 1998. Professional fees and other costs in the Year Ended December 31, 1997 related to investment banking, legal, accounting fees and other transaction related costs incurred in connection with the acquisitions of Skills Bank, Learning Services, TEC Direct and Microsystems. Professional fees and other transaction related costs in the Year Ended December 31, 1996 relate to additional legal and accounting costs incurred in connection with the acquisition of MECC. 50 51 Professional fees and other transaction related costs in the Year Ended December 31, 1995 relate to the investment banking, legal and accounting costs incurred to such date for the proposed merger with MECC and the professional fees associated with the acquisition of Future Vision on August 31, 1995. At December 31, 1997, the Company had merger related accruals of $12,533. The accruals consisted of amounts due for legal and accounting fees, employee severance and lease termination costs related to the acquisitions. The Company expects to substantially pay the remaining amounts prior to December 31, 1998. (11) INCOME TAXES The Company's net loss for the years ended December 31, 1997, 1996 and 1995 includes amortization, merger and other charges of $515,016, $501,330, and $103,172, respectively, certain of which are not deductible for income tax purposes. The Company's loss before income taxes consisted of the following: Years Ended December 31, -------------------------------------------------- 1997 1996 1995 --------- --------- --------- United States $(433,842) $(420,905) $ (64,987) Foreign 19,409 15,454 4,822 --------- --------- --------- $(414,433) $(405,451) $ (60,165) ========= ========= ========= The provision for income taxes consists of the following: Years Ended December 31, -------------------------------------- 1997 1996 1995 ------- -------- ------- Current income taxes: Federal $37,498 $ 16,777 $ 6,000 State 6,687 2,868 1,500 Foreign 1,512 4,000 250 ------- -------- ------- 45,697 23,645 7,750 ------- -------- ------- Deferred income taxes (benefit): Federal 15,537 (23,645) (1,955) State -- -- -- Foreign -- -- -- ------- -------- ------- 15,537 (23,645) (1,955) ------- -------- ------- $61,234 $ -- $ 5,795 ======= ======== ======= The significant components of deferred income tax expense are primarily from changes in deferred tax liabilities related to the acquired technology, depreciation, certain allowances and reserves not currently deductible, and changes in the deferred tax asset valuation reserve. 51 52 The Company's actual tax as compared to the 1997, 1996 and 1995 statutory tax rate reported on income is as follows:
Years Ended December 31, ---------------------------------------------- 1997 1996 1995 --------- --------- -------- Tax provision (benefit) at statutory federal income tax rate (35%) $(145,052) $(141,908) $(21,058) State income tax, net of federal benefit 5,834 5,571 2,500 Net foreign earnings taxed at rates different than federal tax rate 1,700 2,319 700 Non deductible amortization, merger and other charges 121,461 175,465 36,110 Effect of change in valuation allowance 61,234 -- -- Utilization of prior year tax benefits -- (41,447) (12,457) Other 16,057 -- -- --------- --------- -------- $ 61,234 $ -- $ 5,795 ========= ========= ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows: Years Ended December 31, ------------------------- 1997 1996 --------- -------- Deferred tax assets: Net operating losses and credits $ 112,196 $ 49,582 Other reserves and accruals 25,918 8,104 --------- -------- 138,114 57,686 Less: valuation allowance (131,269) (53,350) --------- -------- 6,845 4,336 --------- -------- Tax liabilities: Deferred intangible assets (8,732) (54,429) Deferred foreign taxes -- (3,941) Other deferred taxes (7,008) -- --------- -------- (15,740) (58,370) --------- -------- Net deferred tax liability $ (8,895) $(54,034) ========= ======== The valuation allowance relates to uncertainties surrounding the recoverability of deferred tax assets. In assessing the realizability of deferred assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which benefits from net operating loss carryforwards are available and temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and other matters in making this assessment. As a result of its evaluation of these factors at December 31, 1997 the Company recorded a valuation reserve for deferred tax assets of $131,269 (including $16,600 for items related to additional paid-in-capital in the Year Ended December 31, 1997). At December 31, 1997, the Company had worldwide net operating loss carryforwards and other tax benefits of approximately $280,400 for income tax purposes, expiring from the year 2000 through 2012. The Company expects to reduce its deferred tax liability in proportion to the amortization taken on certain intangible assets established in the acquisitions. The reduction of the intangible assets and the deferred tax liability will not impact future cash flows of the Company. The utilization of tax loss carryforwards is subject to limitations under Section 382 of the U.S. Internal Revenue Code, the U.S. consolidated tax return provisions, and foreign country tax regulations. (12) SUBSEQUENT EVENTS On March 6, 1998, the Company announced that it had entered into an agreement to acquire Mindscape, Inc. and its subsidiaries for a total purchase price of $150,000,000, payable in cash and the remainder through the issuance of shares of common stock. The transaction will be accounted for using the purchase method of accounting. The Company 52 53 has not yet completed its allocation of the purchase price related to the transaction. The closing of the transaction is subject to certain conditions, including expiration of applicable waiting periods under pre-merger notification. On March 6, 1998, the Company also announced that its Canadian subsidiary, SoftKey Software Products Inc., agreed to sell to certain Canadian institutional investors approximately 6.25 million special warrants for aggregate proceeds of approximately U.S. $104 million. Each special warrant is exercisable without additional payment for one SoftKey Exchangeable Share. SoftKey's Exchangeable Shares are exchangeable on a one-for-one basis for common stock of the Company without additional payment. The private placement is ultimately subject to certain conditions, including receipt of certain regulatory approvals. 53 54 (13) GEOGRAPHIC INFORMATION The Company operates primarily in one business segment - software for use with microcomputers. The following table presents information concerning the Company's North American, European and other operations during the Years Ended December 31, 1997, 1996 and 1995.
North America Europe Other Eliminations Consolidated --------- ------- ------- ------------ ------------ DECEMBER 31, 1997 Revenues: Customers $ 318,256 $73,524 $ 658 $ -- $ 392,438 Inter-company 59 11,325 -- (11,384) -- --------- ------- ------- -------- --------- Total $ 318,315 $84,849 $ 658 $(11,384) $ 392,438 ========= ======= ======= ======== ========= Loss from operations $(496,713) $22,306 $(1,260) $ -- $(475,667) ========= ======= ======= ======== ========= Identifiable assets $ 373,306 $44,738 $(1,253) $ -- $ 416,791 ========= ======= ======= ======== ========= DECEMBER 31, 1996 Revenues: Customers $ 284,537 $57,094 $ 1,690 $ -- $ 343,321 Inter-company 383 6,698 -- (7,081) -- --------- ------- ------- -------- --------- Total $ 284,920 $63,792 $ 1,690 $ (7,081) $ 343,321 ========= ======= ======= ======== ========= Loss from operations $(392,905) $10,531 $ 1,062 $ -- $(381,312) ========= ======= ======= ======== ========= Identifiable assets $ 769,338 $23,096 $ 1,084 $ -- $ 793,518 ========= ======= ======= ======== ========= DECEMBER 31, 1995 Revenues: Customers $ 140,811 $27,380 $ 1,227 $ (2,376) $ 167,042 Inter-company 696 (3,071) (1) 2,376 -- --------- ------- ------- -------- --------- Total $ 141,507 $24,309 $ 1,226 $ -- $ 167,042 ========= ======= ======= ======== ========= Loss from operations $ (64,754) $ 3,256 $ 628 $ -- $ (60,870) ========= ======= ======= ======== ========= Identifiable assets $ 891,266 $ 9,062 $ 85 $ -- $ 900,413 ========= ======= ======= ======== =========
The Company conducts a portion of its operations outside the United States. At December 31, 1997, $20,209 of cash and cash equivalents were subject to foreign currency fluctuations. Sales and transfers between geographic areas are generally priced at market less an allowance for marketing costs. No single customer accounted for greater than 10% of revenues for any of the periods presented. 54 55 Schedule II ----------- THE LEARNING COMPANY, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
Additions ------------------------------------------ Charged Balance at to cost Charged Balance beginning and to other at end of period expenses accounts Deductions(1) of period ---------- ---------- -------- ------------- --------- YEAR ENDED DECEMBER 31, 1997 Allowance for returns and doubtful accounts $15,191 $67,773 -- $(53,738) $29,226 YEAR ENDED DECEMBER 31, 1996 Allowance for returns and doubtful accounts $ 6,851 $38,112 -- $(29,772) $15,191 YEAR ENDED DECEMBER 31, 1995 Allowance for returns and doubtful accounts $ 6,744 $22,358 -- $(22,251) $ 6,851
(1) Deductions relate to credits issued for returns and allowances against accounts receivable. 55 56 PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item appears in sections captioned "Nominees," "Other Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement to be delivered to stockholders in connection with the 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"). Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item appears in sections captioned "Directors' Compensation," "Compensation Committee Interlocks and Insider Participation," "Compensation Committee Report on Executive Compensation," "Comparative Stock Performance," "Executive Compensation," "Employment Arrangements," "Stock Option Grants," "Option Exercises and Year-End Option Table," "Repricing of Options" and "Compensation Committee Report on Option Repricing" in the 1998 Proxy Statement. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item appears in section captioned "Security Ownership of the Company" in the 1998 Proxy Statement. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item appears in sections captioned "Directors' Compensation" and "Certain Relationships and Related Transactions" in the 1998 Proxy Statement. Such information is incorporated herein by reference. 56 57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) Documents filed as part of this report (1) FINANCIAL STATEMENTS PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants 32 Consolidated Balance Sheets as of December 31, 1997 and 1996 33 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 34 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1997, 1996 and 1995 35 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 36 Notes to Consolidated Financial Statements 38 (2) FINANCIAL STATEMENT SCHEDULE CONSOLIDATED SUPPLEMENTARY FINANCIAL SCHEDULE: Schedule II - Valuation and Qualifying Accounts 55 57 58 (3) EXHIBITS Exhibit Number Description - ------- ----------- 3.1 Restated Certificate of Incorporation, as amended(1) 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 Stock (15) 3.3 Bylaws of the Company, as amended 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")(2) 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(3) 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")(3) 4.4 Letter Agreement dated November 22, 1995 amending the Registration Rights Agreement(3) 4.5 Form of Securities Resale Registration Rights Agreement by and among the Company and Tribune Company(4) 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 Trustee(5) 4.7 Plan of Arrangement of SoftKey Software Products Inc. under Section 182 of the Business Corporations Act (Ontario)(5) 4.8 Form of Special Warrant dated November 6, 1997 of SoftKey Software Products Inc. 4.9 Special Warrant Indenture dated November 6, 1997 between SoftKey Software Products Inc. and CIBC Mellon Trust Company 4.10 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. 10.1 Employment Agreement dated as of April 9, 1997 by and between the Company and Michael Perik(6)* 10.2 Employment Agreement dated as of April 9, 1997 by and between the Company and Kevin O'Leary (6)* 10.3 Employment Agreement dated as of May 22, 1997 by and between the Company and R. Scott Murray (7)* 10.4 Employment Agreement dated October 8, 1993 by and between SoftKey Software Products Inc. and David E. Patrick (8)* 10.5 Employment Agreement dated March 1, 1994 by and between SoftKey Software Products Inc. and Robert Gagnon (13)* 58 59 10.6 Employment Agreement dated as of February 6, 1997 by and between the Company and Neal S. Winneg* 10.7 Employment Agreement dated as of March 5, 1997 by and between the Company and Anthony Bordon (14)* 10.8 Credit Agreement dated as of September 30, 1994 between SoftKey Inc. and Fleet Bank of Massachusetts, N.A. (10) 10.9 Second Amendment dated as of May 17, 1995 by and between SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of September 30, 1994 (11) 10.10 Third Amendment dated as of December 22, 1995 by and among SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of September 30, 1994 (9) 10.11 Fourth Amendment dated as of February 28, 1996 by and among SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of September 30, 1994 (9) 10.12 Fifth Amendment dated as of October 4, 1996 by and among SoftKey Inc. and Fleet National Bank, as successor in interest to Fleet Bank of Massachusetts, to Credit Agreement dated as of September 30, 1994 (12) 10.13 Sixth Amendment dated December 31, 1997 by and among SoftKey Inc. and Fleet National Bank, as successor in interest to Fleet Bank of Massachusetts, NA to Credit Agreement dated September 30, 1994 10.14 Sublease Agreement dated as of January 5, 1995 by and between Mellon Financial Services Corporation #1 and SoftKey Inc. (13) 10.15 Continuing Guaranty of Lease dated as of January 5, 1995 by the Company in favor of Mellon Financial Services Corporation #1 (13) 10.16 1994 Non-Employee Director Stock Option Plan, as amended and restated effective February 5, 1996 (9)* 10.17 Form of Stock Option Agreement under 1994 Non-Employee Director Stock Option Plan (9)* 10.18 1990 Long Term Equity Incentive Plan, as amended through December 4, 1997* 10.19 Form of Stock Option Agreement under 1990 Long Term Equity Incentive Plan (9)* 10.20 1996 Stock Option Plan, as amended and restated through October 31, 1996 (14)* 10.21 Form of Stock Option Agreement under 1996 Stock Option Plan (9)* 10.22 1996 Non-Employee Director Stock Option Plan (15)* 10.23 Form of Stock Option Agreement under 1996 Non-Employee Director Stock Option Plan* 10.24 1997 Employee Stock Purchase Plan (15)* 10.25 Form of Standstill Agreement by and between the Company and Tribune Company (4) 10.26 Securities Purchase Agreement dated as of August 26, 1997 among the Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III, L.P. and Thomas H. Lee Foreign Fund III, L.P. (16) 10.27 Securities Purchase Agreement dated as of August 26, 1997 among the Company and Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP Associates, L.P. and BCIP Trust Associates, L.P. (16) 10.28 Securities Purchase Agreement dated as of August 26, 1997 among the Company and 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. (16) 59 60 10.29 Receivables Purchase Agreement dated as of June 30, 1997 by and among The Learning Company Funding, Inc. ("Funding"), Lexington Partner Capital Company ("Lexington"), Fleet National Bank ("Fleet"), TLC Multimedia Inc. and the Company (7) 10.30 Receivables Sales Agreement dated as of June 30, 1997 by and between TLC Multimedia Inc. and Funding (7) 10.31 Capital Contribution Agreement dated as of June 30, 1997 by and among TLC Multimedia Inc., Funding and the Company (7) 21.1 Subsidiaries of the Company 23.1 Written Consent of Coopers & Lybrand L.L.P. 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 6, 1996. (2) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. (3) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3 (Reg . No. 333-145) filed January 26, 1996. (4) 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. (5) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3 (Reg . No. 333-40549) filed December 3, 1997. (6) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 5, 1997. (7) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 5, 1997. (8) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 2, 1994. (9) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended January 6, 1996. (10) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended October 1, 1994. (11) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 1, 1995. (12) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended October 5, 1996. (13) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 60 61 (14) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended January 4, 1997. (15) Incorporated by reference to exhibits filed with the Company's Definitive Proxy Statement filed October 24, 1997. (16) Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated August 26, 1997. (b) REPORTS ON FORM 8-K The registrant filed a Current Report on Form 8-K reporting that, on November 6, 1997, it sold 4,072,000 special warrants to certain Canadian institutional investors pursuant to Regulation S under the Securities Act of 1933, as amended. 61 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE LEARNING COMPANY, INC. By: /s/ Michael Perik ----------------------------- Michael Perik Chief Executive Officer and Chairman of the Board (principal executive officer) Date: March 12, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 12, 1998. Signature Title - --------- ----- /s/ MICHAEL PERIK Director, Chief Executive Officer - ----------------------------- and Chairman of the Board of Michael Perik Directors /s/ KEVIN O'LEARY Director and President - ----------------------------- Kevin O'Leary /s/ R. SCOTT MURRAY Executive Vice President and Chief - ----------------------------- Financial Officer (principal R. Scott Murray financial officer and principal accounting officer) /s/ LAMAR ALEXANDER Director - ----------------------------- Lamar Alexander /s/ MICHAEL BELL Director - ----------------------------- Michael Bell /s/ ANTHONY J. DINOVI Director - ----------------------------- Anthony J. DiNovi /s/ JAMES DOWDLE Director - ----------------------------- James Dowdle /s/ ROBERT GAGNON Director - ----------------------------- Robert Gagnon /s/ MARK E. NUNNELLY Director - ----------------------------- Mark E. Nunnelly /s/ CHARLES PALMER Director - ----------------------------- Charles Palmer /s/ CAROLYNN N. REID-WALLACE Director - ----------------------------- Carolynn N. Reid Wallace /s/ ROBERT RUBINOFF Director - ----------------------------- Robert Rubinoff 62 63 /s/ SCOTT SPERLING Director - ----------------------------- Scott Sperling /s/ PAUL J. ZEPF Director - ----------------------------- Paul J. Zepf 63 64 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 3.1 Restated Certificate of Incorporation, as amended (1) 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 Stock (15) 3.3 Bylaws of the Company, as amended 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") (2) 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 (3) 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") (3) 4.4 Letter Agreement dated November 22, 1995 amending the Registration Rights Agreement(3) 4.5 Form of Securities Resale Registration Rights Agreement by and among the Company and Tribune Company (4) 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 Trustee (5) 4.7 Plan of Arrangement of SoftKey Software Products Inc. under Section 182 of the Business Corporations Act (Ontario) (5) 4.8 Form of Special Warrant dated November 6, 1997 of SoftKey Software Products Inc. 4.9 Special Warrant Indenture dated November 6, 1997 between SoftKey Software Products Inc. and CIBC Mellon Trust Company 4.10 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. 10.1 Employment Agreement dated as of April 9, 1997 by and between the Company and Michael Perik (6)* 10.2 Employment Agreement dated as of April 9, 1997 by and between the Company and Kevin O'Leary (6)* 10.3 Employment Agreement dated as of May 22, 1997 by and between the Company and R. Scott Murray (7)* 10.4 Employment Agreement dated October 8, 1993 by and between SoftKey Software Products Inc. and David E. Patrick (8)* 64 65 10.5 Employment Agreement dated March 1, 1994 by and between SoftKey Software Products Inc. and Robert Gagnon (13)* 10.6 Employment Agreement dated February 6, 1997 by and between the Company and Neal S. Winneg* 10.7 Employment Agreement dated March 5, 1997 by and between the Company and Anthony Bordon (14)* 10.8 Credit Agreement dated as of September 30, 1994 between SoftKey Inc. and Fleet Bank of Massachusetts, N.A. (10) 10.9 Second Amendment dated as of May 17, 1995 by and between SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of September 30, 1994 (11) 10.10 Third Amendment dated as of December 22, 1995 by and among SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of September 30, 1994 (9) 10.11 Fourth Amendment dated as of February 28, 1996 by and among SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of September 30, 1994 (9) 10.12 Fifth Amendment dated as of October 4, 1996 by and among SoftKey Inc. and Fleet National Bank, as successor in interest to Fleet Bank of Massachusetts, to Credit Agreement dated as of September 30, 1994 (12) 10.13 Sixth Amendment dated December 31, 1997 by and among SoftKey Inc. and Fleet National Bank, as successor in interest to Fleet Bank of Massachusetts, NA to Credit Agreement dated September 30, 1994 10.14 Sublease Agreement dated as of January 5, 1995 by and between Mellon Financial Services Corporation #1 and SoftKey Inc. (13) 10.15 Continuing Guaranty of Lease dated as of January 5, 1995 by the Company in favor of Mellon Financial Services Corporation #1 (13) 10.16 1994 Non-Employee Director Stock Option Plan, as amended and restated effective February 5, 1996 (9)* 10.17 Form of Stock Option Agreement under 1994 Non-Employee Director Stock Option Plan (9)* 10.18 1990 Long Term Equity Incentive Plan, as amended through December 4, 1997* 10.19 Form of Stock Option Agreement under 1990 Long Term Equity Incentive Plan (9)* 10.20 1996 Stock Option Plan, as amended and restated through October 31, 1996 (14)* 10.21 Form of Stock Option Agreement under 1996 Stock Option Plan (9)* 10.22 1996 Non-Employee Director Stock Option Plan (15)* 10.23 Form of Stock Option Agreement under 1996 Non-Employee Director Stock Option Plan* 10.24 1997 Employee Stock Purchase Plan (15)* 10.25 Form of Standstill Agreement by and between the Company and Tribune Company (4) 10.26 Securities Purchase Agreement dated as of August 26, 1997 among the Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund III, L.P. and Thomas H. Lee Foreign Fund III, L.P. (16) 10.27 Securities Purchase Agreement dated as of August 26, 1997 among the Company and Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP Associates, L.P. and BCIP Trust Associates, L.P. (16) 65 66 10.28 Securities Purchase Agreement dated as of August 26, 1997 among the Company and 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. (16) 10.29 Receivables Purchase Agreement dated as of June 30, 1997 by and among The Learning Company Funding, Inc. ("Funding"), Lexington Partner Capital Company ("Lexington"), Fleet National Bank ("Fleet"), TLC Multimedia Inc. and the Company (7) 10.30 Receivables Sales Agreement dated as of June 30, 1997 by and between TLC Multimedia Inc. and Funding (7) 10.31 Capital Contribution Agreement dated as of June 30, 1997 by and among TLC Multimedia Inc., Funding and the Company (7) 21.1 Subsidiaries of the Company 23.1 Written Consent of Coopers & Lybrand L.L.P. 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 6, 1996. (2) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. (3) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3 (Reg . No. 333-145) filed January 26, 1996. (4) 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. (5) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3 (Reg . No. 333-40549) filed December 3, 1997. (6) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 5, 1997. (7) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 5, 1997. (8) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 2, 1994. (9) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended January 6, 1996. (10) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended October 1, 1994. (11) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 1, 1995. 66 67 (12) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended October 5, 1996. (13) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (14) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended January 4, 1997. (15) Incorporated by reference to exhibits filed with the Company's Definitive Proxy Statement filed October 24, 1997. (16) Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated August 26, 1997. 67 EX-3.3 2 BYLAWS OF THE COMPANY 1 Exhibit 3.3 BYLAWS OF THE LEARNING COMPANY, INC. REGISTERED OFFICE AND REGISTERED AGENT 1. REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. 2. OTHER OFFICES. The corporation may also have offices at such other places, both within or without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require. MEETINGS OF STOCKHOLDERS 3. TIME AND PLACE OF MEETINGS. All meetings of the stockholders shall be held at such time and place, either within or without the State of Delaware, as shall be fixed by the Board of Directors and stated in the notice or waiver of notice of the meeting. 4. ANNUAL MEETING. An annual meeting of the stockholders for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting shall be held on such date and at such time and place as the Board of Directors shall each year designate. 5. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of meeting, may be called by the Board of Directors, the Chairman of the Board, the President, or the holders of shares entitled to cast not less than fifteen percent of the votes at the meeting, and shall be held on such date and at such time and place as they or he or she shall designate. 6. NOTICE. Written notice of the place, date, and time of all meetings of the stockholders shall be given not less than ten nor more than sixty days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the corporation). When a meeting is adjourned to another place, date, or time, written notice need not be given of the adjourned meeting if the place, date, and time thereof are announced at the meeting at which the adjournment is taken and the adjournment is not for more than thirty days; provided, however, that if the date of any adjourned meeting is more than thirty days after the date of which the meeting was originally noticed, or if a 2 new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 7. QUORUM AND REQUIRED VOTE. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote on the subject matter at the meeting, present in person or by proxy, shall constitute a quorum, unless or except to the extent that the presence of a larger number may be required by law. The affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Where a separate vote by class is required by law, the affirmative vote of the majority of shares of such class present in person or represented by proxy at the meeting shall be the act of the class. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. 8. ORGANIZATION. Such person as the Board of Directors may have designated or, in the absence of such a person, the Chairman of the Board or the chief executive officer of the corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the corporation, the secretary of the meeting shall be such person as the chairman appoints. 9. CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. 10. PROXIES AND VOTING. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorize by an instrument in writing filed in accordance with the procedure established for the meeting. Each stockholder shall have one vote for every share of stock entitled to vote on the subject matter which is registered in his or her name on the record date for the 2 3 meeting, except as otherwise provided herein or required by law. Except as required by law, all matters shall be determined by a majority of the votes cast. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. 11. STOCK LIST. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. 12. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise provided by law, any action required to be taken, or any action which may be taken, at an annual or special meeting of the stockholders of the corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize to take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. BOARD OF DIRECTORS 13. POWERS. The business and affairs of the corporation shall be managed by or under the direction of its Board of Directors. 14. NUMBER, CLASSIFICATION, AND TERM OF OFFICE. The number of directors who shall constitute the whole board shall be not less than six nor more than fifteen, as the Board of Directors shall at the time have designated, except that in the absence of any such designation, such number shall be six. Each director shall be elected for a term of one year and until his or her successor is elected and qualified, except as otherwise provided herein or required by law. 3 4 Whenever the authorized number of directors is increased between annual meetings of the stockholders, a majority of the directors then in office shall have the power to elect such new directors for the balance of a term and until their successors are elected and qualified. Any decrease in the authorized number of directors shall not become effective until the expiration of the term of the directors then in office unless, at the time of such decrease, there shall be vacancies on the board which are being eliminated by the decrease. 15. RESIGNATIONS. A director may resign at any time by giving written notice to the corporation and such resignation shall be effective when given unless the director specifies a later time. The resignation shall be effective regardless of whether it is accepted by the corporation. 16. VACANCIES. If the office of any director becomes vacant by reason of death, resignation, disqualification, removal or other cause, a majority of the directors remaining in the office, although less than a quorum, may elect a successor for the unexpired term and until his or her successor is elected and qualified; provided, however, that if the vacancy is caused by the removal of a director by the stockholders, then the stockholders shall have the right to elect a successor. 17. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. 18. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President, the Secretary, any Vice President, and any two directors. 19. NOTICE OF MEETINGS. Special meetings, and regular meetings not fixed as provided in Section 17 of these Bylaws, shall be held upon four days notice by mail or 48 hours notice delivered personally or by telephone or telegraph to each director who does not waive such notice. The notice shall state the place, date and time of the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Notice of an adjourned meeting need not be given if the place, date, and time of the adjourned meeting are announced at the meeting at which the adjournment is taken and the adjournment is not for more than twenty-four hours. If a meeting is adjourned for more than twenty-four hours, notice of the adjourned meeting shall be given prior to the time of that meeting to the directors who were not present at the time of the adjournment. 20. ACTION WITHOUT MEETING. Except as required by law, any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or committee 4 5 thereof, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee thereof. 21. MEETING BY TELEPHONE. Except as required by law, members of the Board of Directors or any committee thereof may participate in the meeting of the Board of Directors or committee thereof by means of conference telephone or similar communications equipment if all persons who participate in the meeting can hear each other and such participation in a meeting shall constitute presence in person at such meeting. 22. QUORUM AND MANNER OF ACTING. At any meeting of the Board of Directors, a majority of the directors then in office shall constitute a quorum for all purposes. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Except as provided herein, the act of the majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. 23. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors may designate one or more committees of the Board, each committee to consist of one or more of the directors of the corporation, with such lawfully delegable powers and duties as the Board thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The principles set forth in Sections 13 through 23 of these Bylaws shall apply to committees of the Board of Directors and to actions taken by such committees. 24. CONDUCT OF BUSINESS OF COMMITTEES. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. A majority of the members of the committee shall constitute a quorum, and all matters shall be determined by a majority vote of the members present. 25. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors or a committee thereof, and may receive fixed fees and other compensation for their services as directors. No such payment shall 5 6 preclude any director from serving the corporation in any other capacity and receiving compensation therefor. OFFICERS 26. TITLES. The officers of the corporation shall be chosen by the Board of Directors and shall include a Chairman of the Board or a President or both, a Secretary, and a Treasurer. The Board of Directors may also appoint one or more Vice-Presidents, Assistant Secretaries, Assistant Treasurers or other officers. Any number of offices may be held by the same person. All officers shall perform their duties and exercise their powers subject to the Board of Directors. 27. ELECTION, TERM OF OFFICE, AND VACANCIES. The officers shall be elected annually by the Board of Directors at its regular meeting following the annual meeting of the stockholders, and each officer shall hold office until the next annual election of officers and until the officer's successor is elected and qualified, or until the officer's death, resignation, or removal. Any officer may be removed at any time, with or without cause, by the Board of Directors. Any vacancy occurring in any office may be filled by the Board of Directors. 28. RESIGNATION. Any officer may resign at any time upon notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. The resignation of an officer shall be effective when given unless the officer specifies a later time. The resignation shall be effective regardless of whether it is accepted by the corporation. 29. CHAIRMAN OF THE BOARD; PRESIDENT. If the Board of Directors elects a Chairman of the Board, such officer shall preside over all meetings of the Board of Directors and of stockholders. If there be no Chairman of the Board, the President shall perform such duties. The Board of Directors shall designate either the Chairman of the Board or the President as the chief executive officer and may prescribe the duties and powers of the chief executive officer. In the absence of such a designation, the President shall be the chief executive officer. If there be no Chairman of the Board, the President shall be the chief executive officer. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, the chief executive officer shall have the responsibility for the general management and control of the business and affairs of the corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts, and other instruments of the corporation which are authorized and shall have general supervision and direction of all of the other officers, employees, and agents of the corporation. 6 7 30. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall issue all authorized notices for, and shall keep minutes of, all meetings of the stockholders and the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. At the request of the Secretary, or in the Secretary's absence or disability, any Assistant Secretary shall perform any of the duties of the Secretary and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Secretary. 31. TREASURER AND ASSISTANT TREASURERS. Unless the Board of Directors designates another chief financial officer, the Treasurer shall be the chief financial officer of the corporation. Unless otherwise determined by the Board of Directors or the chief executive officer, the Treasurer shall have custody of the corporate funds and securities, shall keep adequate and correct accounts of the corporation's properties and business transactions, shall disburse such funds of the corporation as may be ordered by the Board or the chief executive officer (taking proper vouchers for such disbursements), and shall render to the chief executive officer and the Board, at regular meetings of the Board or whenever the Board may require, an account of all transactions and the financial condition of the corporation. At the request of the Treasurer or in the Treasurer's absence or disability, any Assistant Treasurer may perform any of the duties of the Treasurer and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Treasurer. 32. OTHER OFFICERS. The other officers of the corporation, if any, shall exercise such powers and perform such duties as the Board of Directors or the chief executive officer shall prescribe. 33. COMPENSATION. The Board of Directors shall fix the compensation of the chief executive officer and may fix the compensation of other employees of the corporation, including the other officers. If the Board does not fix the compensation of the other officers, the chief executive officer shall fix such compensation. 34. ACTIONS WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the Chairman of the Board, the President, or any officer of the corporation authorized by the Chairman of the Board or the President, shall have power to vote and otherwise act on behalf of the corporation, in person or by proxy, at any meeting of stockholders of, or with respect to any action of stockholders of, any other corporation in which this corporation may hold securities and otherwise shall have power to exercise any and all rights and powers which this corporation may possess by reason of its ownership of securities in such other corporation. STOCK AND DIVIDENDS 35. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate signed by, or in the name of the corporation by, the Chairman, the President, or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, 7 8 certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be facsimile. 36. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer books of the corporation and kept at an office of the corporation or by transfer agents designated to transfer shares of the stock of the corporation. Except where a certificate is issued in accordance with the next sentence of this Section, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. In the event of the loss, theft, or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft, or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. 37. REGULATIONS. The issue, transfer, conversion, and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. RECORD DATE 38. RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed, the record date (1) for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, (2) for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed, (3) for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting. WAIVER OF NOTICE 39. WAIVER OF NOTICE. Whenever notice is required to be given by law or these Bylaws, a written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the 8 9 meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless so required by the Certificate of Incorporation or these Bylaws, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. AMENDMENTS 40. AMENDMENTS. These Bylaws may be amended or repealed or new bylaws may be adopted, by the stockholders at any meeting or by the Board of Directors at any meeting. MISCELLANEOUS 41. FISCAL YEAR. The fiscal year of the corporation shall be as fixed by the Board of Directors. 42. TIME PERIODS. In applying any provision of these Bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. 43. FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. 44. CORPORATE SEAL. The Board of Directors may provide a suitable seal, containing the name of the corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. 45. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the corporation, including reports made to the corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. 9 EX-4.8 3 FORM OF SPECIAL WARRANT 1 Exhibit 4.8 FORM OF WARRANT CERTIFICATE The following is the form of Warrant certificate referred to in Section 2.02 of the Warrant Indenture: EXERCISABLE ONLY DURING THE PERIOD COMMENCING ON THE BUSINESS DAY FOLLOWING THE DATE ON WHICH TRANSACTION APPROVAL (AS DEFINED HEREIN) IS OBTAINED AND ENDING AT 5:00 P.M. (LOCAL TIME) ON THE DATE THAT IS THE EARLIER OF (I) THE FIRST ANNIVERSARY OF THE DATE HEREOF AND (II) THE SIXTH BUSINESS DAY FOLLOWING THE DATE OF ISSUANCE OF A RECEIPT BY THE SECURITIES REGULATORY AUTHORITY IN THE PROVINCE OF RESIDENCE OF THE HOLDER HEREOF (WHICH MAY ONLY BE ONE OF THE PROVINCES OF BRITISH COLUMBIA, ONTARIO AND QUEBEC AND WILL, IN THE CASE OF PERSONS RESIDENT OUTSIDE CANADA, BE DEEMED TO BE THE PROVINCE OF ONTARIO) FOR A (FINAL) PROSPECTUS RELATING TO THE DISTRIBUTION OF THE EXCHANGEABLE NON-VOTING SHARES OF SOFTKEY SOFTWARE PRODUCTS INC. TO BE ISSUED UPON THE EXERCISE OF THE SPECIAL WARRANTS, IMMEDIATELY AT WHICH TIME THESE SPECIAL WARRANTS SHALL BE DEEMED CONCLUSIVELY TO HAVE BEEN EXERCISED. NO._____________ Representing ________________ Special Warrants, each such warrant entitling the holder to acquire one Exchangeable Share (or in the circumstances described below 1.09 Exchangeable Shares), subject to adjustment, of SoftKey Software Products Inc. for no additional consideration. NOTE: THESE SPECIAL WARRANTS ARE NON-TRANSFERABLE EXCEPT AS SET FORTH HEREIN. SPECIAL WARRANT OF SOFTKEY SOFTWARE PRODUCTS INC. THIS CERTIFIES that, for value received, the holder hereof, ______________ ____________________________ , (the "holder") of the Special Warrants (the "Warrants") of SoftKey Software Products Inc. (the "Corporation") represented hereby is entitled at any time during the period (the "Exercise Period") commencing on the Business Day following the date on which Transaction Approval (as defined herein) is obtained and ending at 5:00 p.m. (local time) (the "Expiry Time") on the date (the "Expiry Date") that is the earlier of (i) November 6, 1998 and (ii) the date that is the sixth Business Day following the date (the "Clearance Date") upon which a receipt is issued by the securities regulatory authority in the province of residence of the holder hereof (which may only be one of the Provinces of British Columbia, Ontario and Quebec and will, in the case of persons resident outside Canada, be deemed to be the Province of Ontario) for the (final) prospectus (the "Final Prospectus") of the Corporation qualifying the exchangeable non-voting shares (the "Exchangeable Shares") of the Corporation to be issued upon the exercise of the Warrants, to acquire in accordance with the provisions of the Warrant Indenture (as defined 2 -2- below) one Exchangeable Share (or 1.09 Exchangeable Shares to be issued by the Corporation in the circumstances described below), subject to adjustment, for each Warrant represented hereby without payment of any consideration in addition to the issue price of such Warrant by surrendering to CIBC Mellon Trust Company (the "Trustee") at its principal office in the City of Toronto this Warrant certificate together with an executed exercise form in the form of the attached Exercise Form or any other written notice in a form satisfactory to the Trustee, in either case duly completed and executed PROVIDED THAT UNLESS THE HOLDER HAS SURRENDERED THE WARRANTS REPRESENTED HEREBY FOR EXERCISE PURSUANT TO THE PROVISIONS HEREOF AND OF THE WARRANT INDENTURE DURING THE EXERCISE PERIOD, THE WARRANTS REPRESENTED HEREBY SHALL BE DEEMED TO HAVE BEEN EXERCISED BY THE HOLDER AT THE EXPIRY TIME WITHOUT FURTHER NOTICE TO OR ACTION ON THE PART OF THE HOLDER. For the purposes of this Warrant certificate, "Underwriters" means, collectively, Griffiths McBurney & Partners and First Marathon Securities Limited. Upon the exercise or deemed exercise of the Warrants evidenced hereby, the Corporation shall cause to be issued to the person(s) in whose name(s) the Exchangeable Shares so subscribed for are to be issued (provided that, if the Exchangeable Shares are to be issued to a person other than a holder of this Warrant certificate, the holder's signature on the Exercise Form herein shall be guaranteed by a Canadian chartered bank, by a Canadian trust company or by a member firm of The Toronto Stock Exchange) the number of Exchangeable Shares to be issued to such person(s) and such person(s) shall become a holder in respect of Exchangeable Shares with effect from the date of such exercise and upon due surrender of this Warrant certificate. The Corporation will cause a certificate(s) representing such Exchangeable Shares to be made available for pick-up by such person(s) at 393 University Avenue, 5th Floor, Toronto, Ontario M5G 2M7, or mailed to such person(s) at the address(es) specified in such Exercise Form, within two Business Days after receipt of notice from the Trustee of the exercise of this Warrant. The net proceeds of sale of the Warrants will be deposited on the date hereof in escrow with the Trustee to be held and invested by the Trustee in accordance with the provisions of the Warrant Indenture. In the event that the Corporation fails to obtain Transaction Approval on or prior to March 6, 1998 or such later date as may be agreed upon in writing by the Corporation and the Underwriters (the "Qualification Deadline") the Corporation shall redeem each Warrant for an amount equal to the purchase price paid by the Warrantholder for the Warrant, together with interest thereon as provided in the Warrant Indenture. For the purposes of this Warrant certificate, "Transaction Approval" means Shareholder Approval together with all such other consents and approvals necessary to ensure that the rights and benefits of the holders of Underlying Shares are substantially equivalent to the rights and benefits of the holders of the existing Exchangeable Shares; provided that, for greater certainty Transaction Approval shall not include the filing of, or the obtaining of a receipt for, the Final Prospectus. For the purposes of this Warrant certificate, "Shareholder Approval" means the approval of the holders of the Exchangeable Shares to, among other things, the issue by the Corporation, from time to time, of Exchangeable Shares in addition to those shares outstanding on the record date for the Shareholder Meeting, such approval to be given by resolution passed by not less than two-thirds of the votes cast on such resolution at the 3 -3- Shareholder Meeting, as required by and in accordance with the rights, privileges, restrictions and conditions attaching to the Exchangeable Shares. For the purposes of this Warrant certificate, "Shareholder Meeting" means the special meeting or meeting (including any adjournments thereof) of the holders of the Exchangeable Shares to be called and held in accordance with the articles and by-laws of the Corporation for the purpose of obtaining Shareholder Approval. In the event that the Corporation satisfies the Transaction Support Condition or obtains Shareholder Approval prior to the Qualification Deadline, the Trustee shall, upon receipt of written notice and supporting documents, in prescribed form, release the Escrowed Funds to the Corporation for the purpose of completing the purchase of Creative Wonders L.L.C. If the Escrowed Funds are not released to the Corporation as aforesaid, the Escrowed Funds will be released to the Corporation on the first to occur of (a) the last Clearance Date to occur in British Columbia, Ontario and Quebec and (b) the Qualification Deadline, provided only that the Corporation has obtained Transaction Approval by such date. For the purpose of this Warrant certificate, "Transaction Support Condition" means the obtaining by the Corporation of irrevocable proxies executed by holders of not less than 50.1% of the Exchangeable Shares outstanding on the record date for, and eligible to vote at, the Shareholder Meeting, indicating that such shareholders will vote such shares at the Shareholder Meeting in favour of, among other things, the issue by the Corporation, from time to time, of Exchangeable Shares in addition to those shares outstanding on the record date for the Shareholder Meeting. For the purpose of this Warrant certificate, "escrowed funds" means the net proceeds of sale of the Warrants deposited in escrow with the Trustee, and all proceeds of investment and reinvestment thereof from time to time. If, notwithstanding Transaction Approval having been obtained, the Clearance Date does not occur by 5:00 p.m. (local time) on the Qualification Deadline, or for any reason the Corporation is unable to file the Final Prospectus with the securities regulatory authority of the holder's province (which may only be one of the Provinces of British Columbia, Ontario and Quebec and will, in the case of non-Canadian resident holders of Warrants, be deemed to be the Province of Ontario) by 5:00 p.m. (local time) on the Qualification Deadline, each Warrant represented hereby shall thereafter entitle the holder upon the exercise or deemed exercise thereof, without further action being required to be taken hereunder or under the Warrant Indenture, to acquire 1.09 Exchangeable Shares (subject to adjustment) at no additional cost provided that no fractional Exchangeable Shares will be issued but a cash payment will be made in lieu thereof. IN SUCH CASE, BUT WITHOUT DEROGATING FROM THE CORPORATION'S OBLIGATION TO USE ITS REASONABLE EFFORTS TO OBTAIN FROM EACH OF THE SECURITIES REGULATORY AUTHORITIES OF THE PROVINCES OF BRITISH COLUMBIA, ONTARIO AND QUEBEC, AS SOON AS PRACTICABLE, A RECEIPT OR SIMILAR DOCUMENT FOR THE FINAL PROSPECTUS, THE EXCHANGEABLE SHARES ISSUED UPON THE EXERCISE OR DEEMED EXERCISE OF THE WARRANTS WILL BE SUBJECT TO RESTRICTIONS ON THE RESALE THEREOF IN ACCORDANCE WITH APPLICABLE SECURITIES LAWS OF CANADA AND THE UNITED STATES OF AMERICA AND MAY BEAR A LEGEND TO SUCH EFFECT. 4 -4- This Warrant certificate represents Warrants of the Corporation issued or issuable under the provisions of a warrant indenture (which indenture together with all other instruments supplemental or ancillary thereto is herein referred to as the "Warrant Indenture") made as of November 6, 1997 between the Corporation and the Trustee, as trustee, TO WHICH WARRANT INDENTURE REFERENCE IS HEREBY MADE FOR SPECIFIC PARTICULARS OF THE RIGHTS OF THE HOLDERS OF THE WARRANTS AND THE CORPORATION AND OF THE TRUSTEE IN RESPECT THEREOF AND THE TERMS AND CONDITIONS UPON WHICH THE WARRANTS ARE ISSUED AND HELD (WHICH RIGHTS, TERMS AND CONDITIONS ARE SUMMARIZED ONLY IN THIS WARRANT CERTIFICATE), ALL TO THE SAME EFFECT AS IF THE PROVISIONS OF THE WARRANT INDENTURE WERE HEREIN SET FORTH, TO ALL OF WHICH THE HOLDER OF THIS WARRANT CERTIFICATE BY ACCEPTANCE HEREOF ASSENTS. A copy of the Warrant Indenture will be available for inspection at 393 University Avenue, 5th Floor, Toronto, Ontario M5G 2M7. If any conflict exists between the provisions contained herein and the provisions of the Warrant Indenture, the provisions of the Warrant Indenture shall govern. The Warrant Indenture provides for adjustments to the right of exercise, including the amount of and class and kind of Exchangeable Shares and other shares, securities or property issuable upon exercise, upon the happening of certain stated events including the subdivision or consolidation of the Exchangeable Shares, certain distributions of Exchangeable Shares or securities convertible into Exchangeable Shares or of other securities or assets of the Corporation, certain offerings of rights, warrants or options and certain capital reorganizations and for payment of an amount to compensate for dividends paid on Exchangeable Shares. If, immediately prior to the expiry of the Exercise Period, the Warrants represented by this Warrant certificate have not been exercised, the Warrants represented hereby shall be deemed to have been exercised and surrendered by the holder immediately after that time without any further action on the part of the holder. THIS SPECIAL WARRANT, THE EXCHANGEABLE SHARES ISSUABLE UPON EXERCISE HEREOF AND THE SHARES OF COMMON STOCK, PAR VALUE U.S.$0.01 PER SHARE, OF THE LEARNING COMPANY, INC. (THE "COMMON STOCK") ISSUABLE UPON EXCHANGE OF THE EXCHANGEABLE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF THE UNITED STATES OF AMERICA (THE "U.S. SECURITIES ACT"); THE SPECIAL WARRANT, THE EXCHANGEABLE SHARES AND THE COMMON STOCK MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S PROMULGATED UNDER THE U.S. SECURITIES ACT) UNLESS SUCH OFFER, SALE OR TRANSFER IS COVERED BY OR MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE U.S. SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT, NOR MAY ANY SPECIAL WARRANT OR ANY EXCHANGEABLE SHARE BE OFFERED, SOLD OR OTHERWISE TRANSFERRED 5 -5- WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON UNLESS THE ISSUANCE OF THE COMMON STOCK IS REGISTERED UNDER AN EFFECTIVE REGISTRATION STATEMENT UNDER THE U.S. SECURITIES ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT IS AVAILABLE FOR THE EXCHANGE OF THE EXCHANGEABLE SHARES. Upon presentation at 393 University Avenue, 5th Floor, Toronto, Ontario M5G 2M7, subject to the provisions of the Warrant Indenture and upon compliance with the reasonable requirements of the Trustee, Warrants may be exchanged for Warrants entitling the holder thereof to acquire an equal aggregate number of Exchangeable Shares (subject to adjustment) or, in the circumstances described above, Warrants entitling the holder thereof to acquire an aggregate number of Exchangeable Shares equal to the product of 1.09 and the aggregate number of Warrants (subject to adjustment) rounded down to the nearest whole number. The Corporation and the Trustee may treat the registered holder of this Warrant certificate for all purposes as the absolute owner hereof. The holding of this Warrant certificate shall not constitute the holder hereof a holder of Exchangeable Shares nor entitle him to any right or interest in respect thereof except as herein and in the Warrant Indenture expressly provided. The transfer of the Warrants evidenced hereby is restricted by applicable securities laws of Canada and the United States of America. In addition, no Warrant may be transferred to a person resident in any Province of Canada other than British Columbia, Ontario or Quebec. Warrants may only be transferred, upon compliance with the conditions prescribed in the Warrant Indenture, on the register to be kept at the principal offices of the Trustee in the City of Toronto by the registered holder thereof or his executors or administrators or other legal representatives or his or their attorney duly appointed by an instrument in writing in form and execution satisfactory to the Trustee with the signature guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange and upon compliance with such reasonable requirements as the Trustee may prescribe (including, without limitation, the requirement to provide evidence of satisfactory compliance with applicable securities laws of Canada and the United States of America). PRIOR TO THE EARLIER OF THE CLEARANCE DATE AND THE FIRST ANNIVERSARY OF THE DATE HEREOF, THE TRANSFER OF EXCHANGEABLE SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS EVIDENCED HEREBY IS RESTRICTED BY APPLICABLE SECURITIES LEGISLATION. The Warrant Indenture contains provisions making binding upon all holders of Warrants outstanding thereunder resolutions passed at meetings of such holders held in accordance with such provisions and instruments in writing signed by the Warrantholders holding a specified percentage of outstanding and unexercised Warrants. 6 -6- The Warrant Indenture identifies and provides for certain restrictive legends that will appear on the certificates for the Exchangeable Shares. The Warrants and the Warrant Indenture shall be governed by and performed, construed and enforced in accordance with the laws of the Province of Ontario and shall be treated in all respects as Ontario contracts. Time shall be of the essence hereof and of the Warrant Indenture. This Warrant certificate shall not be valid for any purpose until it has been certified by or on behalf of the Trustee for the time being under the Warrant Indenture. IN WITNESS WHEREOF the Corporation has caused this Warrant certificate to be signed by its duly authorized officers as of the 6th day of November, 1997. SOFTKEY SOFTWARE PRODUCTS INC. By ________________________________ Authorized Signing Officer This Warrant certificate represents Warrants referred to in the Warrant Indenture within mentioned. CIBC MELLON TRUST COMPANY Trustee By ____________________________________ Authorized Signing Officer date of signing____________________________ 7 - 7 - TRANSFER FORM FOR VALUE RECEIVED, _________________________________________ hereby sells, assigns and transfers unto _________________________________________________________________ PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE _________________________________________________________________ _________________________________________________________________ ________________________ Warrants represented by the within Warrant certificate and does hereby irrevocably constitute and appoint ______________ _________________________________________________________________ attorney to transfer the said Warrants on the books of the Trustee with full power of substitution in the premises. DATED _________________________________ , 199__. In the presence of ) ) _____________________________ _________________________________ ) Signature of Warrantholder guaranteed by: _________________________________ _____________________________ Name: (Authorized Signature Number) Upon any due transfer of Warrants, the transferee of a Warrant shall be a permitted assignee of the transferring holder and shall be entitled to the benefits of the covenants of the 8 -8- Corporation referred to in section 5 of Schedule "A" of the Subscription Agreements (as defined in the Warrant Indenture) and granted by the Corporation, subject to the restrictions and limitations described therein. NOTICE: The signature on this assignment must correspond exactly with the name as written upon the face of this Warrant certificate. If Exchangeable Shares are to be issued to a person other than the registered holder, the registered holder must pay to the Trustee all exigible taxes and the signature of the registered holder must be guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange. 9 - 9 - EXERCISE FORM TO: SoftKey Software Products Inc. c/o CIBC Mellon Trust Company 393 University Avenue 5th Floor Toronto, Ontario M5G 2M7 Attention: Stock and Bond Transfer Department The undersigned holder of the within Warrants hereby irrevocably exercises the Warrants represented hereby and subscribes for the maximum number of Exchangeable Shares (or other shares, securities or property issuable in accordance with the Warrant Indenture) issuable pursuant to the exercise of such Warrants on the terms specified in the said Warrants and the Warrant Indenture. The undersigned hereby directs that the said Exchangeable Shares be issued in the name of the undersigned and delivered as follows: - -------------------------------------------------------------------------------- NAME(S) IN FULL ADDRESS(ES) NUMBER OF (include Postal Code) EXCHANGEABLE SHARES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please Print) 10 -10- Please note that if Exchangeable Shares are to be issued to a person other than the registered holder, the registered holder must pay to the Trustee all exigible taxes and the signature of the registered holder must be guaranteed. DATED this ______ day of _____________________ , 199_. - -------------------- ) ------------------------ Witness ) Signature ) ) ------------------------ Print full name ------------------------ Address in full [ ] Please check box if these certificates are to be delivered to the office where this Warrant certificate is surrendered, failing which the certificates will be mailed to the address shown on the register. (The Trustee may require that the signature above be guaranteed, in which event the following must be completed.) Signature of Warrantholder guaranteed by: ________________________________ (Signature of Warrantholder) ______________________________ _________________________________ Name: (Authorized Signature Number) Note: If the signature of the person executing this form is to be guaranteed, it must be guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange. EX-4.9 4 FORM OF SPECIAL WARRANT 1 EXHIBIT 4.9 SOFTKEY SOFTWARE PRODUCTS INC. AND CIBC MELLON TRUST COMPANY ----------------------- SPECIAL WARRANT INDENTURE PROVIDING FOR THE ISSUE OF 4,072,000 SPECIAL WARRANTS ----------------------- NOVEMBER 6, 1997 DAVIES, WARD & BECK CASSELS BROCK & BLACKWELL 2 ARTICLE ONE INTERPRETATION Section 1.01 - Definitions ............................................. 2 Section 1.02 - Number and Gender ....................................... 8 Section 1.03 - Interpretation Not Affected by Headings, Etc ............ 8 Section 1.04 - Business Day ............................................ 8 Section 1.05 - Time of the Essence ..................................... 8 Section 1.06 - Applicable Law .......................................... 8 Section 1.07 - Severability ............................................ 8 ARTICLE TWO ISSUE OF WARRANTS Section 2.01 - Issue of Warrants ....................................... 9 Section 2.02 - Form and Terms of Warrants .............................. 9 Section 2.03 - Signing of Warrant Certificates ......................... 10 Section 2.04 - Certification by the Trustee ............................ 10 Section 2.05 - Warrantholder Not a Shareholder, Etc .................... 11 Section 2.06 - Issue in Substitution for Lost Warrant Certificates ..... 11 Section 2.07 - Warrants to Rank Pari Passu ............................. 11 Section 2.08 - Registers for Warrants .................................. 11 Section 2.09 - Transferee Entitled to Registration ..................... 12 Section 2.10 - Registers Open for Inspection ........................... 12 Section 2.11 - Exchange of Warrants .................................... 13 Section 2.12 - Ownership of Warrants ................................... 13 Section 2.13 - Adjustment of Exercise Rights ........................... 14 Section 2.14 - Adjustment Rules ........................................ 15 Section 2.15 - Proceedings Prior to Any Action Requiring Adjustment .... 16 Section 2.16 - Notice of Adjustment of Exercise Rights ................. 16 Section 2.17 - No Duty to Inquire, Liability ........................... 17 ARTICLE THREE ESCROW OF NET PROCEEDS AND REDEMPTION OF SPECIAL WARRANTS Section 3.01 - Deposit of Net Proceeds in Escrow ....................... 17 Section 3.03 - Release of Escrowed Funds to the Corporation ............ 18 Section 3.04 - Redemption of Warrants .................................. 18 Section 3.05 - Corporation to Fund Shortfall ........................... 20 Section 3.06 - Transaction Approval .................................... 20
3 ARTICLE FOUR TRIGGERING EVENT Section 4.01 - Triggering Event ........................................ 20 Section 4.02 - Change in Exercise Rights ............................... 20 ARTICLE FIVE EXERCISE OF WARRANTS Section 5.01 - Method of Exercise of Warrants .......................... 21 Section 5.02 - Automatic Exercise ...................................... 22 Section 5.03 - Effect of Exercise of Warrants .......................... 22 Section 5.04 - Cancellation of Warrant Certificates .................... 23 Section 5.05 - Notice to Trustee of Extension of Qualification Deadline .................................. 23 Section 5.06 - Legend on Exchangeable Shares ........................... 23 ARTICLE SIX COVENANTS Section 6.01 - General Covenants ....................................... 24 Section 6.02 - Notice to Securities Commissions ........................ 25 Section 6.03 - Trustee's Remuneration and Expenses ..................... 25 Section 6.04 - Performance of Covenants by Trustee ..................... 26 Section 6.05 - Right to Dividends or Distributions ..................... 26 ARTICLE SEVEN ENFORCEMENT Section 7.01 - Suits by Warrantholders ................................. 26 Section 7.02 - Immunity of Shareholders, Etc ........................... 27 Section 7.03 - Limitation of Liability ................................. 27 ARTICLE EIGHT MEETINGS OF WARRANTHOLDERS Section 8.01 - Right to Convene Meetings ............................... 27 Section 8.02 - Notice .................................................. 28 Section 8.03 - Chair ................................................... 28
4 Section 8.04 - Quorum .................................................. 28 Section 8.05 - Power to Adjourn ........................................ 29 Section 8.06 - Show of Hands ........................................... 29 Section 8.07 - Poll and Voting ......................................... 29 Section 8.08 - Regulations ............................................. 30 Section 8.09 - Corporation, Trustee and Counsel May Be Represented ..... 30 Section 8.10 - Powers Exercisable by Extraordinary Resolution .......... 31 Section 8.11 - Meaning of Extraordinary Resolution ..................... 32 Section 8.12 - Powers Cumulative ....................................... 32 Section 8.13 - Minutes ................................................. 33 Section 8.14 - Instruments in Writing .................................. 33 Section 8.15 - Binding Effect of Resolutions ........................... 33 Section 8.16 - Holdings by the Corporation or Subsidiaries of the Corporation Disregarded .......................... 34 ARTICLE NINE SUPPLEMENTAL INDENTURES Section 9.01 - Supplemental Indentures ................................. 34 Section 9.02 - Successor Corporations .................................. 35 ARTICLE TEN CONCERNING THE TRUSTEE Section 10.01 - Trust Indenture Legislation ............................ 35 Section 10.02 - Rights and Duties of Trustee ........................... 36 Section 10.03 - Evidence, Experts and Advisers ......................... 37 Section 10.04 - Documents, Money, Etc. Held by Trustee ................. 37 Section 10.05 - Actions by Trustee to Protect Interests ................ 38 Section 10.06 - Trustee Not Required to Give Security .................. 38 Section 10.07 - Protection of Trustee .................................. 38 Section 10.08 - Replacement of Trustee ................................. 39 Section 10.09 - Conflict of Interest ................................... 40 Section 10.10 - Acceptance of Trusts ................................... 40 Section 10.11 - Trustee Not to Be Appointed Receiver ................... 40 Section 10.12 - Indemnity of Trustee ................................... 40 ARTICLE ELEVEN GENERAL Section 11.01 - Notice ................................................. 41
5 Section 11.02 - Accidental Failure to Give Notice to Warrantholders .... 42 Section 11.03 - Counterparts and Formal Date ........................... 42 Section 11.04 - Satisfaction and Discharge of Indenture ................ 43 Section 11.05 - Provisions of Indenture and Warrants for the Sole Benefit of Parties and Warrantholders ............. 43 Section 11.06 - Language ............................................... 43 SCHEDULE A - Form of Warrant Certificate SCHEDULE B - Form of Release Certificate
6 THIS SPECIAL WARRANT INDENTURE made as of November 6, 1997. B E T W E E N: SOFTKEY SOFTWARE PRODUCTS INC. a corporation existing under the laws of the Province of Ontario, (hereinafter called the "CORPORATION"), OF THE FIRST PART, - and - CIBC MELLON TRUST COMPANY, a trust company incorporated under the laws of Canada and having an office in the City of Toronto, Ontario, (hereinafter called the "TRUSTEE"), OF THE SECOND PART. WHEREAS the Corporation proposes to issue and sell 4,072,000 special warrants (the "Warrants") entitling the holders thereof to acquire upon exercise thereof without additional payment exchangeable non-voting shares in the capital of the Corporation upon the terms and subject to the conditions contained herein; AND WHEREAS for such purpose the Corporation deems it necessary to create and issue Warrants to be constituted and issued in the manner hereinafter set forth; AND WHEREAS the Corporation is duly authorized to create and issue the Warrants to be issued as herein provided; AND WHEREAS all things necessary have been done and performed to make the Warrants, when certified by the Trustee and issued as in this Indenture provided, legal, valid and binding upon the Corporation with the benefits of and subject to the terms of this Indenture; 7 - 2 - AND WHEREAS the Trustee has agreed to enter into this Indenture and to hold all rights, interests and benefits contained herein for and on behalf of those persons who from time to time become holders of Warrants issued pursuant to this Indenture; AND WHEREAS the foregoing recitals are made as representations and statements of fact by the Corporation and not by the Trustee; NOW THEREFORE THIS INDENTURE WITNESSES that for good and valuable consideration mutually given, the receipt and sufficiency of which are hereby acknowledged, the Corporation hereby appoints the Trustee as warrant trustee for the holders of Warrants, to hold all rights, interests and benefits contained herein for and on behalf of those persons who from time to time become holders of Warrants issued pursuant to this Indenture, and it is hereby agreed and declared as follows: ARTICLE ONE INTERPRETATION SECTION 1.01 - DEFINITIONS In this Indenture, unless there is something in the subject matter or context inconsistent therewith, the following phrases and words shall have the following meanings: "AGGREGATE PURCHASE PRICE" means the aggregate Purchase Price received by the Corporation upon the issue and sale of the Warrants by the Corporation on the Closing Date, being $87,548,000; "APPLICABLE LEGISLATION" has the meaning ascribed thereto in subsection 10.01(1); "BUSINESS DAY" means a day other than a Saturday, Sunday or statutory or banking holiday in Toronto, Ontario; "CAPITAL REORGANIZATION" has the meaning ascribed thereto in Section 2.13; "CLEARANCE DATE" means, in respect of a Warrantholder, the date on which a receipt for the Final Prospectus has been issued by the Securities Commission of the Designated Province in which such Warrantholder resides or is deemed to reside, as herein provided; "CLOSING DATE" means the date hereof; 8 - 3 - "CLOSING TIME" means 10:00 a.m. (Toronto time) on the Closing Date or such other time on the Closing Date as the Corporation and the Underwriters may agree pursuant to the Underwriting Agreement; "CORPORATION" means SoftKey Software Products Inc., a corporation existing under the laws of the Province of Ontario, and its successors from time to time; "CORPORATION'S AUDITORS" means the independent chartered accountant or firm of chartered accountants duly appointed as auditor or auditors of the Corporation from time to time; "COUNSEL" means a barrister or solicitor or a firm of barristers or solicitors (who may be counsel for the Corporation) acceptable to the Trustee, acting reasonably; "CREATIVE WONDERS" means Creative Wonders, L.L.C., a limited liability company existing under the laws of the State of Delaware; "DESIGNATED PROVINCES" means the Provinces of British Columbia, Ontario and Quebec; "DIRECTOR" means a director of the Corporation for the time being and, unless otherwise specified herein, reference herein to an "ACTION BY THE DIRECTORS" means an action by the directors of the Corporation as a board or, whenever duly empowered, an action by a committee of directors; "ESCROWED FUNDS" means the Net Proceeds and all proceeds of investment and reinvestment thereof from time to time; "EVENT OF FORCE MAJEURE" means any event resulting from a cause beyond the Corporation's control which prevents the Corporation from obtaining a receipt for the Final Prospectus from any of the Securities Commissions in the Designated Provinces by 5:00 o'clock p.m. on the Qualification Deadline including, without limitation, an act of God, war, riot, sabotage, flood, fire or other like event or any general strike or lockout of the Securities Commissions in any of the Designated Provinces, but for greater certainty does not include any administrative action or inaction by any of such Securities Commissions. "EXCHANGEABLE SHARES" means the fully paid and non-assessable exchangeable non-voting shares without nominal or par value in the capital of the Corporation, as currently constituted; "EXERCISE DATE" means, with respect to any Warrant, the date during the Exercise Period on which such Warrant is surrendered for exercise or the date upon which such Warrant is automatically exercised, in each case, in accordance with the provisions of Article Five; 9 - 4 - "EXERCISE PERIOD" means, with respect to any Warrant, the period beginning on the Business Day following the date on which Transaction Approval is obtained and ending at the Time of Expiry; "EXPIRY DATE" means, in respect of a Designated Province, the date that is the first to occur of (i) the sixth Business Day following the Clearance Date and (ii) the first anniversary of the Closing Date; "EXTRAORDINARY RESOLUTION" has the meaning ascribed thereto in Section 8.11; "FINAL PROSPECTUS" means the (final) prospectus of the Corporation relating to the distribution of the Underlying Shares; "INTEREST AMOUNT" means, at any time and with respect to the determination of the Redemption Amount: (a) if at such time all of the Net Proceeds remain in escrow with the Trustee pursuant to Article Three hereof: (i) interest on the Purchase Price in an amount equal to (a) the aggregate interest or other return actually earned (expressed as a dollar amount) on the Permitted Investments in which the Net Proceeds were invested during the Redemption Period divided by (b) 4,072,000; plus (ii) interest on the Purchase Price in an amount equal to (A) the weighted average annual interest rate or other annual rate of return (expressed as a percentage) applicable to the Permitted Investments in which the Net Proceeds were invested during the Redemption Period multiplied by (B) the Underwriters' Fees and Expenses, which product shall then be multiplied by (C) the number of days in the Redemption Period, which resulting product shall then be divided by (D) 365, which quotient shall be then divided by (E) 4,072,000; and (b) if at such time LESS THAN all of the Net Proceeds remain in escrow pursuant to Article Three hereof, interest on the Purchase Price in an amount equal to (A) the annual interest rate applicable to that Government of Canada treasury bill which could have been purchased on the Closing Date with an original term to maturity which most closely approximates the Redemption Period multiplied by (B) the Aggregate Purchase Price, which product shall then be multiplied by (C) the number of days in the Redemption Period, which resulting product shall then be divided by (D) 365, which quotient shall then be divided by (E) 4,072,000; 10 - 5 - "NET PROCEEDS" means the Aggregate Purchase Price less the Underwriters' Fees and Expenses, such Net Proceeds being $83,458,340; "NOTICE DATE" has the meaning ascribed thereto in subsection 3.04(1); "PERMITTED INVESTMENTS" means Government of Canada treasury bills or such other investments rated at least R1 middle by DBRS Inc. and having an original term to maturity of 120 days or less; "PERSON" includes an individual, a corporation, a partnership, a trustee, any unincorporated organization or any other juridical entity and words importing persons have a similar meaning; "PURCHASE PRICE" has the meaning ascribed thereto in Section 2.01; "QUALIFICATION DEADLINE" means March 6, 1998 or such later date as may be agreed upon in writing by the Corporation and the Underwriters; "REDEMPTION AMOUNT" means an amount per Warrant equal to the Purchase Price plus the Interest Amount; "REDEMPTION PERIOD" means the period from the Closing Date to but excluding the first date of mailing by the Trustee of a cheque or bank draft in payment of the Redemption Amount pursuant to subsection 3.04(1); "RELEASE CERTIFICATE" means a certificate and request for payment substantially in the form of Schedule B hereto, executed and delivered to the Trustee by the Corporation and by Griffiths McBurney & Partners on behalf of the Underwriters; "SECURITIES COMMISSIONS" means, collectively, the securities commission or comparable securities regulatory authority in each of the Designated Provinces and "SECURITIES COMMISSION" means any such authority; "SECURITIES LAWS" means, collectively, the applicable securities laws of each of the Designated Provinces and the respective regulations and rules made and forms prescribed thereunder together with all applicable published policy statements and blanket orders and rulings of the Securities Commissions; "SHAREHOLDER" means a holder of record on the books of the Corporation of one or more Exchangeable Shares; 11 - 6 - "SHAREHOLDER APPROVAL" means the approval of the holders of the Exchangeable Shares to, among other things, the issue by the Corporation, from time to time, of Exchangeable Shares in addition to those shares outstanding on the record date for the Shareholder Meeting, such approval to be given by resolution passed by not less than two-thirds of the votes cast on such resolution at the Shareholder Meeting, as required by and in accordance with the rights, privileges, restrictions and conditions attaching to the Exchangeable Shares; "SHAREHOLDER MEETING" means the special meeting or meetings (including any adjournments thereof) of the holders of the Exchangeable Shares to be called and held in accordance with the articles and by-laws of the Corporation for the purpose of obtaining Shareholder Approval; "SUBSCRIPTION AGREEMENTS" means, collectively, the subscription agreements or other agreements entered into between the Corporation, the Underwriters and each Warrantholder pursuant to which the Warrantholders agree to purchase Warrants from the Corporation; "SUCCESSOR" has the meaning ascribed thereto in Section 9.02; "THIS WARRANT INDENTURE", "THIS INDENTURE", "HEREIN", "HEREBY" and similar expressions mean and refer to this indenture and any indenture, deed or instrument supplemental or ancillary hereto; and the expressions "ARTICLE", "SECTION", "SUBSECTION" and "CLAUSE" followed by a number mean and refer to the specified Article, Section, subsection or clause of this Indenture; "TIME OF EXPIRY" means 5:00 p.m. (local time) on the Expiry Date; "TRANSACTION APPROVAL" means Shareholder Approval together with all such other consents and approvals necessary to ensure that the rights and benefits of the holders of Underlying Shares are substantially equivalent to the rights and benefits of the holders of the existing Exchangeable Shares; provided that, for greater certainty, Transaction Approval shall not include the filing of, or the obtaining of a receipt for, the Final Prospectus; "TRANSACTION SUPPORT CONDITION" means the obtaining by the Corporation of irrevocable proxies executed by holders of not less than 50.1% of the Exchangeable Shares outstanding on the record date for, and eligible to vote at, the Shareholder Meeting, indicating that such holders will vote such shares at the Shareholder Meeting in favour of, among other things, the issue by the Corporation, from time to time, of Exchangeable Shares in addition to those shares outstanding on the record date for the Shareholder Meeting; "TRIGGERING EVENT" has the meaning ascribed thereto in Section 4.01; 12 - 7 - "TRUSTEE" means CIBC Mellon Trust Company, a corporation incorporated under the laws of Canada, or its successors for the time being in the trusts hereby created; "UNDERLYING SHARES" means the Exchangeable Shares issuable upon the exercise or deemed exercise of the Warrants, including any other shares, securities or property issuable upon the exercise of the Warrants as a result of any adjustment of exercise rights pursuant to Section 2.13 and 2.14; "UNDERWRITERS" means, collectively, Griffiths McBurney & Partners and First Marathon Securities Limited; "UNDERWRITERS' FEES AND EXPENSES" means the fee of $3,939,660 together with the Underwriters' estimated expenses in the amount of $150,000, paid to the Underwriters by the Corporation in connection with the issue and sale of the Warrants, being the aggregate amount of $4,089,660; "UNDERWRITING AGREEMENT" means the underwriting agreement made as of October 23, 1997 between the Corporation, The Learning Company, Inc. and the Underwriters; "U.S. SECURITIES LAWS" means, collectively, the applicable federal and state securities laws of the United States of America and the rules and regulations promulgated thereunder, and including without limitation the Securities Act of 1933, as amended. "WARRANT CERTIFICATES" has the meaning ascribed thereto in subsection 2.02(1); "WARRANTHOLDER" or "HOLDER" means a person whose name is entered for the time being in the register maintained pursuant to clause 2.08(2)(a) and, for greater certainty, in respect of any action to be taken by a holder in respect of his Warrants, means the holder or his executors, administrators or other legal representatives or his or their attorney duly appointed by instrument in writing in form, substance and execution satisfactory to the Trustee with signatures guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange; "WARRANTHOLDERS' REQUEST" means an instrument signed in one or more counterparts by Warrantholders holding in the aggregate not fewer than 25% of the then outstanding Warrants, requesting the Trustee to take some action or proceeding specified therein; "WARRANTS" means the special warrants of the Corporation entitling registered holders thereof upon exercise thereof in accordance herewith to acquire Underlying Shares; and "WRITTEN ORDER OF THE CORPORATION", "WRITTEN REQUEST OF THE CORPORATION", "WRITTEN CONSENT OF THE CORPORATION", "CERTIFICATE OF THE CORPORATION" and any other document required to be signed by the Corporation means, respectively, a written order, request, consent, certificate or other 13 - 8 - document signed in the name of the Corporation by any one of the chairman of the board, the vice-chairman of the board, the president or a vice-president of the Corporation, and may consist of one or more instruments so executed. SECTION 1.02 - NUMBER AND GENDER Unless elsewhere herein otherwise expressly provided or unless the context otherwise requires, words importing the singular include the plural and vice versa and words importing the masculine gender include the feminine and neuter genders. SECTION 1.03 - INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this Indenture into Articles, Sections, subsections and clauses, the provision of a table of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Indenture. SECTION 1.04 - BUSINESS DAY In the event that any day on or before which any action is required or permitted to be taken hereunder is not a Business Day, then such action shall be required or permitted to be taken on or before the requisite time on the next succeeding day that is a Business Day. SECTION 1.05 - TIME OF THE ESSENCE Time shall be of the essence in all respects in this Indenture and the Warrants. SECTION 1.06 - APPLICABLE LAW This Indenture and the Warrants shall be governed by and construed and enforced in accordance with the laws of Ontario and shall be treated in all respects as Ontario contracts. SECTION 1.07 - SEVERABILITY The invalidity or unenforceability of any particular provision of this Indenture shall not affect or limit the validity or enforceability of the remaining provisions of this Indenture. 14 - 9 - ARTICLE TWO ISSUE OF WARRANTS SECTION 2.01 - ISSUE OF WARRANTS 4,072,000 Warrants entitling the holders thereof to acquire, on the terms and subject to the conditions herein provided, 4,072,000 Exchangeable Shares (or, in the circumstances described in Article Four, 4,438,480 Exchangeable Shares), or such other kind and amount of Underlying Shares as may be herein provided, are hereby created and authorized to be issued hereunder upon the terms and conditions set forth herein at a purchase price of $21.50 per Warrant (the "Purchase Price"). Certificates evidencing the Warrants shall be executed by the Corporation and certified by or on behalf of the Trustee upon the written order of the Corporation and delivered by the Corporation in accordance with Sections 2.03 and 2.04 against payment of the Aggregate Purchase Price. SECTION 2.02 - FORM AND TERMS OF WARRANTS (1) The certificates representing the Warrants (the "WARRANT CERTIFICATES") shall be substantially in the form set out in Schedule A hereto, shall be dated as of the date hereof (regardless of their actual date of issue) and shall have such distinguishing letters and numbers as the Corporation may prescribe with the approval of the Trustee. Warrant certificates may be engraved, lithographed, printed or typewritten or partly in one form and partly in another, as the Corporation with the approval of the Trustee may determine. (2) Each Warrant authorized to be issued hereunder shall entitle the holder thereof to acquire (subject to subsection 5.01(2)), at no additional cost, one Exchangeable Share (or, in the circumstances described in Article Four, 1.09 Exchangeable Shares) or such other kind and amount of Underlying Shares as may be provided in accordance with the provisions of this Indenture. (3) Fractional Warrants shall not be issued or otherwise provided for. (4) Any legends to be typed onto the Warrant certificates or the Underlying Shares shall be typed thereon upon the direction of the Corporation. The Trustee and the Corporation have no duty to ensure that the Warrantholders comply with the provisions of any such legend. (5) All Warrant certificates shall have typed thereon the following legend: "This Special Warrant, the Exchangeable Shares issuable upon exercise hereof and the shares of Common Stock, par value US$0.01 per share, of The Learning 15 - 10 - Company, Inc. (the "Common Stock") issuable upon exchange of the Exchangeable Shares have not been registered under the Securities Act of 1933, as amended, of the United States of America (the "U.S. Securities Act"); the Special Warrant, the Exchangeable Shares and the Common Stock may not be offered, sold or otherwise transferred within the United States or to, or for the account or benefit of, any U.S. person (as such terms are defined in Regulation S promulgated under the U.S. Securities Act) unless such offer, sale or transfer is covered by or made pursuant to an effective registration statement under the U.S. Securities Act or pursuant to an exemption from registration under the U.S. Securities Act, nor may any Special Warrant or Exchangeable Share be offered, sold or otherwise transferred within the United States or to, or for the account or benefit of, any U.S. person unless the issuance of the Common Stock is registered under an effective registration statement under the U.S. Securities Act or an exemption from registration under the U.S. Securities Act is available for the exchange of the Exchangeable Shares." SECTION 2.03 - SIGNING OF WARRANT CERTIFICATES The Warrant certificates shall be signed by any of the chairman, chief executive officer, president, secretary or a vice-president of the Corporation and may but need not be under the corporate seal of the Corporation or a reproduction thereof. The signature of such officer may be mechanically reproduced in facsimile and Warrant certificates bearing such facsimile signatures shall be binding upon the Corporation as if they had been manually signed by such officer. Notwithstanding that the person whose manual or facsimile signature appears on any Warrant certificate as such officer may no longer hold office at the date of issue of such Warrant certificate or at the date of certification or delivery thereof, any Warrant certificate signed as aforesaid shall, subject to Section 2.04, be valid and binding upon the Corporation and the registered holder thereof shall be entitled to the benefits of this Indenture. SECTION 2.04 - CERTIFICATION BY THE TRUSTEE (1) No Warrant certificate shall be issued or, if issued, shall be valid for any purpose or entitle the registered holder to the benefit hereof or thereof until it has been certified by manual signature by or on behalf of the Trustee in the form of the Warrant certificate set out in Schedule A and such certification by the Trustee upon any Warrant certificate shall be conclusive evidence as against the Corporation that the Warrant certificate so certified has been duly issued hereunder and the holder is entitled to the benefits hereof. (2) The certification of the Trustee on Warrant certificates issued hereunder shall not be construed as a representation or warranty by the Trustee as to the validity of this Indenture or the Warrants (except the due certification thereof) and the Trustee shall in no respect be liable or 16 - 11 - answerable for the use made of the Warrants or any of them or of the consideration therefor except as otherwise specified herein. SECTION 2.05 - WARRANTHOLDER NOT A SHAREHOLDER, ETC. The holding of a Warrant shall not be construed as conferring upon a Warrantholder any right or interest whatsoever as a Shareholder nor entitle the holder to any right or interest in respect thereof except as expressly provided herein and in the Warrants. SECTION 2.06 - ISSUE IN SUBSTITUTION FOR LOST WARRANT CERTIFICATES (1) In the case where any Warrant certificate shall become mutilated or be lost, destroyed or stolen, the Corporation, subject to applicable law and subsection 2.06(2), shall issue and thereupon the Trustee shall certify and deliver a new Warrant certificate of like tenor as the one mutilated, lost, destroyed or stolen in exchange for and in place of and upon cancellation of such mutilated Warrant certificate, or in lieu of and in substitution for such lost, destroyed or stolen Warrant certificate, and the substituted Warrant certificate shall be in a form approved by the Trustee and shall entitle the holder to the benefits hereof and shall rank equally in accordance with its terms with all other Warrant certificates issued or to be issued hereunder. (2) The applicant for the issue of a new Warrant certificate pursuant to this Section 2.06 shall bear the cost of the issue thereof and in case of loss, destruction or theft shall furnish to the Corporation and to the Trustee, as a condition precedent to the issue thereof, such evidence of ownership and of the loss, destruction or theft of the Warrant certificate so lost, destroyed or stolen as shall be satisfactory to the Corporation and to the Trustee in their sole discretion, and such applicant may also be required to furnish an indemnity bond or security in amount and form satisfactory to the Corporation and the Trustee in their sole discretion and shall pay the reasonable charges of the Corporation and the Trustee in connection therewith. SECTION 2.07 - WARRANTS TO RANK PARI PASSU All Warrants shall rank pari passu, whatever may be the actual date of issue of Warrant certificates evidencing the same. SECTION 2.08 - REGISTERS FOR WARRANTS (1) The Corporation hereby appoints the Trustee as transfer agent and registrar of the Warrants. The Corporation may appoint hereafter, with the consent of the Trustee, one or more additional transfer agents and/or registrars of the Warrants. 17 - 12 - (2) The Corporation shall cause to be kept by the Trustee at its principal office in the City of Toronto (a) a register of Warrantholders in which shall be entered the names and addresses of the Warrantholders and of the number of Warrants held by them and (b) a register of transfers of Warrants in which shall be entered the date and other particulars of each transfer of Warrants. (3) No transfer of a Warrant shall be valid unless made by: (a) the holder or his executors, administrators or other legal representatives or his or their attorney duly appointed by an instrument in writing in form and execution satisfactory to the Trustee with signatures guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange; or (b) the liquidator of, or a trustee in bankruptcy for, a Warrantholder, upon compliance with such reasonable requirements as the Trustee and the Corporation may prescribe (including, without limitation, the requirement to provide evidence of satisfactory compliance with applicable Securities Laws), and unless recorded on the register of transfers maintained by the Trustee pursuant to clause 2.08(2)(b), nor until all stamp taxes or governmental or other charges arising by reason of such transfer have been paid. (4) In all cases, no transfer of a Warrant shall be valid if made to, and no Warrant may be transferred to, a person resident in any Province of Canada other than a Designated Province. SECTION 2.09 - TRANSFEREE ENTITLED TO REGISTRATION The transferee of a Warrant shall be entitled to have his name entered on the register of holders as the owner of such Warrant free from all equities or rights of set-off or counterclaim between the Corporation and the transferor or any previous holder of such Warrant, save in respect of equities of which the Corporation or the transferee is required to take notice by statute or by order of a court of competent jurisdiction after the transfer form attached to the Warrant and any other form of transfer acceptable to the Trustee (which may include the obligation of the transferee to provide representations and warranties equivalent to those contained in Schedule C of the Subscription Agreements) is duly completed and the Warrant is lodged with the Trustee and upon compliance with all other conditions in that regard required by this Indenture or by law. SECTION 2.10 - REGISTERS OPEN FOR INSPECTION The registers hereinbefore referred to shall be open during normal business hours for inspection by the Corporation, the Trustee or any Warrantholder. The Trustee shall furnish the Corporation with a list of the names and addresses of holders of Warrants entered in the register of 18 - 13 - holders kept by the Trustee and showing the number of Underlying Shares that might be acquired upon the exercise of the Warrants held by each such holder from time to time when requested to do so in writing by the Corporation. SECTION 2.11 - EXCHANGE OF WARRANTS (1) Warrant certificates may be exchanged for Warrant certificates in any other authorized denomination representing in the aggregate the same number of Warrants upon compliance with the reasonable requirements of the Trustee. The Corporation shall sign and the Trustee shall certify, in accordance with Sections 2.03 and 2.04, all Warrant certificates necessary to carry out the exchanges contemplated herein. (2) Warrant certificates may be exchanged only at the principal office of the Trustee in the City of Toronto or at any other place that is designated by the Corporation with the approval of the Trustee. Any Warrant certificates tendered for exchange shall be surrendered to the Trustee and cancelled. (3) No charge will be levied by the Corporation or the Trustee upon a presenter of a Warrant certificate pursuant to this Indenture for the transfer of any Warrant or for the exchange of any Warrant certificate, however reimbursement of the Trustee or the Corporation for any and all taxes or governmental or other charges required to be paid shall be made by the person requesting such exchange as a condition precedent to such exchange. SECTION 2.12 - OWNERSHIP OF WARRANTS The Corporation and the Trustee shall deem and treat the registered holder of any Warrant certificate as the absolute owner of the Warrant represented thereby for all purposes, and the Corporation and the Trustee shall not be affected by any notice or knowledge to the contrary except where the Corporation or the Trustee is required to take notice by statute or by order of a court of competent jurisdiction. A Warrantholder shall be entitled to the rights evidenced by such Warrant free from all equities or rights of set-off or counterclaim between the Corporation and the original or any intermediate holder thereof and all persons may act accordingly and the receipt by any such Warrantholder of Underlying Shares pursuant to such Warrant shall be a good discharge to the Corporation and the Trustee for the same and neither the Corporation nor the Trustee shall be bound to inquire into the title of any such holder except where the Corporation or the Trustee is required to take notice by statute or by order of a court of competent jurisdiction. 19 - 14 - SECTION 2.13 - ADJUSTMENT OF EXERCISE RIGHTS Subject to Sections 2.14 and 2.15, if at any time after the date hereof and prior to the Time of Expiry, and provided any Warrants remain outstanding, there shall occur: (a) a reclassification of the Exchangeable Shares outstanding at any time or a change of the Exchangeable Shares into other shares or securities or a subdivision or consolidation of the Exchangeable Shares into a greater or lesser number of shares or any other capital reorganization; (b) a consolidation, amalgamation or merger of the Corporation with or into any other person (other than a consolidation, amalgamation or merger that does not result in any reclassification of the outstanding Exchangeable Shares or a change of the Exchangeable Shares into other shares or securities); (c) a transfer of the undertaking or assets of the Corporation as an entirety or substantially as an entirety to another corporation or other entity; or (d) an issue or distribution to the holders of all or substantially all the Corporation's outstanding Exchangeable Shares of securities of the Corporation, including rights, options or warrants to acquire Exchangeable Shares, or securities convertible into or exchangeable for Exchangeable Shares or any property or assets and any evidences of indebtedness, excluding dividends (other than stock dividends) or other distributions made in the ordinary course by the Corporation and excluding securities issued pursuant to a stock option or stock purchase plan of the Corporation or other stock acquisition arrangements of the Corporation in effect as of the date hereof, any of such events being called a "CAPITAL REORGANIZATION", the holder of any Warrant who thereafter shall exercise his right to acquire Underlying Shares shall be entitled to receive, and shall accept for no extra cost, in lieu of the number of Underlying Shares that he was theretofore entitled upon such exercise, the kind and amount of Exchangeable Shares or other shares, securities or property which such holder would have received had he been the registered holder of the Underlying Shares in respect of his Warrants on such effective date or record date, as the case may be. If determined appropriate by the Corporation, acting reasonably, appropriate adjustments shall be made as a result of any such Capital Reorganization in the application of the provisions set forth hereinafter in this Article Two with respect to the rights and interests thereafter of Warrantholders with the result that the provisions set forth hereinafter in this Article Two shall thereafter correspondingly be made applicable as nearly as may be reasonably possible in relation to any other shares, securities or property thereafter deliverable upon the exercise of any Warrant. Any such adjustments shall be made by and set forth in an indenture supplemental hereto approved by the 20 - 15 - directors and the Trustee and shall for all purposes be conclusively deemed to be an appropriate adjustment absent manifest error. SECTION 2.14 - ADJUSTMENT RULES (1) The adjustments provided for in Section 2.13 are cumulative and shall apply (without duplication) to successive Capital Reorganizations or other events resulting in any adjustment under the provisions of Section 2.13 provided that, notwithstanding any other provision of this Article Two, no adjustment shall be made in the number of Underlying Shares that may be acquired on the exercise of a Warrant unless it would result in a change of at least one one-hundredth of an Underlying Share (provided, however, that any adjustments that by reason of this subsection 2.14(1) are not required to be made shall be carried forward and taken into account in any subsequent adjustment). (2) If any question shall arise with respect to the adjustments provided for in this Article Two, such question, absent manifest error and subject to the prior consent of The Toronto Stock Exchange, shall be conclusively determined by a firm of chartered accountants appointed by the Corporation (who may be the Corporation's auditors) and acceptable to the Trustee, acting reasonably; such chartered accountants shall have access to all necessary records of the Corporation and such determination shall be binding upon the Corporation, the Trustee and the Warrantholders, absent manifest error. In the event that any such determination is made, the Corporation shall deliver a certificate to the Trustee describing such determination and confirming such consent. (3) No adjustment in the number of Underlying Shares that may be acquired upon exercise of a Warrant shall be made in respect of any event described in Section 2.13 if Warrantholders are entitled to participate in such event on the same terms mutatis mutandis as if Warrantholders had exercised their Warrants prior to or on the effective date or record date of such event, such participation being subject to the prior consent of The Toronto Stock Exchange. (4) In case the Corporation after the date of this Indenture shall take any action affecting the Exchangeable Shares other than an action described in this Article Two, which in the opinion of the directors would materially affect the rights of Warrantholders, the number of Underlying Shares that may be acquired upon exercise of a Warrant shall be adjusted in such manner and at such time, by action of the directors, in their sole discretion as they may determine to be equitable in the circumstances, provided that no such adjustment will be made unless prior approval of The Toronto Stock Exchange and any other stock exchange on which the Exchangeable Shares are listed for trading or quoted has been obtained. Failure of the directors to make such an adjustment shall be prima facie evidence that the directors have determined that it is equitable to make no adjustment in the circumstances. 21 - 16 - (5) the Corporation shall set a record date to determine the holders of the Exchangeable Shares for the purpose of entitling them to receive any issuance or distribution or for the issuance of any rights, options or warrants and shall thereafter and before such distribution or issuance to such shareholders abandon its plan to make such distribution or issuance, then no adjustment in the number of Underlying Shares that may be acquired upon exercise of any Warrant shall be required by reason of the setting of such record date. (6) The Corporation shall not be required to issue fractional securities in satisfaction of its obligations hereunder. If any fractional interest in an Underlying Share would, except for the provisions of this subsection, be deliverable upon the exercise of a Warrant, the Corporation shall make a cash payment equal to the fair value of the fraction of such Underlying Share not so issued as determined by the board of directors in its sole discretion, acting reasonably. SECTION 2.15 - PROCEEDINGS PRIOR TO ANY ACTION REQUIRING ADJUSTMENT As a condition precedent to the taking of any action which would require an adjustment pursuant to Section 2.13, the Corporation shall take any action that, in the opinion of counsel, may be necessary in order that the Corporation may validly and legally issue as fully paid and non-assessable all the Underlying Shares that the holders of the Warrants are entitled to receive on the full exercise thereof in accordance with the provisions hereof. SECTION 2.16 - NOTICE OF ADJUSTMENT OF EXERCISE RIGHTS (1) At least seven days prior to the effective date or record date, as the case may be, of any event that requires or that may require an adjustment in any of the exercise rights pursuant to any of the Warrants, including the number of Underlying Shares that may be acquired upon the exercise thereof, the Corporation shall: (a) file with the Trustee a certificate of the Corporation specifying the particulars of such event and, if determinable, the required adjustment and the computation of such adjustment; and (b) give notice to the Warrantholders of the particulars of such event and, if determinable, the required adjustment. (2) In case any adjustment for which a notice in subsection 2.16(1) has been given is not then determinable, the Corporation shall promptly after such adjustment is determinable: (a) file a certificate of the Corporation with the Trustee showing how such adjustment was computed; and 22 - 17 - (b) give notice to the Warrantholders of the adjustment. (3) The Trustee may act and rely for all purposes upon any certificates and any other documents filed by the Corporation pursuant to this Section 2.16. SECTION 2.17 - NO DUTY TO INQUIRE, LIABILITY (1) Except as provided in Section 9.02, the Trustee shall not at any time be under any duty or responsibility to any Warrantholder to determine whether any facts exist which may require any adjustment contemplated by Sections 2.13 and 2.14 or with respect to the nature or extent of any such adjustment when made or with respect to the method employed in making the same. (2) In case of any adjustment contemplated by Sections 2.13 and 2.14, the Corporation shall: (a) be accountable with respect to the validity or value (or the kind or amount) of any securities or property which may at any time be issued or delivered upon the exercise or deemed exercise of any Warrant; and (b) be responsible for any failure to make any cash payment or to issue, transfer or deliver security certificates upon the surrender of any Warrant for the purpose of exercise or deemed exercise, or to comply with any of the covenants contained in this Article Two. ARTICLE THREE ESCROW OF NET PROCEEDS AND REDEMPTION OF SPECIAL WARRANTS SECTION 3.01 - DEPOSIT OF NET PROCEEDS IN ESCROW The Corporation hereby deposits the Net Proceeds in escrow with the Trustee, and the Trustee hereby acknowledges receipt thereof. The Corporation hereby irrevocably authorizes and instructs the Trustee to hold and deal with the Net Proceeds in trust for the benefit of the Warrantholders and the Corporation as their respective interests may appear and in accordance with and subject to the provisions of this Article. 23 - 18 - SECTION 3.02 - INVESTMENT OF NET PROCEEDS The Net Proceeds deposited with the Trustee hereunder, pending any release or application thereof as required in accordance with the provisions of this Article, shall be invested by the Trustee in its name in Permitted Investments in accordance with any written directions of the Corporation from time to time given to the Trustee or, in the absence of any such directions, shall be invested by the Trustee in its name in accordance with Section 10.04. SECTION 3.03 - RELEASE OF ESCROWED FUNDS TO THE CORPORATION (1) If the Corporation satisfies the Transaction Support Condition or obtains Shareholder Approval, in each case, to be evidenced by the execution and delivery to the Trustee by the Corporation and Griffiths McBurney & Partners on behalf of the Underwriters of the Release Certificate, prior to the Qualification Deadline, the Trustee shall release the Escrowed Funds to the Corporation, for the purpose of completing the acquisition of Creative Wonders. (2) If the Escrowed Funds are not released to the Corporation pursuant to subsection 3.03(1), the Trustee shall release the Escrowed Funds to the Corporation on the first to occur of (a) the last Clearance Date to occur in the Designated Provinces and (b) the Qualification Deadline, provided only that the Corporation has obtained Transaction Approval on or before such date. The occurrence of such date and the satisfaction of such proviso shall be conclusively evidenced by the execution and delivery to the Trustee of a certificate of an officer of the Corporation to such effect. SECTION 3.04 - REDEMPTION OF WARRANTS (1) If the Corporation fails to obtain Transaction Approval on or prior to the Qualification Deadline, the Corporation shall forthwith after such failure (but in any event within five business days following the Qualification Deadline) give notice thereof to each of the Warrantholders and to the Trustee (the date of such notice being hereafter referred to as the "Notice Date"). Such notice shall specify (i) that the Corporation shall be deemed to have redeemed all of the Warrants on the Notice Date, and that each Warrantholder shall be deemed to have sold his Warrants to the Corporation on the Notice Date and, in connection therewith, to have surrendered his Warrants for cancellation, in each case, for a redemption price per Warrant equal to the Redemption Amount and (ii) that the Trustee shall, not later than three Business Days after the Notice Date, send by ordinary mail to each such Warrantholder, or to such person as such holder may otherwise specify by written notice to the Trustee prior to such mailing, at the address of such holder or, if so specified, of such person, a cheque or bank draft made payable to or to the order of such holder or, if so specified, such person, in an aggregate amount equal to the Redemption Amount for each unexercised Warrant held by such Warrantholder less applicable withholding taxes, if any. 24 - 19 - (2) If the Corporation fails to obtain Transaction Approval on or prior to the Qualification Deadline as contemplated by subsection 3.04(1), on the Notice Date the Corporation shall redeem, and shall be deemed to have redeemed, all of the Warrants outstanding on such date and each Warrantholder shall sell, and be deem to have sold, his Warrants to the Corporation on such date and, in connection therewith, to have surrendered his Warrants for cancellation, in each case, for a redemption price per Warrant equal to the Redemption Amount and, in each case, without any further action on the part of the Corporation or any Warrantholder. Within three Business Days of the Corporation having given the notice contemplated by subsection 3.04(1), the Trustee shall send by ordinary mail to each Warrantholder, or to such person as such holder may otherwise specify by written notice to the Trustee prior to such mailing, at the address of such holder or, if so specified, such person, a cheque or bank draft made payable to or to the order of such holder or, if so specified, such person, in an aggregate amount equal to the Redemption Amount for each unexercised Warrant held by such Warrantholder less applicable withholding taxes, if any. Subject to the Corporation's obligations pursuant to Section 3.05, the Corporation hereby authorizes and directs the Trustee, and the Trustee is hereby authorized and directed, to use the Escrowed Funds to satisfy all such cheques and/or bank drafts issued in payment of the aggregate Redemption Amount as aforesaid. (3) Upon such payment and the cheque or bank draft being satisfied at par on presentation, all rights under any Warrant in respect of which such payment has been made will wholly cease and terminate and the Warrant certificate therefor will be void and of no further force or effect. (4) If a Warrantholder requests that a cheque or bank draft referred to above be made payable to a person other than the registered Warrantholder, the Warrantholder's signature on his written notice to the Trustee specifying such other person should be guaranteed by a Canadian chartered bank, by a trust company or a member firm of The Toronto Stock Exchange. (5) Any payment made in accordance with these provisions shall, to the extent of the sum represented thereby, satisfy and discharge all liability of the Corporation with respect to such payment, unless the cheque or bank draft is not paid at par on presentation. In the event of non-receipt of any cheque or bank draft by a person to whom it is so sent as aforesaid, or the loss or destruction thereof, the Trustee will issue to such person a replacement cheque or bank draft for like amount upon being furnished with such evidence of non-receipt, loss or destruction and with such indemnity as the Trustee may reasonably require. The balance of the funds held by the Trustee, if any, after any payments referred to above, will be paid to the Corporation not later than 12:00 (noon) (Toronto time) on June 1, 1998. 25 - 20 - SECTION 3.05 - CORPORATION TO FUND SHORTFALL To the extent that the Escrowed Funds are insufficient to permit the Trustee to pay the aggregate Redemption Amount as aforesaid, the Corporation shall provide to the Trustee, by certified cheque or bank draft, sufficient funds in sufficient time to permit the Trustee to pay and satisfy the aggregate Redemption Amount as aforesaid. SECTION 3.06 - TRANSACTION APPROVAL For greater certainty, if the Corporation obtains Transaction Approval on or prior to the Qualification Deadline, the Corporation shall have no further obligation, nor any right, to redeem the Warrants and the provisions of subsection 3.04(1) hereof shall be of no further force or effect. In such case, the Corporation shall have no obligation to give notice of the obtaining of Transaction Approval to any Warrantholder or to the Trustee. ARTICLE FOUR TRIGGERING EVENT SECTION 4.01 - TRIGGERING EVENT If for any reason, other than by reason of an Event of Force Majeure (in which case the Clearance Date shall be extended by a period of time equal to the period during which such Event of Force Majeure exists), Transaction Approval has been obtained but the Clearance Date does not occur by 5:00 p.m. (local time) on the Qualification Deadline or the Corporation is unable to file the Final Prospectus with the Securities Commission of any Designated Province by 5:00 p.m. (local time) on the Qualification Deadline (a "TRIGGERING EVENT"), the Corporation shall forthwith give notice of that fact to the Trustee and to each of the Warrantholders resident in the relevant Designated Province(s) (non-Canadian resident holders of Warrants being deemed to be resident in the Province of Ontario for this purpose), which notice shall also describe the change in the exercise rights attaching to the Warrants held by such Warrantholders as a result of such Triggering Event. SECTION 4.02 - CHANGE IN EXERCISE RIGHTS Upon the occurrence during the Exercise Period of a Triggering Event with respect to a Designated Province, each Warrant held by a holder resident or deemed resident in such province shall thereafter entitle the holder, without further action being required to be taken hereunder, to acquire (subject to subsection 5.01(2)), at no additional cost, 1.09 Exchangeable Shares or such other kind and amount of Underlying Shares as is herein provided in accordance with the 26 - 21 - provisions of this Indenture. In such case, but without derogating from the Corporation's obligation to use its reasonable efforts to obtain from each of the Securities Commissions in the Designated Provinces, as soon as practicable, a receipt or similar document for the Final Prospectus, the Exchangeable Shares issued upon the exercise or deemed exercise of the Warrants will be subject to restrictions on the resale thereof in accordance with applicable Securities Laws and U.S. Securities Laws and may bear a legend to such effect. ARTICLE FIVE EXERCISE OF WARRANTS SECTION 5.01 - METHOD OF EXERCISE OF WARRANTS (1) The holder of any Warrant may exercise during the Exercise Period the right thereby conferred on such holder to acquire without further payment (except as provided in subsection 5.01(2)) the Underlying Shares to which such Warrant entitles the holder by surrendering such Warrant to the Trustee at any time during the Exercise Period at its principal stock and bond transfer office in the City of Toronto (or at such additional place or places as may be decided by the Corporation from time to time with the approval of the Trustee) with a duly completed and executed exercise form substantially in the form set out in the Warrant certificate. A Warrant with the duly completed and executed exercise form shall be deemed to be surrendered only upon personal delivery thereof to, or if sent by mail or other means of transmission upon actual receipt thereof by, the Trustee. (2) Any exercise form referred to in subsection 5.01(1) shall be signed by the Warrantholder. If any of the Underlying Shares issuable upon the exercise of Warrants by a holder are to be issued to a person or persons other than the Warrantholder, the signatures set out in the exercise form referred to in subsection 5.01(1) shall be guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange and the Warrantholder shall pay to the Corporation or the Trustee all applicable transfer or similar taxes and the Corporation shall not be required to issue or deliver certificates evidencing Underlying Shares unless or until such Warrantholder shall have paid to the Corporation or the Trustee on behalf of the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid or that no such tax is due. The exercise form attached to the Warrant certificate shall be completed to specify the person or persons in whose name or names the Underlying Shares to be issued upon exercise are to be registered, such person's or persons' address or addresses and the number of Underlying Shares to be issued to each person if more than one is so specified. 27 - 22 - SECTION 5.02 - AUTOMATIC EXERCISE (1) If at the Time of Expiry the holder of a Warrant certificate has not exercised his right to acquire Underlying Shares during the Exercise Period in accordance with the provisions of Section 5.01, the Warrants held by such Warrantholder shall be deemed to have been exercised by such Warrantholder, without any further action on the part of such Warrantholder, immediately prior to the expiry of the Exercise Period. (2) If a Clearance Date occurs during the Exercise Period, the Corporation shall forthwith give notice of such occurrence, together with copies of the receipts for the Final Prospectus, to the Trustee. (3) As soon as practicable following the automatic exercise of the Warrants pursuant to this Section 5.02, the Trustee shall notify each of the holders of such Warrants as have been automatically exercised to the effect that such Warrants have been automatically exercised and that the holders thereof have acquired the Underlying Shares and shall be entered in the relevant register(s) of holders of Underlying Shares, in each case, effective as at the Expiry Time, and shall receive certificates for the Underlying Shares to which they have become entitled. SECTION 5.03 - EFFECT OF EXERCISE OF WARRANTS (1) Upon compliance by the Warrantholder with the provisions of Section 5.01 or the automatic exercise of the Warrants pursuant to Section 5.02, the Underlying Shares issuable upon the exercise of the Warrants shall be deemed to have been issued and the person to whom such Underlying Shares are to be issued shall be deemed to have become the holder of record of such Underlying Shares on the Exercise Date unless the transfer registers of the Corporation for the Exchangeable Shares shall be closed on such date, in which case the Underlying Shares subscribed for shall be deemed to have been issued and such person shall be deemed to have become the holder of record of such Underlying Shares on the date on which such transfer registers are reopened. (2) Forthwith following the due exercise by a Warrantholder of Warrants in accordance with Section 5.01 or the automatic exercise of the Warrants pursuant to Section 5.02, the Trustee shall deliver to the Corporation a notice setting out the particulars of the Warrants exercised, the person in whose name the Underlying Shares are to be issued and the address of such person. (3) Within three Business Days of receipt of the notice referred to in subsection 5.03(2), the Corporation shall cause to be mailed to the person in whose name the Underlying Shares issuable upon the exercise of the Warrants are to be issued, as specified in the exercise form completed on the Warrant, at the address specified therein, or, if so specified in such exercise form, cause to be delivered to such person at the office of the Trustee where such Warrant was surrendered, or in the 28 - 23 - event of the automatic exercise of the Warrants pursuant to Section 5.02, to the applicable Warrantholder at his address specified in the register for the Warrants, a certificate or certificates for the Underlying Shares to which the Warrantholder is entitled. (4) If at the time of any exercise of the Warrants there remain trading restrictions on the Underlying Shares pursuant to applicable Securities Laws, the Corporation may, upon the advice of counsel, endorse any certificates representing the Underlying Shares to such effect. SECTION 5.04 - CANCELLATION OF WARRANT CERTIFICATES All Warrant certificates surrendered to the Trustee pursuant to Section 2.06, 2.11 or 5.01 shall be cancelled by the Trustee. All Warrant certificates deemed to have been exercised pursuant to Section 5.02 shall be deemed to have been cancelled by the Trustee. All Warrants represented by Warrant certificates that have been cancelled or have been deemed to have been cancelled pursuant to this Section 5.04 shall be without further force or effect whatsoever. SECTION 5.05 - NOTICE OF EXTENSION OF QUALIFICATION DEADLINE If the Corporation and the Underwriters extend the Qualification Deadline, the Corporation shall forthwith give notice in writing thereof to the Trustee and the Warrantholders. SECTION 5.06 - LEGEND ON EXCHANGEABLE SHARES All certificates representing Exchangeable Shares shall have typed thereon the following legend: "The Exchangeable Shares issuable upon exercise of the Special Warrants and the shares of Common Stock, par value U.S.$0.01 per share, of The Learning Company, Inc. (the "Common Stock") issuable upon exchange of the Exchangeable Shares have not been registered under the Securities Act of 1933, as amended, of the United States of America (the "U.S. Securities Act"); the Exchangeable Shares and the Common Stock may not be offered, sold or otherwise transferred within the United States or to, or for the account or benefit of, any U.S. person (as such terms are defined in Regulation S promulgated under the U.S. Securities Act) unless such offer, sale or transfer is covered by or made pursuant to an effective registration statement under the U.S. Securities Act or pursuant to an exemption from registration under the U.S. Securities Act, nor may any Exchangeable Share be offered, sold or otherwise transferred 29 - 24 - within the United States or to, or for the account or benefit of, any U.S. person unless the issuance of the Common Stock is registered under an effective registration statement under the U.S. Securities Act or an exemption from registration under the U.S. Securities Act is available for the exchange of the Exchangeable Shares. Any holder that surrenders this certificate in exchange for Common Stock prior to effectiveness of a registration statement filed under the U.S. Securities Act covering such exchange must certify that the holder is not a U.S. person." ARTICLE SIX COVENANTS SECTION 6.01 - GENERAL COVENANTS The Corporation covenants with the Trustee that so long as any Warrants remain outstanding: (1) It will at all times maintain its corporate existence and will carry on and conduct its business in accordance with good business practice. (2) It will send to each Warrantholder copies of all financial statements and other material furnished to the holders of Exchangeable Shares after the date of this Indenture. (3) It will reserve and there will remain unissued out of its authorized capital a sufficient number of Underlying Shares to satisfy the rights of acquisition provided for herein. (4) It will cause the Underlying Shares from time to time subscribed for pursuant to the Warrants in the manner herein provided and the certificates representing such Underlying Shares to be duly issued and delivered in accordance with the Warrants and the terms hereof. (5) All Exchangeable Shares that shall be issued upon exercise of the right to acquire provided for herein shall be issued as fully paid and non-assessable and the holders thereof shall not be liable to the Corporation or its creditors in respect thereof. (6) It shall use its reasonable efforts to obtain, as soon as practicable, Transaction Approval and, as soon as practicable thereafter, to obtain from each of the Securities Commissions in the Designated Provinces a receipt or similar document for the Final Prospectus. 30 - 25 - (7) It will use its reasonable efforts to maintain the listing of the Exchangeable Shares on The Toronto Stock Exchange and to ensure that the Exchangeable Shares issuable upon the exercise of the Warrants will be listed and posted for trading on such exchange simultaneously with or as soon as practicable following their issue. (8) It will use its reasonable best efforts to maintain its status as a reporting issuer (or analogous entity) as set out in paragraph 4(i) of Schedule "A" of the Subscription Agreements and to continue to be in compliance with its obligations under the Securities Laws of such Provinces, without default, from the date hereof up to and including the first anniversary of the Closing Date. (9) Subject only to the obtaining by the Corporation of Shareholder Approval, the issue and sale of the Warrants do not and will not result in a breach by the Corporation of, and do not and will not create a state of facts which, after notice or lapse of time or both, will result in a breach by the Corporation of any applicable laws and do not and will not conflict with any of the terms, conditions or provisions of the articles of the Corporation or by-laws or resolutions of the Corporation or any trust indenture, loan agreement or any other agreement or instrument to which the Corporation is a party or by which it is contractually bound on the date hereof. (10) It will call and hold the Shareholder Meeting prior to the Qualification Deadline and, immediately following the holding of the Shareholder Meeting, will inform the Trustee of the results thereof. SECTION 6.02 - NOTICE TO SECURITIES COMMISSIONS The Corporation will give written notice of the issue of Underlying Shares pursuant to the exercise of Warrants in such detail as may be required to The Toronto Stock Exchange and to each Securities Commission in each Designated Province in which there is legislation requiring the giving of any such notice. SECTION 6.03 - TRUSTEE'S REMUNERATION AND EXPENSES The Corporation covenants that it will pay to the Trustee the fees agreed to by the Corporation and the Trustee from time to time for the Trustee's services hereunder and will pay or reimburse the Trustee upon its request for all its reasonable expenses and disbursements arising from the administration or execution of the trusts hereby created (including the reasonable compensation and the disbursements of its counsel and all other advisers, experts, accountants and assistants not regularly in its employ) both before any default hereunder and thereafter until all duties of the Trustee hereunder shall be finally and fully performed, except any such expense or disbursement in 31 - 26 - connection with or related to or required to be made as a result of the gross negligence, wilful misconduct or bad faith of the Trustee. SECTION 6.04 - PERFORMANCE OF COVENANTS BY TRUSTEE If the Corporation shall fail to perform any of its covenants contained in this Indenture and the Corporation has not rectified such failure within 15 Business Days after receiving written notice from the Trustee of such failure, the Trustee may notify the Warrantholders of such failure on the part of the Corporation or may itself perform any of the said covenants capable of being performed by it but shall be under no obligation to perform said covenants or to notify the Warrantholders of such performance by it. All reasonable sums expended or disbursed by the Trustee in so doing shall be repayable as provided in Section 6.03. No such performance, expenditure or disbursement by the Trustee shall be deemed to relieve the Corporation of any default hereunder or of its continuing obligations under the covenants herein contained. SECTION 6.05 - RIGHT TO DIVIDENDS OR DISTRIBUTIONS If, during the Exercise Period, the Corporation shall pay any dividend or make any distribution to all or substantially all of the holders of Exchangeable Shares or if the Corporation declares any dividend or provides for any distribution payable to all or substantially all of the holders of Exchangeable Shares of record during that period, Warrantholders who hold any unexercised Warrants on the date of payment or date of record as the case may be shall be entitled to a payment in compensation for the making of such dividend or distribution mutatis mutandis, as if they had exercised their Warrants and acquired Exchangeable Shares thereunder immediately prior to the effective date or record date of the dividend or distribution. For cash dividends, this entitlement shall be satisfied by the payment of such amounts by the Corporation to the holders of the Warrants. For stock dividends or distributions in respect of which an adjustment can be made in the number of Exchangeable Shares to be delivered to the Warrantholder upon exercise of Warrants pursuant to paragraph sections 2.13 and 2.14, this entitlement shall be satisfied by such an adjustment. 32 - 27 - ARTICLE SEVEN ENFORCEMENT SECTION 7.01 - SUITS BY WARRANTHOLDERS All or any of the rights conferred upon a Warrantholder by the terms of the Warrants held by such Warrantholder and/or this Indenture may be enforced by such Warrantholder by appropriate legal proceedings, but subject to the rights that are hereby conferred upon the Trustee and subject to the provisions of Section 8.10. SECTION 7.02 - IMMUNITY OF SHAREHOLDERS, ETC. The Trustee and, by the acceptance of the Warrant certificates and as part of the consideration for the issue of the Warrants, the Warrantholders hereby waive and release any right, cause of action or remedy now or hereafter existing in any jurisdiction against any person in his capacity as an incorporator or any past, present or future Shareholder or other securityholder, director, officer, employee or agent of the Corporation for the creation and issue of the Underlying Shares pursuant to any Warrant or on any covenant, agreement, representation or warranty by the Corporation herein or in the Warrant certificates contained. The foregoing, with respect to the officers and directors of the Corporation, shall be subject to rights of action for rescission or damages which Warrantholders may have pursuant to applicable Securities Laws. SECTION 7.03 - LIMITATION OF LIABILITY The obligations hereunder are not personally binding upon, nor shall resort hereunder be had to, the directors or shareholders of the Corporation or any of the past, present or future directors or shareholders of the Corporation or any of the past, present or future officers, employees or agents of the Corporation. Only the property of the Corporation shall be bound in respect hereof. ARTICLE EIGHT MEETINGS OF WARRANTHOLDERS SECTION 8.01 - RIGHT TO CONVENE MEETINGS The Trustee may at any time and from time to time, and shall on receipt of a written request of the Corporation or of a Warrantholders' Request, convene a meeting of the Warrantholders provided that the Trustee is indemnified and funded to its reasonable satisfaction by the Corporation 33 - 28 - or by the Warrantholders signing such Warrantholders' Request against the costs, charges, expenses and liabilities that may be incurred in connection with the calling and holding of such meeting. If within five Business Days after the receipt of a written request of the Corporation or a Warrantholders' Request and funding and indemnity given as aforesaid the Trustee fails to give the requisite notice specified in Section 8.02 to convene a meeting, the Corporation or such Warrantholders, as the case may be, may convene such meeting. Every such meeting shall be held in the City of Toronto or at such other place as may be approved by the Trustee. SECTION 8.02 - NOTICE At least 15 days' prior notice of any meeting of Warrantholders shall be given to the Warrantholders in the manner provided for in Section 11.01 and a copy of such notice shall be delivered to the Trustee unless the meeting has been called by it and to the Corporation unless the meeting has been called by it. Such notice shall state the time and place of the meeting, the general nature of the business to be transacted and shall contain such information as is reasonably necessary to enable the Warrantholders to make a reasoned decision on the matter. It shall not be necessary for any such notice to set out the terms of any resolution to be proposed or any of the provisions of this Article Eight. The notice convening any such meeting may be signed by an appropriate officer of the Trustee or of the Corporation or the person designated by such Warrantholders, as the case may be. SECTION 8.03 - CHAIR The Trustee may nominate in writing an individual to be Chair of the meeting and if no individual is so nominated, or if the individual so nominated is not present within 15 minutes after the time fixed for the holding of the meeting, the Warrantholders present in person or by proxy shall appoint an individual present to be Chair. SECTION 8.04 - QUORUM Subject to the provisions of Section 8.11, at any meeting of the Warrantholders a quorum shall consist of Warrantholders present in person or represented by proxy and holding at least 10% of the aggregate number of Warrants then unexercised and outstanding, provided that at least two persons entitled to vote thereat are personally present. If a quorum of the Warrantholders shall not be present within one half-hour from the time fixed for holding any meeting, the meeting, if summoned by the Warrantholders or on a Warrantholders' Request, shall be dissolved; but in any other case the meeting shall be adjourned to the same day in the next week at the same time and place to the extent possible and, subject to the provisions of Section 8.11, no notice of the adjournment need be given. Any business may be brought before or dealt with at an adjourned meeting which might have been dealt with at the original meeting in accordance with the notice 34 - 29 - calling the same. At the adjourned meeting the Warrantholders present in person or represented by proxy shall form a quorum and may transact the business for which the meeting was originally convened notwithstanding that they may not hold at least 10% of the aggregate number of Warrants then unexercised and outstanding. No business shall be transacted at any meeting unless a quorum is present at the commencement of business. SECTION 8.05 - POWER TO ADJOURN The Chair of any meeting at which a quorum of the Warrantholders is present, with the consent of the meeting, may adjourn any such meeting and no notice of such adjournment need be given except such notice, if any, as the meeting may prescribe. SECTION 8.06 - SHOW OF HANDS Every question submitted to a meeting shall be decided in the first place by a majority of the votes given on a show of hands except that votes on an extraordinary resolution shall be given in the manner hereinafter provided. At any such meeting, unless a poll is duly demanded as herein provided, a declaration by the Chair that a resolution has been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact. SECTION 8.07 - POLL AND VOTING On every extraordinary resolution, and when demanded by the Chair or by one or more of the Warrantholders acting in person or by proxy on any other question submitted to a meeting and after a vote by show of hands, a poll shall be taken in such manner as the Chair shall direct. Questions other than those required to be determined by extraordinary resolution shall be decided by a majority of the votes cast on a poll. On a show of hands, every person who is present and entitled to vote, whether as a Warrantholder or as proxy for one or more absent Warrantholders, or both, shall have one vote. On a poll, each Warrantholder present in person or represented by a proxy duly appointed by instrument in writing shall be entitled to one vote in respect of each Warrant that he (or the Warrantholder appointing him as proxy) holds. A proxyholder need not be a Warrantholder. The Chair of any meeting shall be entitled to vote, both on a show of hands and on a poll, in respect of any Warrants held or represented by him. 35 - 30 - SECTION 8.08 - REGULATIONS Subject to the provisions of this Indenture, the Trustee or the Corporation with the approval of the Trustee from time to time may make and vary such regulations as it shall consider necessary or appropriate: (a) for the deposit of instruments appointing proxies at such place and time as the Trustee, the Corporation or the Warrantholders convening the meeting, as the case may be, may direct in the notice convening the meeting; (b) for the deposit of instruments appointing proxies at some approved place other than the place at which the meeting is to be held and enabling particulars of such instruments appointing proxies to be mailed or telecopied before the meeting to the Corporation or to the Trustee at the place where the meeting is to be held and for the voting of proxies so deposited as though the instruments themselves were produced at the meeting; (c) for the form of the instrument of proxy; and (d) generally for the calling of meetings of Warrantholders and the conduct of business thereat. Any regulations so made shall be binding and effective and the votes given in accordance therewith shall be valid and shall be counted. Save as such regulations may provide, the only persons who shall be recognized at any meeting as a Warrantholder, or be entitled to vote or be present at the meeting in respect thereof (subject to Section 8.09), shall be Warrantholders or persons holding proxies of Warrantholders. SECTION 8.09 - CORPORATION, TRUSTEE AND COUNSEL MAY BE REPRESENTED The Corporation and the Trustee, by their respective employees, directors and officers, and the counsel for each of the Corporation, the Warrantholders and the Trustee may attend any meeting of the Warrantholders and speak thereto but shall have no vote as such. 36 - 31 - SECTION 8.10 - POWERS EXERCISABLE BY EXTRAORDINARY RESOLUTION In addition to all other powers conferred upon them by any other provisions of this Indenture or by law, the Warrantholders at a meeting shall have the power, exercisable from time to time by extraordinary resolution: (a) to agree with the Corporation to any modification, abrogation, alteration, compromise or arrangement of the rights of Warrantholders and/or the Trustee in its capacity as Trustee hereunder (subject to the consent of the Trustee) or on behalf of the Warrantholders against the Corporation whether such rights arise under this Indenture or the Warrants or otherwise, except that a change in the Exercise Period or the Purchase Price of the Warrants shall not be binding upon a Warrantholder who does not consent thereto; (b) to amend or repeal any extraordinary resolution previously passed or sanctioned by the Warrantholders; (c)) to direct or authorize the Trustee, subject to receipt of funding and indemnity, to enforce any of the covenants on the part of the Corporation contained in this Indenture or the Warrants or to enforce any of the rights of the Warrantholders in any manner specified in such extraordinary resolution or to refrain from enforcing any such covenant or right; (d) to waive and direct the Trustee to waive any default on the part of the Corporation in complying with any provisions of this Indenture or the Warrants, either unconditionally or upon any conditions specified in such extraordinary resolution; (e) to restrain any Warrantholder from taking or instituting any suit, action or proceeding against the Corporation for the enforcement of any of the covenants on the part of the Corporation contained in this Indenture or the Warrants or to enforce any of the rights of the Warrantholders, except for a suit or action against the Corporation to compel payment to a Warrantholder in respect of monies owing to him in accordance with the provisions of Section 6.05; (f) to direct any Warrantholder who, as such, has brought any suit, action or proceeding to stay or discontinue or otherwise deal with any such suit, action or proceeding, upon payment of the costs, charges and expenses reasonably and properly incurred by such Warrantholder in connection therewith, except for a suit or action against the Corporation to compel payment to a Warrantholder in respect of monies owing to him in accordance with the provisions of Section 6.05; and 37 - 32 - (g) to remove the Trustee and appoint a successor trustee. SECTION 8.11 - MEANING OF EXTRAORDINARY RESOLUTION (1) The expression "EXTRAORDINARY RESOLUTION" when used in this Indenture means, subject to this Section 8.11 and Section 8.14, a resolution proposed at a meeting of Warrantholders duly convened for that purpose and held in accordance with the provisions of this Article Seven at which there are present in person or represented by proxy Warrantholders holding at least 25% of the aggregate number of then outstanding unexercised Warrants and passed by the affirmative votes of Warrantholders holding not less than 66 2/3% of the aggregate number of the then outstanding unexercised Warrants represented at the meeting and voted on the poll upon such resolution. (2) If, at any meeting called for the purpose of passing an extraordinary resolution, Warrantholders holding at least 25% of the aggregate number of then outstanding unexercised Warrants are not present in person or by proxy within one half-hour after the time appointed for the meeting, then the meeting, if convened by Warrantholders or on a Warrantholders' Request, shall be dissolved; but in any other case it shall stand adjourned to such day, being not less than four or more than 10 Business Days later, and to such place and time as may be appointed by the Chair. Not less than three Business Days' prior notice shall be given of the time and place of such adjourned meeting in the manner provided in Article Eleven. Such notice shall state that at the adjourned meeting the Warrantholders present in person or represented by proxy shall form a quorum but it shall not be necessary to set forth the purposes for which the meeting was originally called or any other particulars. At the adjourned meeting the Warrantholders present in person or represented by proxy shall form a quorum and may transact the business for which the meeting was originally convened and a resolution proposed at such adjourned meeting and passed by the requisite vote as provided in subsection 8.11(1) shall be an extraordinary resolution within the meaning of this Indenture notwithstanding that Warrantholders holding at least 25% of the aggregate number of then outstanding unexercised Warrants are not present in person or represented by proxy at such adjourned meeting. (3) Votes on an extraordinary resolution shall always be given on a poll and no demand for a poll on an extraordinary resolution shall be necessary. SECTION 8.12 - POWERS CUMULATIVE It is hereby declared and agreed that any one or more of the powers or any combination of the powers in this Indenture stated to be exercisable by the Warrantholders by extraordinary resolution or otherwise may be exercised from time to time and the exercise of any one or more of such powers or any combination of powers from time to time shall not be deemed to 38 - 33 - exhaust the right of the Warrantholders to exercise such powers or combination of powers then or thereafter from time to time. SECTION 8.13 - MINUTES Minutes of all resolutions and proceedings at every meeting of Warrantholders shall be made and duly entered in books to be from time to time provided for that purpose by the Trustee at the reasonable expense of the Corporation and any such minutes, if signed by the Chair of the meeting at which such resolutions were passed or proceedings held or by the Chair of the next succeeding meeting of the Warrantholders, shall be prima facie evidence of the matters therein stated and, until the contrary is proved, every such meeting in respect of the proceedings of which minutes shall have been made shall be deemed to have been duly convened and held and all resolutions passed thereat or proceedings taken shall be deemed to have been duly passed and taken. SECTION 8.14 - INSTRUMENTS IN WRITING All actions that may be taken and all powers that may be exercised by the Warrantholders at a meeting held as provided in this Article Seven also may be taken and exercised by Warrantholders holding at least 66 2/3% of the aggregate number of then outstanding unexercised Warrants by an instrument in writing signed in one or more counterparts by such Warrantholders in person or by attorney duly appointed in writing and the expression "extraordinary resolution" when used in this Indenture shall include an instrument so signed. SECTION 8.15 - BINDING EFFECT OF RESOLUTIONS Every resolution and every extraordinary resolution, subject to subsection 8.10(a), passed in accordance with the provisions of this Article Seven at a meeting of Warrantholders shall be binding upon all the Warrantholders, whether present at or absent from such meeting, and every instrument in writing signed by Warrantholders in accordance with Section 8.14 shall be binding upon all the Warrantholders, whether signatories thereto or not, and each and every Warrantholder and the Trustee (subject to the provisions for indemnity herein contained) shall be bound to give effect accordingly to every such resolution and instrument in writing. In the case of an instrument in writing, the Trustee shall give notice in the manner contemplated in Section 11.01 of the effect of the instrument in writing to all Warrantholders and the Corporation as soon as is reasonably practicable. 39 - 34 - SECTION 8.16 - HOLDINGS BY THE CORPORATION OR SUBSIDIARIES OF THE CORPORATION DISREGARDED In determining whether Warrantholders holding the required number of outstanding Warrants are present at a meeting of Warrantholders for the purpose of determining a quorum or the number of holders who have concurred in any consent, waiver, extraordinary resolution, Warrantholders' Request or other action under this Indenture, Warrants owned legally or beneficially by the Corporation or any associate or affiliate (as those terms are defined in the Securities Act (Ontario)) of the Corporation shall be disregarded. The Trustee shall be protected in acting and relying upon a certificate of the Corporation, to be provided on request of the Trustee, detailing the exact registration of any Warrants owned legally or beneficially by the Corporation or any associate or affiliate thereof. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 9.01 - SUPPLEMENTAL INDENTURES Subject to the provisions of this Indenture, from time to time the Corporation and the Trustee may execute and deliver and, when so directed by this Indenture, they shall execute and deliver by their proper officers, indentures or instruments supplemental hereto, which thereafter shall form part hereof, for any one or more or all of the following purposes: (a) setting forth adjustments in the application of Article Two; (b) adding to the provisions hereof such additional covenants and enforcement provisions as in the opinion of counsel are necessary or advisable, provided that the same, in the opinion of the Trustee relying on the opinion of counsel, are not prejudicial to the interests of the Warrantholders as a group; (c) giving effect to any extraordinary resolution passed as provided in Article Eight; (d) making such provisions not inconsistent with this Indenture as may be necessary or desirable with respect to matters or questions arising hereunder, provided that such provisions are not, in the opinion of the Trustee relying on the opinion of counsel, prejudicial to the interests of the Warrantholders as a group; 40 - 35 - (e) adding to or amending the provisions hereof in respect of the transfer of Warrants, making provision for the exchange of Warrants and making any modification in the forms of the Warrant certificates that does not affect the substance thereof; (f) making any additions to, deletions from or alterations to the provisions of this Indenture which, in the opinion of the Trustee relying on the advice of counsel, do not materially and adversely affect the interests of the Warrantholders and are necessary or advisable in order to incorporate, reflect or comply with any Applicable Legislation; and (g) for any other purpose not inconsistent with the terms of this Indenture, including the correction or rectification of any ambiguities, defective or inconsistent provisions, errors or omissions herein, provided that, in the opinion of the Trustee relying on the opinion of counsel, the rights of the Trustee and of the Warrantholders as a group are not prejudiced thereby. SECTION 9.02 - SUCCESSOR CORPORATIONS In the case of the consolidation, amalgamation, arrangement, merger or transfer of the undertaking or assets of the Corporation as an entirety or substantially as an entirety to another person (a "SUCCESSOR"), forthwith following the occurrence of such event the successor resulting from such consolidation, amalgamation, arrangement, merger or transfer (if not the Corporation) shall expressly assume, by supplemental indenture satisfactory in form to the Trustee relying on the advice of counsel and executed and delivered to the Trustee, the due and punctual performance and observance of each and every covenant and condition of this Indenture to be performed and observed by the Corporation and, in any event, shall be bound by the provisions hereof and all obligations for the due and punctual performance and observance of each and every covenant and obligation contained in this Indenture to be performed by the Corporation. ARTICLE TEN CONCERNING THE TRUSTEE SECTION 10.01 - TRUST INDENTURE LEGISLATION (1) In this Article, the term "APPLICABLE LEGISLATION" means the provisions, if any, of the Business Corporations Act (Ontario) and any other statute of Ontario or Canada and of regulations under any such named or other statute relating to trust indentures and/or to the rights, 41 - 36 - duties and obligations of trustees and of corporations under trust indentures to the extent that such provisions are at the time in force and applicable to this Indenture. (2) If and to the extent that any provision of this Indenture limits, qualifies or conflicts with a mandatory requirement of Applicable Legislation, such mandatory requirement shall prevail. (3) The Corporation and the Trustee agree that at all times in relation to this Indenture and any action to be taken hereunder each will observe and comply with and be entitled to the benefit of Applicable Legislation. SECTION 10.02 - RIGHTS AND DUTIES OF TRUSTEE (1) In the exercise of the rights and duties prescribed or conferred by the terms of this Indenture, the Trustee shall act honestly and in good faith with a view to the best interests of the Warrantholders and shall exercise the degree of care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances. No provision of this Indenture shall be construed to relieve the Trustee from, or require any other person to indemnify the Trustee against, liability for its own gross negligence, wilful misconduct or bad faith. (2) Subject only to subsection 10.02(1), the Trustee shall not be bound to do or take any act, action or proceeding for the enforcement of any of the obligations of the Corporation under this Indenture unless and until it shall have received a Warrantholders' Request specifying the act, action or proceeding that the Trustee is requested to take. The obligation of the Trustee to commence or continue any act, action or proceeding for the purpose of enforcing any rights of the Trustee or the Warrantholders hereunder shall be conditional upon the Warrantholders furnishing, when required by notice in writing by the Trustee, sufficient funds to commence or continue such act, action or proceeding and an indemnity reasonably satisfactory to the Trustee to protect and hold harmless the Trustee against the costs, charges, expenses and liabilities to be incurred thereby and any loss and damage it may suffer by reason thereof. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties or in the exercise of any of its rights or powers unless indemnified as aforesaid. (3) The Trustee, before commencing or at any time during the continuance of any such act, action or proceeding, may require the Warrantholders at whose instance it is acting to deposit with the Trustee the Warrants held by them, for which Warrants the Trustee shall issue receipts. (4) Every provision of this Indenture that by its terms relieves the Trustee of liability or entitles it to rely upon any evidence submitted to it is subject to the provisions of Applicable Legislation, of this Section 10.02 and of Section 10.03. 42 - 37 - SECTION 10.03 - EVIDENCE, EXPERTS AND ADVISERS (1) In addition to the reports, certificates, opinions and other evidence required by this Indenture, the Corporation shall furnish to the Trustee such additional evidence of compliance with any provision hereof in such form as may be prescribed by Applicable Legislation or as the Trustee may reasonably require by written notice to the Corporation. (2) In the exercise of its rights and duties hereunder, the Trustee, if it is acting in good faith, may rely as to the truth of the statements and the accuracy of the opinions expressed therein, upon statutory declarations, opinions, reports, written requests, consents or orders of the Corporation, certificates of the Corporation or other evidence furnished to the Trustee provided that such evidence complies with Applicable Legislation and the Trustee examines the same and determines that such evidence complies with the applicable requirements of this Indenture. (3) Whenever Applicable Legislation requires that evidence referred to in subsection 10.03(1) be in the form of a statutory declaration, the Trustee may accept such statutory declaration in lieu of a certificate of the Corporation required by any provision hereof. Any such statutory declaration may be made by one or more of the chairman, chief executive officer, president or any vice-president of the Corporation. (4) Proof of the execution of an instrument in writing, including a Warrantholders' Request, by any Warrantholder may be made by the certificate of a notary public, or other officer with similar powers, that the person signing such instrument acknowledged to him the execution thereof or by an affidavit of a witness to such execution or in any other manner that the Trustee may consider adequate. (5) The Trustee may employ or retain such counsel, accountants or other experts or advisers as it may reasonably require for the purpose of determining and discharging its duties hereunder, may act on and rely upon, and shall be protected in acting and relying in good faith upon, the advice or opinions so obtained and may pay reasonable remuneration for all services so performed by any of them (any such remuneration paid by the Trustee to be repaid by the Corporation to the Trustee in accordance with Section 6.03), without taxation of costs of any counsel, and shall not be responsible for any misconduct on the part of any of them. SECTION 10.04 - DOCUMENTS, MONEY, ETC. HELD BY TRUSTEE (1) Any securities, documents of title or other instruments that may at any time be held by the Trustee subject to the trusts hereof may be placed in the deposit vaults of the Trustee or of any 43 - 38 - Canadian chartered bank or trust company or deposited for safekeeping with any such bank or trust company. (2) Unless otherwise expressly provided herein, any monies so held pending the application or withdrawal thereof under any provision of this Indenture shall be held in the name of the Trustee in a segregated trust account with any Canadian chartered bank or financial institution (which may be the Trustee or any affiliate or related party), at the rate of interest then current on similar deposits or, on the direction of the Corporation, may be invested in Permitted Investments. Any such direction by the Corporation to the Trustee as to the investment of the funds shall be in writing and shall be provided to the Trustee no later than 9:00 a.m. on the day on which the investment is to be made. Any such direction received by the Trustee after 9:00 a.m. or received on a non-Business Day, shall be deemed to have been given prior to 9:00 a.m. the next Business Day. SECTION 10.05 - ACTIONS BY TRUSTEE TO PROTECT INTERESTS The Trustee shall have the power to institute and to maintain such actions and proceedings as it may consider necessary or expedient to preserve, protect or enforce its interests and the interests of the Warrantholders. SECTION 10.06 - TRUSTEE NOT REQUIRED TO GIVE SECURITY The Trustee shall not be required to give any bond or security in respect of the execution of the trusts and powers of this Indenture or otherwise. SECTION 10.07 - PROTECTION OF TRUSTEE By way of supplement to the provisions of any law for the time being relating to trustees, it is expressly declared and agreed as follows: (1) The Trustee shall not be liable for or by reason of any statements of fact or recitals in this Indenture or in the Warrants (except the representation contained in Section 10.09 or in the certificate of the Trustee on the Warrants) or be required to verify the same. (2) Nothing herein contained shall impose any obligation on the Trustee to see to or to require evidence of the registration or filing (or renewal thereof) of this Indenture or any instrument ancillary or supplemental hereto. (3) The Trustee shall not be bound to give notice to any person of the execution hereof. 44 - 39 - (4) The Trustee shall not incur any liability or responsibility whatsoever or be in any way responsible for the consequence of any breach on the part of the Corporation of any of the covenants herein contained or of any acts of any directors, officers, employees, agents or servants of the Corporation. SECTION 10.08 - REPLACEMENT OF TRUSTEE (1) The Trustee may resign its trust and be discharged from all further duties and liabilities hereunder by giving to the Corporation not less than 45 days' prior notice in writing or such shorter prior notice as the Corporation may accept as sufficient. The Warrantholders by extraordinary resolution shall have the power at any time to remove the existing Trustee and to appoint a new trustee. In the event of the Trustee resigning or being removed as aforesaid or being dissolved, becoming bankrupt, going into liquidation or otherwise becoming incapable of acting hereunder, the Corporation shall forthwith appoint a new trustee unless a new trustee has already been appointed by the Warrantholders. Failing such appointment by the Corporation, within 10 days the retiring Trustee or any Warrantholder may apply to a justice of the Ontario Court (General Division) at the Corporation's expense, on such notice as such justice may direct, for the appointment of a new trustee. Any new trustee so appointed by the Corporation or by the Court shall be subject to removal as aforesaid by the Warrantholders. Any new trustee appointed under any provision of this Section 10.08 shall be a corporation authorized to carry on the business of a trust company in the Province of Ontario and, if required by Applicable Legislation of any other province, in such other province. On any such appointment, the new trustee shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as Trustee without any further assurance, conveyance, act or deed. In addition, there shall be immediately executed, at the expense of the Corporation, all such conveyances or other instruments as may be necessary or advisable, in the opinion of counsel, for the purpose of assuring the same to the new trustee, provided that any resignation or removal of the Trustee and appointment of a successor trustee shall not become effective until the successor trustee shall have executed an appropriate instrument accepting such appointment and, at the request of the Corporation, the predecessor Trustee, upon payment of its outstanding remuneration and expenses, shall execute and deliver to the successor trustee an appropriate instrument transferring to such successor trustee all rights and powers of the Trustee hereunder. (2) Upon the appointment of a successor trustee, the Corporation shall promptly notify the Warrantholders thereof. (3) Any corporation into or with which the Trustee may be merged or consolidated or amalgamated or any corporation succeeding to the trust business of the Trustee shall be the successor to the Trustee hereunder without any further act on its part or of any of the parties hereto, provided that such corporation would be eligible for appointment as a new trustee under subsection 10.08(1). 45 - 40 - (4) Any Warrants certified but not delivered by a predecessor trustee may be certified by the successor trustee in the name of the predecessor or successor trustee. SECTION 10.09 - CONFLICT OF INTEREST (1) The Trustee represents to the Corporation that at the time of execution and delivery hereof no material conflict of interest exists in the Trustee's role as a fiduciary hereunder and agrees that in the event of a material conflict of interest arising hereafter it will, within 90 days after ascertaining that it has such a material conflict of interest, either eliminate the same or resign its trust hereunder to a successor trustee approved by the Corporation. If any such material conflict of interest exists or hereafter shall exist, the validity and enforceability of this Indenture and the Warrants shall not be affected in any manner whatsoever by reason thereof. (2) Subject to subsection 10.09(1), the Trustee in its personal or any other capacity may buy, lend upon and deal in securities of the Corporation and generally may contract and enter into financial transactions with the Corporation or any subsidiary of the Corporation without being liable to account for any profit made thereby. SECTION 10.10 - ACCEPTANCE OF TRUSTS The Trustee hereby accepts the trusts in this Indenture declared and provided for and agrees to perform the same upon the terms and conditions herein set forth, and to hold all rights, interests and benefits contained herein for and on behalf of those persons who become Warrantholders from time to time. SECTION 10.11 - TRUSTEE NOT TO BE APPOINTED RECEIVER The Trustee and any person related to the Trustee shall not be appointed a receiver or receiver and manager or liquidator of all or any part of the assets or undertaking of the Corporation. SECTION 10.12 - INDEMNITY OF TRUSTEE The Corporation hereby indemnifies and holds harmless the Trustee and its officers, directors, employees and agents from and against all reasonable costs, liabilities, expenses and disbursements (including reasonable legal fees and disbursements) that it might incur or to which it might have become subject in any action, suit or other similar legal proceeding that might be instituted against the Trustee arising from or out of any act, omission or error of the Trustee arising pursuant to this Indenture, provided that the Trustee acted in accordance with the standards set forth 46 - 41 - in Section 9.02 and that any such act, omission or error did not constitute negligence, wilful misconduct or bad faith on the part of the Trustee. This Section 10.12 shall survive the resignation or removal of the Trustee or the termination of this Indenture. ARTICLE ELEVEN GENERAL SECTION 11.01 - NOTICE (1) Unless herein otherwise expressly provided, any notice, document or thing required or permitted to be given or delivered hereunder shall be deemed to be properly given or delivered if: (a) delivered in person to the address set out below and acknowledged by written receipt signed by the person receiving such notice; (b) telecopied and confirmed by prepaid registered letter addressed to the party receiving such notice at its respective addresses set out below; or (c) sent by letter (provided that any notice to be so given is not unlikely to reach its destination as a result of any actual or threatened interruption of mail services) or courier delivery addressed to the party receiving such notice at its respective address set out below: the Corporation: SoftKey Software Products Inc. c/o The Learning Company, Inc. One Athenaeum Street Cambridge, Massachusetts U.S.A. 02142 ATTENTION: General Counsel TELECOPY: (617) 494-5660 47 - 42 - the Trustee: CIBC Mellon Trust Company 393 University Avenue 5th Floor Toronto, Ontario M5G 2M7 ATTENTION: Vice President, Client Services TELECOPY: (416) 813-4555 a Warrantholder: the address appearing in the register of holders. (2) Any notice or delivery given in accordance with the provisions of this Section 11.01 shall be deemed to have been given and received: (a) if delivered in person in accordance with the provisions of clause 11.01(1)(a), on the day of delivery in person (provided that such day is a Business Day at the place of receipt and delivery occurs prior to 4:00 p.m. (local time of the recipient) and, if it is not, on the next following Business Day); (b) if telecopied in accordance with the provisions of clause 11.01(1)(b) during the business hours of the recipient, on the date of receipt of the telecopy (provided that such day is a Business Day at the place of receipt and, if it is not, on the next following Business Day) and if telecopied other than during business hours, on the next following Business Day; and (c) if sent by letter or courier delivery in accordance with the provisions of clause 11.01(1)(c), on the date the letter is actually received by the addressee. (3) For greater certainty, a letter delivered by courier where such courier obtains a written acknowledgement of receipt from the party receiving the letter shall be considered a delivery in person in accordance with clause 11.01(1)(a) rather than the sending of a letter in accordance with clause 11.01(1)(c). (4) Any party may from time to time by notice in writing delivered in accordance with the provisions of this Article Eleven change its address for purposes hereof. 48 - 43 - SECTION 11.02 - ACCIDENTAL FAILURE TO GIVE NOTICE TO WARRANTHOLDERS Accidental error or omission in giving notice or accidental failure to give notice to any Warrantholder shall not invalidate any action or proceeding founded thereon. SECTION 11.03 - COUNTERPARTS AND FORMAL DATE This Indenture may be executed in several counterparts each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument and notwithstanding their date of execution shall be deemed to be dated as of the Closing Date. SECTION 11.04 - SATISFACTION AND DISCHARGE OF INDENTURE Upon the date by which all Warrants theretofore certified hereunder have been cancelled or deemed to be cancelled in accordance with Section 5.04, this Indenture, except to the extent that Exchangeable Shares and certificates therefor have not been issued and delivered hereunder or the Corporation has not performed any of its obligations hereunder, shall cease to be of further effect in respect of the Corporation and the Trustee, on written demand of and at the cost and expense of the Corporation and upon delivery to the Trustee of a certificate of the Corporation stating that all conditions precedent to the satisfaction and discharge of this Indenture have been complied with and upon payment to the Trustee of the expenses, fees and other remuneration payable to the Trustee, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture provided that, if the Trustee has not then performed any of its obligations hereunder, any such satisfaction and discharge of the Corporation's obligations hereunder shall not affect or diminish the rights of any Warrantholder or the Corporation against the Trustee. SECTION 11.05 - PROVISIONS OF INDENTURE AND WARRANTS FOR THE SOLE BENEFIT OF PARTIES AND WARRANTHOLDERS Except as provided in Sections 7.02 and 7.03, nothing in this Indenture or the Warrants, expressed or implied, shall give or be construed to give to any person other than the parties hereto and the holders from time to time of the Warrants any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision therein contained, all such covenants and provisions being for the sole benefit of the parties hereto and the Warrantholders. SECTION 11.06 - LANGUAGE The parties hereto confirm their express wish that this Indenture and all documents and agreements directly or indirectly relating thereto be drawn up in the English language. 49 - 44 - Notwithstanding such express wish, the parties agree that any such document or agreement or any part thereof or of this Indenture may be drawn up in the French language. Les parties aux presentes confirment leur volonte expresse que la presente convention ainsi que tous les documents et conventions s'y rattachant directement ou indirectement soient rediges en anglais. Nonobstant cette volonte expresse, les parties aux presentes conviennent que la presente convention ainsi que tous les documents et conventions s'y rattachant directement ou indirectement, ou toute partie de ceux-ci, puissent etre rediges en francais. IN WITNESS WHEREOF the parties hereto have executed this Indenture under the hands of their proper officers in that behalf. SOFTKEY SOFTWARE PRODUCTS INC. By /s/ Neal S. Winneg -------------------------- Authorized Signing Officer CIBC MELLON TRUST COMPANY By /s/ Rebecca Woollatt -------------------------- Authorized Signing Officer By /s/ Susan Clough -------------------------- Authorized Signing Officer 50 SCHEDULE A FORM OF WARRANT CERTIFICATE The following is the form of Warrant certificate referred to in Section 2.02 of the Warrant Indenture: EXERCISABLE ONLY DURING THE PERIOD COMMENCING ON THE BUSINESS DAY FOLLOWING THE DATE ON WHICH TRANSACTION APPROVAL (AS DEFINED HEREIN) IS OBTAINED AND ENDING AT 5:00 P.M. (LOCAL TIME) ON THE DATE THAT IS THE EARLIER OF (I) THE FIRST ANNIVERSARY OF THE DATE HEREOF AND (II) THE SIXTH BUSINESS DAY FOLLOWING THE DATE OF ISSUANCE OF A RECEIPT BY THE SECURITIES REGULATORY AUTHORITY IN THE PROVINCE OF RESIDENCE OF THE HOLDER HEREOF (WHICH MAY ONLY BE ONE OF THE PROVINCES OF BRITISH COLUMBIA, ONTARIO AND QUEBEC AND WILL, IN THE CASE OF PERSONS RESIDENT OUTSIDE CANADA, BE DEEMED TO BE THE PROVINCE OF ONTARIO) FOR A (FINAL) PROSPECTUS RELATING TO THE DISTRIBUTION OF THE EXCHANGEABLE NON-VOTING SHARES OF SOFTKEY SOFTWARE PRODUCTS INC. TO BE ISSUED UPON THE EXERCISE OF THE SPECIAL WARRANTS, IMMEDIATELY AT WHICH TIME THESE SPECIAL WARRANTS SHALL BE DEEMED CONCLUSIVELY TO HAVE BEEN EXERCISED. NO. ____________ Representing ______________ Special Warrants, each such warrant entitling the holder to acquire one Exchangeable Share (or in the circumstances described below 1.09 Exchangeable Shares), subject to adjustment, of SoftKey Software Products Inc. for no additional consideration. NOTE: THESE SPECIAL WARRANTS ARE NON-TRANSFERABLE EXCEPT AS SET FORTH HEREIN. SPECIAL WARRANT OF SOFTKEY SOFTWARE PRODUCTS INC. THIS CERTIFIES that, for value received, the holder hereof, ___________ _______________________________________________ , (the "holder") of the Special Warrants (the "Warrants") of SoftKey Software Products Inc. (the "Corporation") represented hereby is entitled at any time during the period (the "Exercise Period") commencing on the Business Day following the date on which Transaction Approval (as defined herein) is obtained and ending at 5:00 p.m. (local time) (the "Expiry Time") on the date (the "Expiry Date") that is the earlier of (i) November 6, 1998 and (ii) the date that is the sixth Business Day following the date (the "Clearance Date") upon which a receipt is issued by the securities regulatory authority in the province of residence of the holder hereof (which may only be one of the Provinces of British Columbia, Ontario and Quebec and will, in the case of persons resident outside Canada, be deemed to be the Province of Ontario) 51 - 2 - for the (final) prospectus (the "Final Prospectus") of the Corporation qualifying the exchangeable non-voting shares (the "Exchangeable Shares") of the Corporation to be issued upon the exercise of the Warrants, to acquire in accordance with the provisions of the Warrant Indenture (as defined below) one Exchangeable Share (or 1.09 Exchangeable Shares to be issued by the Corporation in the circumstances described below), subject to adjustment, for each Warrant represented hereby without payment of any consideration in addition to the issue price of such Warrant by surrendering to CIBC Mellon Trust Company (the "Trustee") at its principal office in the City of Toronto this Warrant certificate together with an executed exercise form in the form of the attached Exercise Form or any other written notice in a form satisfactory to the Trustee, in either case duly completed and executed PROVIDED THAT UNLESS THE HOLDER HAS SURRENDERED THE WARRANTS REPRESENTED HEREBY FOR EXERCISE PURSUANT TO THE PROVISIONS HEREOF AND OF THE WARRANT INDENTURE DURING THE EXERCISE PERIOD, THE WARRANTS REPRESENTED HEREBY SHALL BE DEEMED TO HAVE BEEN EXERCISED BY THE HOLDER AT THE EXPIRY TIME WITHOUT FURTHER NOTICE TO OR ACTION ON THE PART OF THE HOLDER. For the purposes of this Warrant certificate, "Underwriters" means, collectively, Griffiths McBurney & Partners and First Marathon Securities Limited. Upon the exercise or deemed exercise of the Warrants evidenced hereby, the Corporation shall cause to be issued to the person(s) in whose name(s) the Exchangeable Shares so subscribed for are to be issued (provided that, if the Exchangeable Shares are to be issued to a person other than a holder of this Warrant certificate, the holder's signature on the Exercise Form herein shall be guaranteed by a Canadian chartered bank, by a Canadian trust company or by a member firm of The Toronto Stock Exchange) the number of Exchangeable Shares to be issued to such person(s) and such person(s) shall become a holder in respect of Exchangeable Shares with effect from the date of such exercise and upon due surrender of this Warrant certificate. The Corporation will cause a certificate(s) representing such Exchangeable Shares to be made available for pick-up by such person(s) at 393 University Avenue, 5th Floor, Toronto, Ontario M5G 2M7, or mailed to such person(s) at the address(es) specified in such Exercise Form, within two Business Days after receipt of notice from the Trustee of the exercise of this Warrant. The net proceeds of sale of the Warrants will be deposited on the date hereof in escrow with the Trustee to be held and invested by the Trustee in accordance with the provisions of the Warrant Indenture. In the event that the Corporation fails to obtain Transaction Approval on or prior to March 6, 1998 or such later date as may be agreed upon in writing by the Corporation and the Underwriters (the "Qualification Deadline") the Corporation shall redeem each Warrant for an amount equal to the purchase price paid by the Warrantholder for the Warrant, together with interest thereon as provided in the Warrant Indenture. For the purposes of this Warrant certificate, "Transaction Approval" means Shareholder Approval together with all such other consents and approvals necessary to ensure that the rights and benefits of the holders of Underlying Shares are substantially equivalent to the rights and benefits of the holders of the existing Exchangeable Shares; provided that, for greater certainty Transaction Approval shall not include the filing of, or the 52 - 3 - obtaining of a receipt for, the Final Prospectus. For the purposes of this Warrant certificate, "Shareholder Approval" means the approval of the holders of the Exchangeable Shares to, among other things, the issue by the Corporation, from time to time, of Exchangeable Shares in addition to those shares outstanding on the record date for the Shareholder Meeting, such approval to be given by resolution passed by not less than two-thirds of the votes cast on such resolution at the Shareholder Meeting, as required by and in accordance with the rights, privileges, restrictions and conditions attaching to the Exchangeable Shares. For the purposes of this Warrant certificate, "Shareholder Meeting" means the special meeting or meeting (including any adjournments thereof) of the holders of the Exchangeable Shares to be called and held in accordance with the articles and by-laws of the Corporation for the purpose of obtaining Shareholder Approval. In the event that the Corporation satisfies the Transaction Support Condition or obtains Shareholder Approval prior to the Qualification Deadline, the Trustee shall, upon receipt of written notice and supporting documents, in prescribed form, release the Escrowed Funds to the Corporation for the purpose of completing the purchase of Creative Wonders L.L.C. If the Escrowed Funds are not released to the Corporation as aforesaid, the Escrowed Funds will be released to the Corporation on the first to occur of (a) the last Clearance Date to occur in British Columbia, Ontario and Quebec and (b) the Qualification Deadline, provided only that the Corporation has obtained Transaction Approval by such date. For the purpose of this Warrant certificate, "Transaction Support Condition" means the obtaining by the Corporation of irrevocable proxies executed by holders of not less than 50.1% of the Exchangeable Shares outstanding on the record date for, and eligible to vote at, the Shareholder Meeting, indicating that such shareholders will vote such shares at the Shareholder Meeting in favour of, among other things, the issue by the Corporation, from time to time, of Exchangeable Shares in addition to those shares outstanding on the record date for the Shareholder Meeting. For the purpose of this Warrant certificate, "escrowed funds" means the net proceeds of sale of the Warrants deposited in escrow with the Trustee, and all proceeds of investment and reinvestment thereof from time to time. If, notwithstanding Transaction Approval having been obtained, the Clearance Date does not occur by 5:00 p.m. (local time) on the Qualification Deadline, or for any reason the Corporation is unable to file the Final Prospectus with the securities regulatory authority of the holder's province (which may only be one of the Provinces of British Columbia, Ontario and Quebec and will, in the case of non-Canadian resident holders of Warrants, be deemed to be the Province of Ontario) by 5:00 p.m. (local time) on the Qualification Deadline, each Warrant represented hereby shall thereafter entitle the holder upon the exercise or deemed exercise thereof, without further action being required to be taken hereunder or under the Warrant Indenture, to acquire 1.09 Exchangeable Shares (subject to adjustment) at no additional cost provided that no fractional Exchangeable Shares will be issued but a cash payment will be made in lieu thereof. IN SUCH CASE, BUT WITHOUT DEROGATING FROM THE CORPORATION'S OBLIGATION TO USE ITS REASONABLE EFFORTS TO OBTAIN FROM EACH OF THE SECURITIES 53 - 4 - REGULATORY AUTHORITIES OF THE PROVINCES OF BRITISH COLUMBIA, ONTARIO AND QUEBEC, AS SOON AS PRACTICABLE, A RECEIPT OR SIMILAR DOCUMENT FOR THE FINAL PROSPECTUS, THE EXCHANGEABLE SHARES ISSUED UPON THE EXERCISE OR DEEMED EXERCISE OF THE WARRANTS WILL BE SUBJECT TO RESTRICTIONS ON THE RESALE THEREOF IN ACCORDANCE WITH APPLICABLE SECURITIES LAWS OF CANADA AND THE UNITED STATES OF AMERICA AND MAY BEAR A LEGEND TO SUCH EFFECT. This Warrant certificate represents Warrants of the Corporation issued or issuable under the provisions of a warrant indenture (which indenture together with all other instruments supplemental or ancillary thereto is herein referred to as the "Warrant Indenture") made as of November 6, 1997 between the Corporation and the Trustee, as trustee, TO WHICH WARRANT INDENTURE REFERENCE IS HEREBY MADE FOR SPECIFIC PARTICULARS OF THE RIGHTS OF THE HOLDERS OF THE WARRANTS AND THE CORPORATION AND OF THE TRUSTEE IN RESPECT THEREOF AND THE TERMS AND CONDITIONS UPON WHICH THE WARRANTS ARE ISSUED AND HELD (WHICH RIGHTS, TERMS AND CONDITIONS ARE SUMMARIZED ONLY IN THIS WARRANT CERTIFICATE), ALL TO THE SAME EFFECT AS IF THE PROVISIONS OF THE WARRANT INDENTURE WERE HEREIN SET FORTH, TO ALL OF WHICH THE HOLDER OF THIS WARRANT CERTIFICATE BY ACCEPTANCE HEREOF ASSENTS. A copy of the Warrant Indenture will be available for inspection at 393 University Avenue, 5th Floor, Toronto, Ontario M5G 2M7. If any conflict exists between the provisions contained herein and the provisions of the Warrant Indenture, the provisions of the Warrant Indenture shall govern. The Warrant Indenture provides for adjustments to the right of exercise, including the amount of and class and kind of Exchangeable Shares and other shares, securities or property issuable upon exercise, upon the happening of certain stated events including the subdivision or consolidation of the Exchangeable Shares, certain distributions of Exchangeable Shares or securities convertible into Exchangeable Shares or of other securities or assets of the Corporation, certain offerings of rights, warrants or options and certain capital reorganizations and for payment of an amount to compensate for dividends paid on Exchangeable Shares. If, immediately prior to the expiry of the Exercise Period, the Warrants represented by this Warrant certificate have not been exercised, the Warrants represented hereby shall be deemed to have been exercised and surrendered by the holder immediately after that time without any further action on the part of the holder. THIS SPECIAL WARRANT, THE EXCHANGEABLE SHARES ISSUABLE UPON EXERCISE HEREOF AND THE SHARES OF COMMON STOCK, PAR VALUE U.S.$0.01 PER SHARE, OF THE LEARNING COMPANY, INC. (THE "COMMON STOCK") ISSUABLE UPON EXCHANGE OF THE EXCHANGEABLE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF 54 - 5 - THE UNITED STATES OF AMERICA (THE "U.S. SECURITIES ACT"); THE SPECIAL WARRANT, THE EXCHANGEABLE SHARES AND THE COMMON STOCK MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S PROMULGATED UNDER THE U.S. SECURITIES ACT) UNLESS SUCH OFFER, SALE OR TRANSFER IS COVERED BY OR MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE U.S. SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT, NOR MAY ANY SPECIAL WARRANT OR ANY EXCHANGEABLE SHARE BE OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON UNLESS THE ISSUANCE OF THE COMMON STOCK IS REGISTERED UNDER AN EFFECTIVE REGISTRATION STATEMENT UNDER THE U.S. SECURITIES ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT IS AVAILABLE FOR THE EXCHANGE OF THE EXCHANGEABLE SHARES. Upon presentation at 393 University Avenue, 5th Floor, Toronto, Ontario M5G 2M7, subject to the provisions of the Warrant Indenture and upon compliance with the reasonable requirements of the Trustee, Warrants may be exchanged for Warrants entitling the holder thereof to acquire an equal aggregate number of Exchangeable Shares (subject to adjustment) or, in the circumstances described above, Warrants entitling the holder thereof to acquire an aggregate number of Exchangeable Shares equal to the product of 1.09 and the aggregate number of Warrants (subject to adjustment) rounded down to the nearest whole number. The Corporation and the Trustee may treat the registered holder of this Warrant certificate for all purposes as the absolute owner hereof. The holding of this Warrant certificate shall not constitute the holder hereof a holder of Exchangeable Shares nor entitle him to any right or interest in respect thereof except as herein and in the Warrant Indenture expressly provided. The transfer of the Warrants evidenced hereby is restricted by applicable securities laws of Canada and the United States of America. In addition, no Warrant may be transferred to a person resident in any Province of Canada other than British Columbia, Ontario or Quebec. Warrants may only be transferred, upon compliance with the conditions prescribed in the Warrant Indenture, on the register to be kept at the principal offices of the Trustee in the City of Toronto by the registered holder thereof or his executors or administrators or other legal representatives or his or their attorney duly appointed by an instrument in writing in form and execution satisfactory to the Trustee with the signature guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange and upon compliance with such reasonable requirements as the Trustee may prescribe (including, without limitation, the requirement to provide 55 - 6 - evidence of satisfactory compliance with applicable securities laws of Canada and the United States of America). PRIOR TO THE EARLIER OF THE CLEARANCE DATE AND THE FIRST ANNIVERSARY OF THE DATE HEREOF, THE TRANSFER OF EXCHANGEABLE SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS EVIDENCED HEREBY IS RESTRICTED BY APPLICABLE SECURITIES LEGISLATION. The Warrant Indenture contains provisions making binding upon all holders of Warrants outstanding thereunder resolutions passed at meetings of such holders held in accordance with such provisions and instruments in writing signed by the Warrantholders holding a specified percentage of outstanding and unexercised Warrants. The Warrant Indenture identifies and provides for certain restrictive legends that will appear on the certificates for the Exchangeable Shares. The Warrants and the Warrant Indenture shall be governed by and performed, construed and enforced in accordance with the laws of the Province of Ontario and shall be treated in all respects as Ontario contracts. Time shall be of the essence hereof and of the Warrant Indenture. This Warrant certificate shall not be valid for any purpose until it has been certified by or on behalf of the Trustee for the time being under the Warrant Indenture. IN WITNESS WHEREOF the Corporation has caused this Warrant certificate to be signed by its duly authorized officers as of the 6th day of November, 1997. SOFTKEY SOFTWARE PRODUCTS INC. By ___________________________ Authorized Signing Officer 56 - 7 - This Warrant certificate represents Warrants referred to in the Warrant Indenture within mentioned. CIBC MELLON TRUST COMPANY Trustee By __________________________ Authorized Signing Officer date of signing _____________ 57 - 8 - TRANSFER FORM FOR VALUE RECEIVED, _____________________________________________ hereby sells, assigns and transfers unto __________________________________________________________________________ PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE __________________________________________________________________________ __________________________________________________________________________ _____________________ Warrants represented by the within Warrant certificate and does hereby irrevocably constitute and appoint ___________________________ __________________________________________________________________________ attorney to transfer the said Warrants on the books of the Trustee with full power of substitution in the premises. DATED ____________________, 199__. In the presence of ) ) _____________________________ __________________________ ) Signature of Warrantholder guaranteed by: __________________________ _____________________________ Name: (Authorized Signature Number) 58 - 9 - Upon any due transfer of Warrants, the transferee of a Warrant shall be a permitted assignee of the transferring holder and shall be entitled to the benefits of the covenants of the Corporation referred to in section 5 of Schedule "A" of the Subscription Agreements (as defined in the Warrant Indenture) and granted by the Corporation, subject to the restrictions and limitations described therein. NOTICE: The signature on this assignment must correspond exactly with the name as written upon the face of this Warrant certificate. If Exchangeable Shares are to be issued to a person other than the registered holder, the registered holder must pay to the Trustee all exigible taxes and the signature of the registered holder must be guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange. 59 - 10 - EXERCISE FORM TO: SoftKey Software Products Inc. c/o CIBC Mellon Trust Company 393 University Avenue 5th Floor Toronto, Ontario M5G 2M7 Attention: Stock and Bond Transfer Department The undersigned holder of the within Warrants hereby irrevocably exercises the Warrants represented hereby and subscribes for the maximum number of Exchangeable Shares (or other shares, securities or property issuable in accordance with the Warrant Indenture) issuable pursuant to the exercise of such Warrants on the terms specified in the said Warrants and the Warrant Indenture. The undersigned hereby directs that the said Exchangeable Shares be issued in the name of the undersigned and delivered as follows:
- -------------------------------------------------------------------------------- NAME(S) IN FULL | ADDRESS(ES) | NUMBER OF EXCHANGEABLE | (include Postal Code) | SHARES - -------------------------------------------------------------------------------- | | | | | | - -------------------------------------------------------------------------------- | | | | | | - --------------------------------------------------------------------------------
(Please Print) 60 - 11 - Please note that if Exchangeable Shares are to be issued to a person other than the registered holder, the registered holder must pay to the Trustee all exigible taxes and the signature of the registered holder must be guaranteed. DATED this ___ day of _______________________, 199_. _____________________________ ) _____________________________ Witness ) Signature ) ) _____________________________ Print full name _____________________________ Address in full [ ] Please check box if these certificates are to be delivered to the office where this Warrant certificate is surrendered, failing which the certificates will be mailed to the address shown on the register. (The Trustee may require that the signature above be guaranteed, in which event the following must be completed.) Signature of Warrantholder guaranteed by: _____________________________ (Signature of Warrantholder) _____________________________ _____________________________ Name: (Authorized Signature Number) Note: If the signature of the person executing this form is to be guaranteed, it must be guaranteed by a Canadian chartered bank, a Canadian trust company or a member firm of The Toronto Stock Exchange. 61 SCHEDULE B FORM OF RELEASE CERTIFICATE TO: CIBC MELLON TRUST COMPANY ________________________________________________________________________________ Reference is made to the special warrant indenture (the "Indenture") dated November 6, 1997 between SoftKey Software Products Inc. (the "Corporation") and CIBC Mellon Trust Company (the "Trustee"). Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Indenture. I, [INSERT NAME], being the [INSERT TITLE] of SoftKey Software Products Inc., on behalf of the Corporation hereby certify: (i) that the Corporation has obtained irrevocable proxies executed by holders of not less than 50.1% of the Exchangeable Shares outstanding on the record date for, and eligible to vote at, the Shareholder Meeting, indicating that such holders will vote such shares at the Shareholder Meeting in favour of, among other things, the issue by the Corporation, from time to time, of Exchangeable Shares in addition to those shares outstanding on the record date for the Shareholder Meeting; or (ii) that the Corporation has obtained approval of the holders of the Exchangeable Shares to, among other things, the issue by the Corporation, from time to time, of Exchangeable Shares in addition to those shares outstanding on the record date for the Shareholder Meeting, such approval having been given by resolution passed by not less than two-thirds of the votes cast on such resolution at the Shareholder Meeting, as required by and in accordance with the rights, privileges, restrictions and conditions attaching to the Exchangeable Shares; and (iii) that the Escrowed Funds are required for the purpose of completing the purchase of Creative Wonders. Based on the foregoing, the Corporation hereby requests that all/$ of the Escrowed Funds be released from escrow and paid to the Corporation. DATED this ___ day of ____________, 1997. SOFTKEY SOFTWARE PRODUCTS INC. By _____________________________ [NAME] [TITLE] 62 - 2 - __________________________ The undersigned, on behalf of the Underwriters, hereby agrees with and confirms the foregoing and hereby requests that the above-referenced amount of the Escrowed Funds be released from escrow and paid to the Corporation. DATED this ___ day of ____________, 1997. GRIFFITHS McBURNEY & PARTNERS, on behalf of itself and on behalf of FIRST MARATHON SECURITIES LIMITED By ________________________________ [NAME] [TITLE] EX-4.10 5 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 4.10 -------------- REGISTRATION RIGHTS AGREEMENT by and among THE LEARNING COMPANY, INC. and THE PURCHASERS NAMED HEREIN -------------- Dated as of August 26, 1997 2 TABLE OF CONTENTS SECTION PAGE 1. Introduction................................................. 1 2. Registration under Securities Act, etc....................... 1 2.1 Registration on Request............................. 1 (a) Request.................................... 1 (b) Registration Statement Form................ 2 (c) Expenses................................... 2 (d) Effective Registration Statement........... 2 (e) Selection of Underwriters.................. 3 (f) Priority in Requested Registrations........ 3 (g) Limitation on Registration on Request...... 3 2.2 Incidental Registration............................. 4 (a) Right to Include Registrable Securities.... 4 (b) Priority in Incidental Registrations....... 5 2.3 Registration Procedures............................. 5 2.4 Underwritten Offerings.............................. 11 (a) Requested Underwritten Offerings........... 11 (b) Incidental Underwritten Offerings.......... 12 (c) Holdback Agreements........................ 12 (d) Participation in Underwritten Offerings.... 13 2.5 Preparation; Reasonable Investigation............... 13 2.6 Indemnification..................................... 14 (a) Indemnification by the Company............. 14 (b) Indemnification by the Sellers............. 15 (c) Notices of Claims, etc..................... 15 (d) Other Indemnification...................... 16 3 (e) Indemnification Payments................... 16 (f) Contribution............................... 16 2.7 Adjustments Affecting Registrable Securities........ 18 3. Definitions.................................................. 18 4. Rule 144..................................................... 21 5. Amendments and Waivers....................................... 21 6. Nominees for Beneficial Owners............................... 21 7. Notices...................................................... 22 8. Assignment................................................... 22 9. Descriptive Headings......................................... 23 10. GOVERNING LAW................................................ 23 11. Counterparts................................................. 23 12. Entire Agreement............................................. 23 14. Severability................................................. 23 ii 4 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of August 26, 1997, among THE LEARNING COMPANY, a Delaware corporation (the "Company"), and each of the other parties listed on the signature pages hereto (each a "Purchaser" and, collectively, the "Purchasers"). 1. INTRODUCTION. The Company is a party to three separate Securities Purchase Agreements (the "Purchase Agreements"), each dated as of August 26, 1997, with the Purchasers pursuant to which the Purchasers have agreed to purchase from the Company an aggregate of 750,000 shares of Series A Convertible Participating Preferred Stock, par value $.01 per share, of the Company (the "Convertible Preferred Stock"). Certain capitalized terms used in this Agreement are defined in Section 3 hereof. 2. REGISTRATION UNDER SECURITIES ACT, ETC. 2.1 REGISTRATION ON REQUEST. (a) REQUEST. At any time or from time to time after the Applicable Period, upon the written request of one or more holders (the "Initiating Holders") of Registrable Securities holding (a) in the case of the first and second registrations effected pursuant to this Section 2.1 and during the five-year period commencing on the date hereof, a majority of the Registrable Securities then outstanding on an as-converted basis, and (b) in the case of the third and fourth registrations effected pursuant to this Section 2.1, or the first and second registrations if such registrations are not effected within five years hereof, at least 15% of the Registrable Securities then outstanding on an as-converted basis, requesting that the Company effect the registration under the Securities Act of all or part of such Initiating Holders' Registrable Securities and specifying the intended method of disposition thereof, the Company will promptly give written notice of such requested registration to all registered holders of Registrable Securities, and thereupon the Company will, subject to the terms of this Agreement, use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Securities which the Company has been so requested to register by such Initiating Holders for disposition in 1 5 accordance with the intended method of disposition stated in such request; and (ii) all other Registrable Securities the holders of which shall have made a written request to the Company for registration thereof within 30 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Securities); all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered. (b) REGISTRATION STATEMENT FORM. Registrations under this Section 2.1 shall be on such appropriate registration form of the Commission (i) as shall be selected by the Company and (ii) as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in their request for such registration. If, in connection with any registration under this Section 2.1 which is proposed by the Company to be on Form S-3 or any similar short form registration statement which is a successor to Form S-3, the managing underwriters, if any, shall advise the Company in writing that in their opinion the use of another permitted form is of material importance to the success of the offering, then such registration shall be on such other permitted form. (c) EXPENSES. The Company will pay all Registration Expenses in connection with any registration requested pursuant to this Section 2.1. (d) EFFECTIVE REGISTRATION STATEMENT. A registration re quested pursuant to this Section 2.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective, and remained effective in compliance with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement, PROVIDED, that except with respect to any registration statement on Form S-3 filed pursuant to Rule 415 under the Securities Act, such period need not exceed 180 days, and PROVIDED, FURTHER, that a registration requested pursuant to this Section 2.1 shall be deemed to have been effected if a registration statement with respect thereto is withdrawn at the request of the Initiating Holders for any reason other than a material adverse development involving the Company, (ii) if, after it has become effective, such registration be comes subject to 2 6 any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason or (iii) the conditions to closing specified in the purchase agreement or underwriting agree ment entered into in connection with such registration are not satisfied, other than by reason of some act or omission by such Initiating Holders. (e) SELECTION OF UNDERWRITERS. If a requested registration pursuant to this Section 2.1 involves an underwritten offering, the managing or lead underwriter or underwriters thereof shall be selected by the holders of at least a majority (by number of shares) of the Registrable Securities as to which registra tion has been requested and shall be acceptable to the Company, which shall not unreasonably withhold its acceptance of any such underwriters. (f) PRIORITY IN REQUESTED REGISTRATIONS. If a requested registration pursuant to this Section 2.1 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each holder of Registrable Securities requesting registration) that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the holders of a majority of the Registrable Securities requested to be included in such registration, the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, Registrable Securities requested to be included in such registration by the holder or holders of Registrable Securities, PRO RATA among such holders requesting such registration on the basis of the number of such securities requested to be included by such holders. (g) LIMITATION ON REGISTRATION ON REQUEST. Subject to Sections 1(d) and 1(f), in no event will the Company be required to effect, in the aggregate, more than four registrations pursuant to this Section 2.1 PROVIDED, HOWEVER, that the Company will be required to effect only one registration of Option Shares and Related Registrable Securities. If, while a registration request is pending pursuant to this Section 2.1, the Board of Directors of the Company makes a good faith determination that the filing of the requested registration would adversely affect either (i) a pending transaction of the Company or (ii) a securities offering which the Company plans to undertake, the Company shall not be re quired to effect a registration pursuant to this Section 2.1 until the consummation of such transaction or registration; PROVIDED, HOWEVER, that the Company may only assert either of such delays once during any 12-month period, and any such asserted delay with respect to the Company's obligation to effect a registration pursuant to this Section 2.1 shall in no event exceed 90 days. 3 7 2.2 INCIDENTAL REGISTRATION. (a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If the Company at any time proposes to register, after the Applicable Period, any of its securities under the Securities Act (other than by a registration on Form S-4 or S-8, or any successor or similar forms, and other than pursuant to Section 2.1), whether or not for sale for its own account, it will each such time give prompt written notice to all holders of Registrable Securities of its intention to do so and of such holders' rights under this Section 2.2. Upon the written request of any such holder (a "Requesting Holder") made within 30 days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method of disposition thereof), the Company will, subject to the terms of this Agreement, use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holders thereof, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which the Company proposes to register, PROVIDED that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each holder of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under Section 2.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this Section 2.2 shall relieve the Company of its obligation to effect any registration upon request under Section 2.1, nor shall any such registration hereunder be deemed to have been effected pursuant to Section 2.1. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 2.2. (b) PRIORITY IN INCIDENTAL REGISTRATIONS. If (i) a registration pursuant to this Section 2.2 involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, to be 4 8 distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, (ii) the Registrable Securities so requested to be registered for sale for the account of holders of Registrable Securities are not also to be included in such underwritten offering (either because the Company has not been requested so to include such Registrable Securities pursuant to Section 2.4(b) or, if requested to do so, is not obligated to do so under Section 2.4(b), and (iii) the managing underwriter of such underwritten offering shall inform the Company and holders of the Registrable Securities requesting such registration by letter of its belief that the distribution of all or a specified number of such Registrable Securities concurrently with the securities being distributed by such underwriters would interfere with the successful marketing of the securities being distributed by such underwriters (such writing to state the approximate number of such Registrable Securities which may be distributed without such effect), then the Company may, upon written notice to all holders of such Registrable Securities, reduce PRO RATA (if and to the extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such Registrable Securities the registration of which shall have been requested by each holder of Registrable Securities so that the resultant aggregate number of such Registrable Securities so included in such registration shall be equal to the number of shares stated in such managing underwriter's letter. 2.3 REGISTRATION PROCEDURES. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 2.1 and 2.2 the Company shall, as expeditiously as possible: (i) prepare and as soon as reasonably practicable file with the Commission the requisite registration statement to effect such registration (including such audited financial statements as may be required by the Securities Act or the rules and regulations promulgated thereunder) and thereafter use its reasonable efforts to cause such registration statement to become and remain effective, PROVIDED however that the Company may discontinue any registration of its securities which are not Registrable Securities (and, under the circumstances specified in Section 2.2(a), its securities which are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto, PROVIDED further that before filing such registration statement or any amendments thereto, the Company will furnish to the counsel selected by the holders of Registrable Securities which are to be included in such registration copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel; 5 9 (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; PROVIDED, that except with respect to any such registration statement on Form S-3 filed pursuant to Rule 415 under the Securities Act, such period need not exceed 180 days; (iii) furnish to each seller of Registrable Securities covered by such registration statement and each underwriter, if any, of the securities being sold by such seller such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller and underwriter, if any, may reasonably request; (iv) use its best efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities laws or blue sky laws of such jurisdictions as any seller thereof and any underwriter of the securities being sold by such seller shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and to take any other action which may be reasonably necessary or advisable to enable such seller and underwriter to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (v) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or 6 10 sellers of Registrable Securities to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) notify each seller of Registrable Securities and the managing underwriter or underwriters, if any, promptly and confirm such advice in writing promptly thereafter: (v) when the registration statement, the prospectus or any prospectus supplement related thereto or post-effective amendment to the registration statement has been filed, and, with respect to the registration statement or any post-effective amendment thereto, when the same has become effective; (w) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information; (x) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings by any Person for that purpose; (y) if at any time the representations and warranties of the Company made as contemplated by Section 2.4 below cease to be true and correct; and (z) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation or threat of any proceeding for such purpose. (vii) notify each seller of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of any such 7 11 seller promptly prepare and furnish to such seller and each underwriter, if any, a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (viii) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible moment; (ix) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first day of the Company's first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder, and will furnish to each such seller at least five business days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof to which any such seller shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (x) make available for inspection by a representative or representatives of the holders of Registrable Securities, any under writer participating in any disposition pursuant to the registration statement and any attorney or accountant retained by such selling holders or underwriter (each, an "Inspector"), all financial and other records, pertinent corporate documents and properties of the Company (the "Records"), and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration in order to permit a reasonable investigation within the meaning of Section 11 of the Securities Act; (xi) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration 8 12 statement from and after a date not later than the effective date of such registration statement; (xii) enter into such agreements and take such other actions as sellers of such Registrable Securities holding a majority of the shares so to be sold shall reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; (xiii) use its best efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the securities of the same class as the Registrable Securities are then listed and, if no such Registrable Securities are so listed, on any national securities exchange on which the Common Stock is then listed; and (xiv) use its best efforts to provide a CUSIP number for the Registrable Securities, not later than the effective date of the registration statement. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. The Company will not file any registration statement or amendment thereto or any prospectus or any supplement thereto (including such documents incorporated by reference and proposed to be filed after the initial filing of the registration statement) to which the holders of a majority of the Registrable Securities covered by such registration statement or the underwriter or under writers, if any, shall reasonably object, PROVIDED that the Company may file such document in a form required by law or upon the advice of its counsel. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 2.3(viii), such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 2.3(viii) and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at 9 13 the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 2.1(d) and Section 2.3(ii) shall be extended by the length of the period from and including the date when each seller of any Registrable Securities covered by such registration statement shall have received such notice to the date on which each such seller has received the copies of the supplemented or amended prospectus contemplated by Section 2.3(viii). If any such registration statement refers to any holder of Registrable Securities by name or otherwise as the holder of any securities of the Company, then such holder shall have the right to require (i) the insertion therein of language, in form and substance satisfactory to such holder, to the effect that the holding by such holder of such securities is not to be construed as a recommendation by such holder of the investment quality of the Company's securities covered thereby and that such holding does not imply that such holder will assist in meeting any future financial requirements of the Company, or (ii) in the event that such reference to such holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force, the deletion of the reference to such holder. 2.4 UNDERWRITTEN OFFERINGS. (a) REQUESTED UNDERWRITTEN OFFERINGS. If requested by the underwriters for any underwritten offering by holders of Registrable Securities pursuant to a registration requested under Section 2.1, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to be satisfactory in substance and form to the Company, each such holder and the underwriters, and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of this type, including, without limitation, indemnities to the effect and to the extent provided in Section 2.6. The holders of the Registrable Securities will cooperate with the Company in the negotiation of the underwriting agreement and will give consideration to the reasonable suggestions of the Company regarding the form thereof, PROVIDED that nothing herein contained shall diminish the foregoing obligations of the Company. The holders of Registrable Securities to be distributed by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such holder of Registrable Securities shall not be required to make 10 14 any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. (b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company at any time proposes to register any of its securities under the Securities Act as contemplated by Section 2.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any Requesting Holder of Registrable Securities as provided in Section 2.2 and subject to the provisions of Section 2.2(b), use its reasonable efforts to arrange for such under writers to include all the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters, PROVIDED that if the managing underwriter of such underwritten offering shall inform the holders of the Registrable Securities requesting such registration by letter of its belief that inclusion in such underwritten distribution of all or a specified number of such Registrable Securities would interfere with the successful marketing of the securities (other than such Registrable Securities) by the underwriters (such writing to state the basis of such belief and the approximate number of such Registrable Securities which may be included in such underwritten offering without such effect), then the Company may, upon written notice to all holders of such Registrable Securities, exclude PRO RATA from such underwritten offering (if and to the extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such Registrable Securities so that the resultant aggregate number of such Registrable Securities shall be equal to the approximate number of shares stated in such managing underwriter's letter. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. (c) HOLDBACK AGREEMENTS. (i) Each holder of Registrable Securities agrees by acquisition of such Registrable Securities, if so required by the managing underwriter, not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of 11 15 any equity securities of the Company, during the 90 days after any underwritten registration pursuant to Section 2.1 or 2.2 has become effective, except as part of such underwritten registration, whether or not such holder participates in such registration. Notwithstanding the foregoing sentence, each holder of Registrable Securities subject to the foregoing sentence shall be entitled to sell during the foregoing period securities in a private sale as long as the purchaser agrees to be bound by the provisions of this Section 2.4(c)(i) for the balance of such 90 day period. (ii) The Company agrees if so requested by the managing underwriter not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or other wise dispose of its equity securities or securities convertible into or exchangeable or exercisable for any of such securities during the seven days prior to and the 90 days after any underwritten registration pursuant to Section 2.1 or 2.2 has become effective, except as part of such underwritten registration and except in connection with a stock option plan, stock purchase plan, managing directors' plan, or savings or similar plan, or an acquisition of a business, merger or exchange of stock for stock or any private placement of stock in which the purchaser agrees to be bound by the provisions of this Section 2.4(c)(ii) for the balance of such 90 day period. (d) PARTICIPATION IN UNDERWRITTEN OFFERINGS. No Person may participate in any underwritten offering hereunder unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved, subject to the terms and conditions hereof, by the holders of a majority of Registrable Securities to be included in such underwritten offering and (ii) completes and executes all questionnaires, indemnities, underwriting agreements and other documents (other than powers of attorney) required under the terms of such underwriting arrangements. 2.5 PREPARATION; REASONABLE INVESTIGATION. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, their underwriters, if any, each Requesting Holder and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the 12 16 independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such under writers' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 2.6 INDEMNIFICATION. (b) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and hereby does agree to, indemnify and hold harmless in the case of any registration statement filed pursuant to Section 2.1 or 2.2, the holder of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such holder or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such holder or any such director, officer, underwriter or controlling Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such holder, director, officer, under writer and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, PROVIDED that the Company shall not be liable to any such holder, director, officer, underwriter or controlling Person, as the case may be, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such holder or underwriter, as the case may be, specifically stating that it is for use in the preparation thereof and, PROVIDED further that the Company shall not be liable to any Person who participates as an under writer in the offering or sale of Registrable Securities or to any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, 13 17 claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting the existence of an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such director, officer, underwriter or controlling Person and shall survive the transfer of such securities by such holder. (b) INDEMNIFICATION BY THE SELLERS. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 2.3, that the Company shall have received an undertaking satisfactory to it from the prospective seller of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 2.6(a)) the Company, each director of the Company, each officer of the Company and each other person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement, PROVIDED, HOWEVER, that the liability of such indemnifying party under this Section 2.6(b) shall be limited to the amount of proceeds received by such indemnifying party in the offering giving rise to such liability. Any such indemnity shall remain in full force and effect, regard less of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 2.6, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, PROVIDED that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 2.6, except to the extent that the indemnifying party is 14 18 actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. (d) OTHER INDEMNIFICATION. Indemnification similar to that specified in the preceding subdivisions of this Section 2.6 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority, other than the Securities Act. (e) INDEMNIFICATION PAYMENTS. The indemnification required by this Section 2.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (f) CONTRIBUTION. If the indemnification provided for in this Section 2.6 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the holder or underwriter, as the case may be, on the other from the distribution of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as 15 19 is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other in connec tion with the statements or omissions which resulted in such expense, loss, damage or liability, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the holder or underwriter, as the case may be, on the other in connection with the distribution of the Registrable Securities shall be deemed to be in the same proportion as the total net proceeds received by the Company from the initial sale of the Registrable Securi ties by the Company to the purchasers pursuant to the Purchase Agreements bear to the gain, if any, realized by the selling holder or the underwriting discounts and commissions received by the underwriter, as the case may be. The relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company, by the holder or by the underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, PROVIDED that the foregoing contribution agreement shall not inure to the benefit of any indemnified party if indemnification would be unavailable to such indemnified party by reason of the provisions contained in the first sentence of Section 2.6(a), and in no event shall the obligation of any indemnifying party to contribute under this Section 2.6(f) exceed the amount that such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under Section 2.6(a) or (b) had been available under the circumstances. The Company and the holders of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 2.6(f) were determined by PRO RATA allocation (even if the holders, Requesting Holders and any underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth in the preceding sentence and Section 2.6(c), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2.6(f), no holder of Registrable Securities or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any such holder, the net proceeds 16 20 received by such holder from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 2.7 ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will not effect or permit to occur any combination or subdivision of Shares which would adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in any registration of its securities contemplated by this Section 2 or the marketability of such Registrable Securities under any such registration. 3. DEFINITIONS. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: APPLICABLE PERIOD: In the case of a proposed registration by an Initiating Holder or Requesting Holder, as the case may be, of (a) Conversion Shares and any Related Registrable Securities, 18 months from the Closing Date, (b) Convertible Preferred Stock and any Related Registrable Securities, 30 months from the Closing Date and (c) Option Shares and any Related Registrable Securities, the period ending on the date of first issuance of Option Shares; provided, however, that the Applicable Period shall immediately cease upon a mandatory conversion of the Convertible Preferred Stock pursuant to Section 8.10.1 of the Certificate of Designation for the Convertible Preferred Stock. CLOSING DATE: The date on which the Convertible Preferred Stock is first issued. COMMISSION: The Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. COMMON STOCK: The common stock, par value $.01 per share, of the Company. 17 21 COMPANY: As defined in the introductory paragraph of this Agreement. CONVERSION SHARES: The shares of Common Stock issued or issuable upon conversion of the Convertible Preferred Stock. CONVERTIBLE PREFERRED STOCK: As defined in Section 1 of this Agreement. EXCHANGE ACT: The Securities Exchange Act of 1934, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934 shall include a reference to the comparable section, if any, of any such similar Federal statute. INITIATING HOLDERS: As defined in Section 2.1 of the Agreement. OPTION SHARES: Shares of Common Stock issued pursuant to the Stock Option Agreements dated as of the date hereof between the Company and affiliates of the Purchasers. PERSON: A corporation, an association, a partnership, an organization, business, an individual, a governmental or political subdivision thereof or a governmental agency. PURCHASE AGREEMENTS: As defined in Section 1. REGISTRABLE SECURITIES: (i) any Conversion Shares and any Related Registrable Securities, (ii) any Convertible Preferred Stock and any Related Registrable Securities and (iii) any Option Shares and any Related Registrable Securities. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been sold as permitted by Rule 144 (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been 18 22 delivered by the Company and subsequent public distribution of them shall not require registration of them under the Securities Act, or (d) they shall have ceased to be outstanding. In calculating a percentage of Registrable Securities held, each share of Convertible Preferred Stock shall be deemed to be equivalent to the number of shares of Common Stock into which it is then convertible. REGISTRATION EXPENSES: All expenses incident to the Company's performance of or compliance with Section 2, including, without limitation, all registration, filing and NASD fees, all stock exchange listing fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, the reasonable fees and disbursements of one counsel retained by the holder or holders of a majority of the Registrable Securities being registered, but excluding underwriting discounts and commissions and transfer taxes, if any, PROVIDED, HOWEVER, that in the event that the Company shall, in accordance with Section 2.2(a), not register any securities with respect to which it had given written notice of its intention to so register to holders of Registrable Securities, notwithstanding anything to the contrary in the foregoing, all of the costs incurred by Requesting Holders in connection with such registration shall be deemed Registration Expenses. RELATED REGISTRABLE SECURITIES: With respect to Conversion Shares, Convertible Preferred Stock or Option Shares, any securities of the Company issued or issuable with respect to any Conversion Shares, Convertible Preferred Stock or Option Shares by way of a dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidated or other reorganization or otherwise. REQUESTING HOLDER: As defined in Section 2.2. SECURITIES ACT: The Securities Act of 1933, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as of the same shall be in effect at the time. References to a particular section of the Securities Act of 1933 shall include a 19 23 reference to the comparable section, if any, of any such similar Federal statute. 4. RULE 144. The Company shall timely file the reports required to be filed by it under the Securities Act and the Exchange Act (including but not limited to the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c) of Rule 144 adopted by the Commission under the Securities Act) (or, if the Company is not required to file such reports, will, upon the request of any holder of Registrable Securities, make publicly available other information) and will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with the requirements of this Section 4. 5. AMENDMENTS AND WAIVERS. This Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of a majority of the shares of Registrable Securities. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 5, whether or not such Registrable Securities shall have been marked to indicate such consent. 6. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 7. NOTICES. Except as otherwise provided in this Agreement, all notices, requests and other communications to any Person provided for hereunder 20 24 shall be in writing and shall be given to such Person (a) in the case of a party hereto other than the Company, addressed to such party in the manner set forth in the applicable Purchase Agreement or at such other address as such party shall have furnished to the Company in writing, or (b) in the case of any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company, or (c) in the case of the Company, at One Athenaeum Street, Cambridge, Massachusetts 02142 to the attention of its President, or at such other address, or to the attention of such other officer, as the Company shall have furnished to each holder of Registrable Securities at the time outstanding. Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means (including, without limitation, by air courier), when delivered at the address specified above, PROVIDED that any such notice, request or communication to any holder of Registrable Securities shall not be effective until received. 8. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Securities, subject to the provisions respecting the minimum numbers or percentages of shares of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein and provided that the rights of the Purchasers hereunder may only be assigned to holders of at least 75,000 shares of Convertible Preferred Stock or underlying Conversion Shares. Any assignee must agree in writing to be bound by the provisions of this Agreement. 9. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 10. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICTS OF LAWS. 21 25 11. COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. 12. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the Company and each other party hereto relating to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 13. SEVERABILITY. If any provision of this Agreement, or the application of such provisions to any Person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. 22 26 IN WITNESS WHEREOF, each of the undersigned has caused the foregoing Agreement to be executed under seal by one of its duly authorized officers as of the date first above written. THE LEARNING COMPANY, INC. By: /s/ R. Scott Murray --------------------------------- Name: R. Scott Murray Title: Executive Vice President and Chief Financial Officer 23 27 PURCHASERS: THOMAS H. LEE EQUITY FUND III, L.P. By: THL Equity Advisors III Limited Partnership, as General Partner By: THL Equity Trust III, as General Partner By: /s/ Anthony J. DiNovi -------------------------------------- Name: Anthony J. DiNovi Title: Vice President THOMAS H. LEE FOREIGN FUND III, L.P. By: THL Equity Advisors III Limited Partnership, as General Partner By: THL Equity Trust III, as General Partner By: /s/ Anthony J. DiNovi -------------------------------------- Name: Anthony J. DiNovi Title: Vice President THOMAS H. LEE COMPANY By: /s/ Anthony J. DiNovi -------------------------------------- Name: Anthony J. DiNovi Title: Managing Director 24 28 BAIN CAPITAL FUND V, L.P. By: Bain Capital Partners V, L.P., as General Partner By: Bain Capital Investors V, Inc., as General Partner By: /s/ Mark E. Nunnelly -------------------------------------- Name: Mark E. Nunnelly Title: Managing Director BAIN CAPITAL FUND V-B, L.P. By: Bain Capital Partners V, L.P., as General Partner By: Bain Capital Investors V, Inc., as General Partner By: /s/ Mark E. Nunnelly -------------------------------------- Name: Mark E. Nunnelly Title: Managing Director BCIP ASSOCIATES, L.P. By: /s/ Mark E. Nunnelly -------------------------------------- Name: Mark E. Nunnelly Title: General Partner BCIP TRUST ASSOCIATES, L.P. By: /s/ Mark E. Nunnelly -------------------------------------- Name: Mark E. Nunnelly Title: Managing Director 25 29 CENTRE CAPITAL INVESTORS II, L.P. CENTRE CAPITAL TAX-EXEMPT INVESTORS II, L.P. CENTRE CAPITAL OFFSHORE INVESTORS II, L.P. By: Centre Partners II, L.P., as General Partner By: Centre Partners Management LLC, as Attorney-in-fact By: /s/ [illegible] ---------------------------------------- Managing Director STATE BOARD OF ADMINISTRATION OF FLORIDA By: Centre Parallel Management Partners, L.P., as Manager By: Centre Partners Management LLC, as Attorney-in-fact By: /s/ [illegible] ---------------------------------------- Managing Director CENTRE PARALLEL MANAGEMENT PARTNERS, L.P. CENTRE PARTNERS COINVESTMENT, L.P. By: Centre Partners II LLC, as General Partner By: /s/ [illegible] ---------------------------------------- Managing Director 26 EX-10.6 6 EMPLOYMENT AGREEMENT 1 Exhibit 10.6 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT made effective as of this 6th day of February, 1997 by and between THE LEARNING COMPANY, INC., a Delaware corporation (the "Corporation"), and Neal S. Winneg (the "Executive"). WHEREAS the Corporation desires to employ the Executive in the position of Vice President and General Counsel or a position with similar responsibilities, and the Executive wishes to be so employed by the Corporation. NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I EMPLOYMENT 1.1 EMPLOYMENT AND POSITION. Effective as of the date hereof and for the Term (as defined in Section 3.1 herein), the Corporation hereby employs the Executive in the capacity of Vice President and General Counsel, and the Executive hereby accepts such employment, all on and pursuant to the terms and conditions set out herein. 1.2 DUTIES AND RESPONSIBILITIES. The Executive shall have such powers and duties as are customarily associated with the office or offices of the Corporation held by the Executive and as may from time to time be prescribed by the Board of Directors of the Corporation (the "Board") or the Chief Executive Officer or such other officer to whom the Executive may then report. Notwithstanding the foregoing, it is expressly understood and agreed that the Board may at any time give any other person authority equivalent or superior to that of the Executive if, in the reasonable judgment of the Board such a change is advisable under the circumstances. 1.3 FULL TIME AND ATTENTION. The Executive shall well and faithfully serve the Corporation and its subsidiaries and shall devote his or her full working time and attention to the business and affairs of the Corporation and its subsidiaries and the performance of his or her duties and responsibilities hereunder; PROVIDED, HOWEVER, that the Executive may participate in other business ventures and activities from time to time which do not interfere with his or her duties hereunder. 1.4 PROHIBITED INTERESTS. Neither the Executive nor any member of his or her immediate family shall purchase or hold an interest in any company doing business with the Corporation (other than as a customer of the Corporation) or competing with the Corporation other than a two percent or lesser interest in publicly traded stock or such other interests to which the Corporation has given its prior written consent. 1 2 ARTICLE II REMUNERATION AND BENEFITS 2.1 ANNUAL BASE SALARY. Effective as of the date hereof and for each year of employment during the Term (an "Employment Year"), the Corporation shall pay to the Executive an annual base salary (the "Annual Base Salary") of not less than $200,000. The Annual Base Salary shall be payable twice monthly in equal installments or in such other regular installments as the Corporation may pay its employees from time to time. 2.2 BENEFITS. The Corporation shall provide to the Executive benefits consistent with benefits provided under the existing benefit plans, practices, programs and policies of the Corporation in effect for executive officers from time to time during the Term. 2.3 VACATION. The Executive shall be entitled to paid vacation in accordance with the Corporation's vacation policy, as the same may be in effect from time to time; provided, however that the Executive shall be entitled to at least four weeks of paid vacation per year. 2.4 BONUS. In addition to the Annual Base Salary, the Executive shall be eligible to receive a targeted annual cash bonus of not less than $100,000 (the "Bonus"), payable in quarterly installments, based upon the same financial performance objectives approved by the Corporation's Compensation Committee (the "Compensation Committee") for each Employment Year for determination of the bonus of the Chief Executive Officer of the Corporation. If the Chief Executive Officer of the Corporation ceases to be compensated in part by means of a bonus based on financial performance objectives approved by the Corporation's Compensation Committee, then the Bonus will be based on quantifiable performance objectives mutually agreed to by the Executive and the Chief Executive Officer. 2.5 EXPENSES. During the Term the Corporation will reimburse the Executive for all normal and customary expenses incurred by the Executive in carrying out his or her duties under this Agreement, provided that the Executive complies with the policies, practices and procedures of the Corporation for submission of expense reports, receipts or other similar documentation of such expenses. ARTICLE III TERM AND TERMINATION 3.1 TERM. Unless otherwise terminated in accordance with the provisions hereof, this Agreement shall have a term of two years from the effective date hereof, as the same is first set forth above (the "Term"). On the expiration of the Term and on each anniversary of the expiration of the Term this Agreement shall automatically renew for an additional one year period (each of which renewal periods shall form part of the Term) unless the Corporation notifies the Executive in writing three months in advance of the expiration of the Term, or any subsequent anniversary thereof, that the Corporation does not wish to further extend this Agreement. 2 3 3.2 TERMINATION FOR JUST CAUSE. (a) The Corporation may terminate the employment of the Executive hereunder at any time for Just Cause, such termination to be communicated by the Corporation to the Executive by written notice. For the purposes hereof, "Just Cause" means a determination by the Board, in the exercise of its reasonable judgment and after permitting the Executive a reasonable opportunity to be heard, that any of the following has occurred: (i) the willful and continued failure by the Executive to perform his or her duties and responsibilities with the Corporation under this Agreement (other than any such failure resulting from incapacity due to physical or mental illness or disability) which is not cured within 30 days of receiving written notice from the Corporation specifying in reasonable detail the duties and responsibilities which the Corporation believes are not being adequately performed; (ii) the willful engaging by the Executive in any act which is demonstrably and materially injurious to the Corporation; (iii) the conviction of the Executive of a criminal offense involving fraud, dishonesty or other moral turpitude; (iv) any material breach by the Executive of the terms of this Agreement or any other written agreement between the Executive and the Corporation relating to proprietary information, confidentiality, non-competition or non-solicitation which is not cured within 30 days of receiving written notice from the Corporation specifying in reasonable detail such breach; or (v) the engaging by the Executive in any intentional act of dishonesty resulting or intended to result, directly or indirectly, in personal gain to the Executive at the Corporation's expense. (b) Upon the termination of the Executive's employment for Just Cause, the Executive shall not be entitled to any severance, termination or other compensation payment other than unpaid base salary earned by the Executive up to the date of termination, together with any amount to which the Executive may be entitled under the provisions of applicable employment legislation in force at the date of termination of the Executive's employment (less any deductions required by law). 3.3 TERMINATION WITHOUT JUST CAUSE OR FOR GOOD REASON. (a) The Corporation may terminate the employment of the Executive hereunder at any time without Just Cause, such termination to be communicated by the Corporation to the Executive by at least 30 days prior written notice. In addition, the Executive may terminate his or her employment for Good Reason, such termination to be communicated by the Executive to the Corporation by at least 30 days prior written notice. For purposes of this Agreement, "Good Reason" shall mean (i) a substantial diminution in the Executive's 3 4 position, duties, responsibilities or authority with the Corporation, (ii) any purported termination of the Executive's employment which is not effected in accordance with this Agreement (which purported termination shall not be effective), (iii) the failure of the Corporation to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 4.8 hereof, (iv) any requirement by the Corporation that the Executive move or maintain his principal business office more than 30 miles from Boston, Massachusetts or (v) any material breach by the Corporation of this Agreement which is not cured within 30 days of receiving written notice from the Executive specifying in reasonable detail such breach. The Executive's right to terminate his or her employment for Good Reason shall not be affected by his or her incapacity due to physical or mental illness or disability. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (b) Upon the termination of the Executive's employment without Just Cause or for Good Reason, the Corporation shall have the following obligations: (i) if not theretofore paid, the Corporation shall pay to or to the order of the Executive within 10 days after the date of termination of the Executive's employment hereunder any unpaid base salary earned by the Executive up to the date of termination (less any deductions required by law); (ii) the Corporation shall pay to or to the order of the Executive, in equal installments in accordance with its normal payroll practices over an eighteen month period, as compensation for the Executive's loss of employment, an amount equal to one and one-half times the Annual Base Salary then in effect plus one and one-half times the maximum Bonus then in effect payable pursuant to Section 2.4 hereof (less any deductions required by law); and (iii) the Corporation shall take all action necessary, consistent with applicable stock option and incentive plans, to permit immediate vesting of the Executive's then outstanding options for the purchase of capital stock of the Corporation. 3.4 TERMINATION UPON DEATH OR DISABILITY OR BY EXECUTIVE FOR OTHER THAN GOOD REASON. (a) The Corporation may terminate the employment of the Executive hereunder at any time forthwith upon the death or permanent disability of the Executive, such termination to be communicated by written notice given by the Corporation to the Executive or, in the event of the death of the Executive, to his or her personal representative or his or her estate. The Executive shall be considered to have become permanently disabled if in any period of 12 consecutive months during the Term, because of ill health, physical or mental disability, or for other causes beyond the control of the Executive, the Executive has been or is reasonably likely to be continuously unable or unwilling or has failed to perform his or her duties and responsibilities hereunder for 120 consecutive days, 4 5 or if, during any period of 12 consecutive months during the Term, the Executive has been unable or unwilling or has failed to perform his or her duties and responsibilities hereunder for a total of 180 days, consecutive or not. (b) The Executive may, upon three months' prior written notice to the Corporation, voluntarily terminate his or her employment hereunder for other than Good Reason. (c) On termination of the Executive's employment as a result of the Executive's death or as a result of the Executive having become permanently disabled, or upon the termination by the Executive of his or her or her employment for other than Good Reason, the Corporation shall pay to the Executive or his or her personal representative on behalf of the estate of the Executive, within 10 days after date of termination of the Executive's employment, any unpaid base salary earned by the Executive up to the date of termination, together with any amount to which the Executive may be entitled under the provisions of applicable employment legislation in force at the date of termination of the Executive's employment (less any deductions required by law). (d) The several payments and other obligations of the Corporation described in this Section 3.4 are the only severance, compensation or termination payments or benefits that the Executive will receive in the event of any termination of employment set forth in this Section 3.4. 3.5 RETURN OF PROPERTY. Upon the termination of the employment of the Executive hereunder, regardless of the reason therefor, the Executive will immediately deliver or cause to be delivered to the Corporation all books, documents, effects, money, securities, equipment or other property (including manuals, computer disks and software products) belonging to the Corporation, or for which the Corporation is liable to others, which are in the possession, charge or custody of the Executive. The Executive agrees not to make for personal or business use or for the use of any other party any reproductions or copies of any such books, documents, effects or other property belonging to the Corporation or for which the Corporation is liable to others. ARTICLE IV GENERAL 4.1 CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Corporation all secret or confidential information, knowledge or data relating to the Corporation and its subsidiaries and their respective businesses which shall have been obtained by the Executive during the Executive's employment by the Corporation and which shall not be or become public knowledge (other than by acts of the Executive or representatives of the Executive in violation of this Agreement). If the employment of the Executive hereunder is terminated for any reason, the Executive shall not, without the prior written consent of the Corporation or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to any person other than the Corporation and those persons designated by it. 5 6 4.2 NON-INTERFERENCE WITH PERSONNEL RELATIONS. During the Executive's employment with the Corporation and for a period of twelve months thereafter, the Executive will not, directly or indirectly, solicit, entice or persuade any employee of the Corporation or any of its subsidiaries to leave the services of the Corporation for any reason. 4.3 EQUITABLE RELIEF. The Executive acknowledges that a breach of the restrictions contained in Sections 4.1 and 4.2 hereof will cause irreparable damage to the Corporation, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the Executive and the Corporation agree that if the Executive breaches or attempts to breach any of the restrictions contained in Sections 4.1 and 4.2 hereof, then the Corporation shall be entitled to temporary or permanent injunctive relief with respect to any such breach or attempted breach (in addition to any other remedies, at law or in equity, as may be available to the Corporation), without posting bond or other security. 4.4 RESIGNATIONS. If the employment of the Executive hereunder is terminated in accordance with the terms of this Agreement, the Executive shall tender his or her resignation from all positions he may hold as an officer or director of the Corporation or any of its subsidiaries. 4.5 MITIGATION. The Executive shall have no duty to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination of the Employee's employment with the Corporation, or otherwise. 4.6 NOTICES. Any notice required or permitted to be given under this Agreement shall be in writing and shall be properly given if delivered personally or mailed by prepaid registered mail addressed as follows: (a) in the case of the Corporation, to: The Learning Company, Inc. One Athenaeum Street Cambridge, Massachusetts 02142 Attention: Chief Executive Officer (b) in the case of the Executive, to: Neal S. Winneg 11 Highfields Wayland, MA 01778 or to such other address as the parties may from time to time specify by notice given in accordance herewith. Any notice so given shall be conclusively deemed to have been given or made on the day of delivery, if delivered, or, if mailed by registered mail, upon the date shown on the postal return receipt as the date upon which the envelope containing such 6 7 notice was actually received by the addressee. 4.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the employment relationship contemplated hereby and cancels and supersedes all prior understandings and agreements between the parties with respect thereto, and no agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 4.8 SUCCESSORS AND ASSIGNS. Neither the Executive nor the Corporation may assign its rights hereunder to another person without the consent of the other; provided, however, that the Corporation may assign its rights hereunder to a successor corporation which acquires (whether directly or indirectly, by purchase, arrangement, merger, consolidation, dissolution or otherwise) all or substantially all of the business or assets of the Corporation and expressly assumes and agrees to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place and provided that such successor shall reasonably be able to perform all of its obligations under this Agreement. As used in this Agreement, the term "Corporation" shall mean the Corporation (as herein defined) and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 4.9 ENUREMENT. This Agreement shall enure to the benefit of and be binding upon the Executive and his or her personal representatives and upon the Corporation and its successors and permitted assigns. 4.10 FURTHER ASSURANCES. Each of the Corporation and the Executive agrees to execute all such documents and to do all such acts and things as the other party may reasonably request and as may be lawful and within its power to do or to cause to be done in order to carry out or implement in full the provisions and intent of this Agreement. 4.11 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts and the federal laws of the United States of America applicable therein. Each of the parties assents to the jurisdiction of the courts of the Commonwealth of Massachusetts to hear any action, suit or proceeding arising in connection with this Agreement. 4.12 WAIVER OF RIGHTS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing by the party against whom the same is sought to be enforced and no failure by any party to enforce any of its rights hereunder shall, except as aforesaid, be deemed to be a waiver of such right. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any provision of this Agreement to be performed by such other party shall be deemed to be a waiver of a similar or dissimilar provision hereof at the same or at any prior or subsequent time. 4.13 MANDATORY ARBITRATION. Except as expressly stated below, any dispute, controversy or claim arising out of or relating to my employment by the Corporation or its 7 8 termination, including but not limited to claims of unlawful discrimination or harassment (collectively, the "Arbitrable Claims"), will be settled by binding arbitration in (a) Boston or Cambridge, Massachusetts (if the Executive's primary place of work is in Massachusetts), or (b) Fremont or San Francisco, California (if the Executive's primary place of work is in California) or (c) in such city as is located the office of the Corporation in which constitutes the Executive's primary place of work (if the Executive's primary place of work is not in Massachusetts or California), in accordance with the then current rules of the American Arbitration Association (the "AAA"), before an experienced employment arbitrator licensed to practice law in the state in which the arbitration is conducted (the "Arbitration Site") and selected in accordance with the Model Employment Arbitration Procedures of the AAA. Notwithstanding the foregoing, and for purposes of clarity, each of the Corporation and the Executive acknowledges and agrees that any Arbitrable Claim shall be governed by the internal laws of the Commonwealth of Massachusetts (regardless of the Arbitration Site) without regard to the laws that might otherwise apply under applicable principles of conflicts of laws. The Corporation and the Executive each knowingly waive the right to a jury trial in a court of law with respect to the Arbitrable Claims. For purposes of any arbitration under this Section 4.13, the Corporation and the Executive hereby incorporate by reference, and adopt all of the discovery rights and procedures referenced in, the Massachusetts Code of Civil Procedure, and agree that each of the Corporation and the Executive shall pay the fees of its, his or her own attorneys, the expenses of its, his or her own witnesses and any other expenses connected with presenting its, his or her own claims. The fees of the arbitrator will be paid half by the Executive and half by the Corporation, provided that the Corporation will pay 100% of any portion of the arbitrator's fee that exceeds $1000. The Arbitrator shall have the power to summarily adjudicate claims and/or enter summary judgment in appropriate cases. Notwithstanding any of the foregoing, any claim or counterclaim brought for infringement or misappropriation of any patent, copyright, trade secret, trademark or other proprietary right shall not be subject to arbitration, and neither the Executive nor the Corporation waive any right to submit any such claim, or any factual or legal issues relating to such a claim, to a court of competent jurisdiction. IN WITNESS WHEREOF the parties hereto have executed this Agreement on the date and year first above written. /s/ Neal S. Winneg --------------------------------------- NEAL S. WINNEG THE LEARNING COMPANY, INC. By: /s/ Michael J. Perik ----------------------------------- Michael J. Perik Chief Executive Officer 8 EX-10.13 7 SIXTH AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 10.13 SIXTH AMENDMENT TO LOAN DOCUMENTS AMENDMENT dated as of December 31, 1997 (the "AMENDMENT") by and among TLC MULTIMEDIA INC., a Minnesota corporation f/k/a/ "SoftKey Inc." (hereinafter, "MULTIMEDIA"), MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC), a Minnesota corporation ("MECC"), and TLC PROPERTIES INC., a Massachusetts corporation f/k/a "SoftKey Multimedia Inc." (hereinafter "PROPERTIES"), 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. Multimedia and its corporate affiliates MECC and Properties, each a wholly-owned subsidiary of The Learning Company, Inc., a Delaware Corporation f/k/a "SoftKey International Inc." (hereinafter, the "GUARANTOR"), 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, a Fourth Amendment to Loan Documents dated as of February 28, 1996 and a Fifth Amendment to Loan Documents dated as of October 4, 1996 (as so amended and as the same may be amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"). Unless otherwise defined herein, capitalized terms used herein shall have the same respective meanings as set forth in the Credit Agreement. 2. The Bank and the Borrowers wish to amend the Credit Agreement to extend the Commitment Expiration Date from June 30, 1998 to June 30, 1999 and to extend the Maturity Date from July 1, 1998 to July 1, 1999. 3. The Bank and the Borrowers wish to make provision for a future amendment of the Credit Agreement and the other Loan Documents to include Creative Wonders Inc., a Delaware corporation and wholly-owned subsidiary of Guarantor ("CREATIVE WONDERS"), as a party to the Credit Agreement and as a Co-Borrower with the other Borrowers. 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: Section 1. AMENDMENTS TO CREDIT AGREEMENT. 1.1 Section 1.1 is hereby amended by deleting the date "June 30, 1998" appearing in the fourth line thereof (defined therein as the "Commitment Expiration Date") and substituting in lieu thereof the date "June 30, 1999". 1.2 Section 1.5 is hereby amended by deleting the date "July 1, 1998" appearing in the third line thereof (defined therein as the "Maturity Date") and substituting in lieu thereof the date "July 1, 1999". 2 -2- Section 2. SPECIAL COVENANTS WITH REGARD TO THE ADDITION OF CREATIVE WONDERS AS A CO-BORROWER. The Borrowers agree to enter into, on or before January 31, 1998, agreements with the Bank and Creative Wonders, in form and substance satisfactory to the Bank, whereby the Credit Agreement will be amended to include Creative Wonders as a party thereto and Creative Wonders will become jointly and severally liable with the Borrowers under the Credit Agreement and the other Loan Documents and shall become, for all purposes thereof, a "Borrower" thereunder. The Borrowers further agree (a) to provide the Bank, on or before January 31, 1998, with an updated list of the Borrower's intellectual property referred to in Section 6.12 of the Credit Agreement and (b) to cause Creative Wonders and the Borrowers to enter, on or before January 31, 1998, into other such agreements with the Bank (including, without limitation, security agreements covering some or all of their assets and properties) as the Bank shall deem appropriate. Section 3. CONDITIONS OF EFFECTIVENESS. This Amendment shall be deemed effective as of December 30, 1997 (the "EFFECTIVE DATE"), provided that the Bank shall have received on or before such date two (2) copies of this Amendment executed by each Borrower and consented to by the Guarantor. Section 4. CONFIRMATION OF REPRESENTATIONS, ABSENCE OF DEFAULT. Each Borrower hereby confirms that the representations set forth in the Loan Documents are true and correct as of the date hereof, subject to the exceptions and further disclosures set forth in SCHEDULE A hereto. Each Borrower hereby confirms that, except as set forth in Section 4 hereof or in SCHEDULE A hereto, no Event of Default has occurred and is continuing under the Credit Agreement. Section 5. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. 5.1 Upon the Effective Date, each occurrence in the Credit Agreement of "this Credit Agreement", "hereunder", "hereof", "herein", or words of like import referring to the Credit Agreement, and each occurrence in 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 to be a reference to the Credit Agreement as amended hereby. 5.2 Except as specifically amended above, the Credit Agreement each of the other Loan Documents shall remain in full force and effect and is hereby ratified and confirmed. Each Borrower (and the Guarantor by its consent to this Agreement) agrees that, as of the date hereof, it has no defenses against the obligations represented by the Credit Agreement and the other Loan Documents. 5.3 The amendments set forth herein (i) do not constitute a waiver or modification of any term, condition or covenant of the Credit Agreement or 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 other Loan Documents or any of the instruments or documents referred to therein. Section 6. 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. 3 -3- Section 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. Section 8. 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. TLC MULTIMEDIA INC. By: /s/ R. Scott Murray -------------------------------- Name: R. Scott Murray Title: Chief Financial Officer MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC) By: /s/ R. Scott Murray -------------------------------- Name: R. Scott Murray Title: Chief Financial Officer TLC PROPERTIES INC. By: /s/ R. Scott Murray -------------------------------- Name: R. Scott Murray Title: Chief Financial Officer 4 -4- FLEET NATIONAL BANK, as successor in interest to Fleet Bank of Massachusetts, N.A. By: /s/ William E. Rurode ------------------------------ Name: William E. Rurode, Jr. Title: Senior Vice President 5 SCHEDULE A EXCEPTIONS AND QUALIFICATIONS TO REPRESENTATIONS (Section 6 of this Amendment) [If none, please initial: /s/RSM] -------- 6 CONSENT The undersigned, as Guarantor under the Guaranty dated as of September 30, 1994, as amended (the "Guaranty"), in favor of Fleet National Bank (successor to Fleet Bank of Massachusetts, N.A.), hereby consents to the foregoing amendment to the Credit Agreement dated as of September 30, 1994, as amended (the "Credit Agreement"), and hereby confirms and agrees that the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, upon the effectiveness of, and on and after the date of, said amendment, each occurrence in the Guaranty and in each other Loan Document (as defined in the Credit Agreement) to which the undersigned is a party, of "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 thereby. THE LEARNING COMPANY, INC. By: /s/ R. Scott Murray ---------------------------- Name: R. Scott Murray Title: Chief Financial Officer EX-10.18 8 1990 LONG TERM EQUITY INCENTIVE PLAN 1 Exhibit 10.18 THE LEARNING COMPANY, INC. LONG TERM EQUITY INCENTIVE PLAN RESTATED AS OF DECEMBER 4, 1997 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 2 any successor agency. 10. "COMMITTEE" means the Committee referred to in Section 2, or the 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. 3 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. 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. 3 4 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. 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 4 5 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. 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 9,000,000 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 9,000,000 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. 5 6 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 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 6 7 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. 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 7 8 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 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 8 9 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 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 9 10 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, (i) all awards of Restricted Stock granted pursuant to this Section 7 to participants who are employees whom the Committee determines are likely to be Covered Employees at the end of the year shall have restrictions which will lapse contingent on the attainment of performance goals based on the attainment of an amount of Pre-tax Profit of the Company during a tax year and (ii) in no event shall the grant of Restricted Stock in any fiscal year be made to an employee whom the Committee determines is likely to be a Covered Employee at the end of the year with a Fair Market Value as of the date of grant which exceeds the lesser of (i) 100% of such Participant's Annual Base Salary and (ii) $500,000. 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 10 11 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 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 11 12 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 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 12 13 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 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. 13 14 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 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 14 15 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 (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 15 16 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 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, 16 17 qualification, consent, approval, agreement or representations shall have been effected or obtained free of any conditions not acceptable to the Committee. 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". 17 18 X. PLAN DESIGNATION AND STATUS. Notwithstanding the designation of this 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 18 19 Company represented in person or by proxy and entitled to vote at the meeting. 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-10.23 9 FORM OF STOCK OPTION PLAN 1 Exhibit 10.23 THE LEARNING COMPANY, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN STOCK OPTION AGREEMENT The Learning Company, Inc. (the "Company") has granted to you an option (the "Option") to purchase the number of shares (the "Shares") of common stock, par value $.01 per share, of the Company ("Common Stock") listed on Exhibit A hereto at the exercise price set forth on Exhibit A. The Option is granted subject in all respects to the terms of the Company's 1996 Non-Employee Director Stock Option Plan (the "Plan"). The Option does not constitute an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. Capitalized terms used and not defined in this Agreement shall have the meanings assigned to such terms in the Plan. The terms of the Option are as follows: 1. TERM. The term of the Option commences on the Grant Date set forth in Exhibit A and, except as provided in Section 4 hereof, ends on the Expiration Date set forth on Exhibit A. 2. EXERCISABILITY. The Option shall be exercisable at the times, and with respect to the number of Shares, set forth on Exhibit A. Exercisability of the Option may also be accelerated or adjusted as provided in the Plan. 3. EXERCISE AND PAYMENT. (a) EXERCISE. You, or the person or persons having the right to exercise the Option upon Disability, may exercise the Option to purchase all or any part of the Shares for which it is then exercisable by delivering in person or by mail to the Secretary of the Company a completed Notice of Exercise Form attached hereto as Exhibit B (the "Exercise Form"), together with payment of the exercise price. The date the Company receives full payment of the exercise price and any required documents from you will be considered the date that the Option was exercised. You shall not have privileges as a stockholder until the date of issuance of a stock certificate representing Shares. (b) PAYMENT OF EXERCISE PRICE. Payment of the exercise price must be made in full at the time of exercise in cash, by certified or cashier's check or, in the sole discretion of the Committee, pursuant to such other methods as may be permitted under the Plan. In lieu of full payment of the exercise price in cash, upon request, the Committee may, in its sole discretion, allow you (or the person or persons having the right to exercise the Option upon your death or Disability), to exercise the Option or a portion thereof by tendering shares of Common Stock (including Shares received upon exercise of the Option), valued at Fair Market Value on the date 2 immediately preceding the day of exercise, equal to the exercise price for the Shares being acquired, as permitted by the Plan. (c) WITHHOLDING TAX. You may be subject to withholding taxes which, in the Company's judgment, result from the purchase of shares upon exercise of the Option. At the time of any exercise of the Option (or at any such later time as such obligation arises or as the amount of such obligation becomes determinable), you shall pay to the Company in cash all applicable federal, state, local and foreign withholding and employment taxes required to be withheld resulting from exercise of the Option, from the lapse of any restriction imposed on the Shares, from a transfer or other disposition of the Shares, or otherwise related to the Shares. The Company may withhold from your wages, or require you to pay to the Company, such amount. The Committee may in its discretion permit you to pay some or all of such amount as provided in Section 15 of the Plan, with all decisions of the Committee to be made at any time at or prior to each exercise of the Option. 4. TERMINATION OF EMPLOYMENT. (a) GENERAL. In the event of your Termination for any reason other than death or Disability before exercise in full of your Option, you may (only to the extent then exercisable on the date of such Termination) exercise your Option in whole or in part any time within 90 days after the date of Termination (unless otherwise indicated on Exhibit A hereto). (b) DEATH OR DISABILITY. In the event of your Termination by reason of death or Disability prior to the exercise in full of your option, you, your personal representative or the person to whom the Option is transferred by will or the laws of descent and distribution may (only to the extent exercisable on the date of such Termination) exercise the Option in whole or in part at any time within one year after the date of death or Disability, as the case may be. (c) CAUSE. In the event of your Termination by reason of Cause (as defined in the Plan), you may have a period of time to be determined by the Committee not to exceed ten days from the date of cessation of service (but in no event after the expiration date of the Option) to exercise the Option (to the extent exercisable at the time of the optionee's cessation of service), and the Option shall thereafter terminate. (d) FINAL CUT-OFF. In no event may this Option be exercised by anyone after the Expiration Date. 5. TAX CONSEQUENCES. The tax consequences associated with this Option are complex and can depend upon your particular circumstances. The Company is not making any warranties or representations to you with respect to the income tax consequences of the transactions contemplated by the option agreement, and you should consult a tax advisor before exercising this Option. 2 3 6. THE PLAN. (a) PLAN PROVISIONS APPLICABLE. The Option is subject to all provisions of the Plan, a copy of which is being delivered to you with this Agreement. The Plan is described in the Prospectus which is also being delivered to you with this Agreement. (b) OPTION AND PLAN PROVISIONS CONTROL. THE OPTIONS DESCRIBED IN THE PROSPECTUS MAY VARY SUBSTANTIALLY FROM THIS OPTION. YOUR RIGHTS ARE AS SET FORTH IN THIS AGREEMENT AND THE PLAN, WHICH CONTROL IN THE EVENT OF ANY INCONSISTENCY WITH THE DESCRIPTION IN THE PROSPECTUS. 7. TRANSFER OF OPTIONS. (a) The Option represented by this Agreement may be received by the Optionee in exchange for an option granted under the Company's 1996 Stock Option Plan. In the event of any conflict between the terms of this Option and the option granted under the 1996 Stock Option Plan, the terms of the Plan and this Agreement shall govern. (b) This Option may be transferred to your spouse, child or grandchild or trust or limited partnership for your or their benefit. 8. ADJUSTMENTS. The Company may adjust the number and kind of stock issuable upon exercise of the Option and the exercise price thereof in certain circumstances in accordance with the provisions of Section 8 and Section 9 of the Plan. 9. LEGALITY OF ISSUANCE. The Company shall not be obligated to sell or issue any Shares pursuant to this Agreement if such sale or issuance, in the opinion of the Company or the Company's counsel, might constitute a violation by the Company of any provision of law, including without limitation the provisions of the Securities Act of 1933, as amended. 10. INVESTMENT REPRESENTATIONS. The Company may, as a condition of issuance Shares, require you to make such investment representations as the Company and the Company's counsel deem necessary or desirable in order to assure compliance with applicable federal or state securities law. 11. LEGENDS. The Company may impose restrictions upon the sale, pledge or other transfer of Shares acquired upon exercise of this option (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company or the Company's counsel, such restrictions are necessary or desirable in order to achieve compliance with any federal or state securities or other laws. 12. MISCELLANEOUS. 3 4 12.1 ASSIGNMENT; BINDING EFFECT; NO TRANSFER. Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon and insure to the benefit of the executors, administrators, heirs, legal representatives, successors and assigns of the parties hereto; PROVIDED, HOWEVER, that you may not assign any of your rights under this Agreement. The Option is not transferable except at death by will or the laws of descent and distribution, and is exercisable during your lifetime only by you. 12.2 DAMAGES. You shall be liable to the Company for all costs and damages, including incidental and consequential damages and attorneys' fees and expenses, resulting from a disposition of shares which is not in conformity with the provisions of this Agreement. 12.3 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware. 12.4 NOTICES. All notices and other communications under this agreement shall be in writing. Unless you are notified in writing to the contrary, all notices, communications and documents directed to the Company and related to the Agreement, if not delivered by hand, shall be mailed, addressed as follows: The Learning Company, Inc. One Athenaeum Street Cambridge, MA 02142 Attention: Secretary Unless and until the Company is notified in writing to the contrary, all notices, communications and documents intended for you and related to this Agreement, if not delivered by hand, shall be mailed to your last known address as shown on the Company's books. Notices and communications shall be mailed by first class mail, postage prepaid; documents shall be mailed by U.S. registered mail, return receipt requested, postage prepaid. All mailing and deliveries related to the Agreement shall be deemed delivered, if mailed, on the second day after they are deposited in the U.S. mail. 12.5 EXHIBITS. The exhibits attached to, or delivered to you with, this Agreement (including without limitation the Plan) are incorporated herein and form a part of this Agreement. 12.6 ENTIRE AGREEMENT. This Agreement, including the Plan, contains all of the terms and conditions agreed upon by the parties relating to its subject matter and supersedes any and all prior and contemporaneous agreements, negotiations, correspondence, understandings and communications of the parties whether oral or written, respecting that subject matter. 4 5 12.7 ATTORNEYS' FEES. If any party to this Agreement seeks to enforce this Agreement by legal proceedings or otherwise, the nonprevailing party shall pay the prevailing party's costs and expenses, including, without limitation reasonable attorneys' fees. 12.8 VALIDITY OF PROVISIONS; SEVERABILITY. If any provision of this Agreement is held invalid, illegal or unenforceable, the provision shall be adjusted if possible rather than voided to carryout its intent to the maximum extent possible and in all events the remainder of this Agreement will remain in full force and effect. 12.9 COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same agreement. THE LEARNING COMPANY, INC. By: -------------------------------- R. Scott Murray Chief Financial Officer OPTIONEE ----------------------------------- CONSENT OF SPOUSE If the Optionee resides in California, or another community property jurisdiction, I, as the Optionee's spouse, also accept and agree to be bound by the terms and conditions of this option and the Plan. ------------------------------------ Optionee's Spouse 5 EX-21.1 10 SUBSIDIARIES 1 EXHIBIT 21.1 THE LEARNING COMPANY, INC. SUBSIDIARIES SoftKey Software Products Inc. (Ontario) SoftKey Holdings Corporation (Ontario) TLC Multimedia Inc. (Minnesota) Learning Company Properties Inc. (Delaware) The Learning Company Funding, Inc. (Delaware) The Learning Company (Ireland) Limited (Ireland) Minnesota Educational Computing Corporation (Minnesota) Compton's NewMedia, Inc. (California) EX-23.1 11 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of The Learning Company, Inc. (formerly known as Softkey International, Inc.) on Form S-3 (File Nos. 33-73422, 33-63073, 333-00145, 333-02385, 333-03271, 333-10009, 333-40543, 333-40549) and Form S-8 (File Nos. 33-75134, 33-92920, 33-92922, 33-61931, 333-00107, 333-02337, 333-04619, 333-40539, 333-42449, 333-43653, 333-45113, 333-45115) our report dated February 9, 1998 (except as to note 12, which is as of March 6, 1998) on our audits of the consolidated financial statements and financial statement schedule of The Learning Company, Inc. as of January 3, 1998 and January 4, 1997, and for each of the three fiscal years in the period ended January 3, 1998, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND, L.L.P. Boston, Massachusetts March 13, 1998 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 0000719612 THE LEARNING COMPANY 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-02-1996 DEC-31-1997 1 95,137 0 99,677 29,226 29,600 257,004 32,306 24,065 416,791 160,356 294,356 0 8 489 (104,283) 416,791 392,438 392,438 111,703 673,790 0 0 21,378 (414,433) 61,234 (425,667) 0 0 0 (425,667) (9.59) (9.59)
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