1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1995

Commission File Number 0-13069

SOFTKEY INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 94-2562108
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(Address of Principal Executive Offices)

(617) 494-1200
(Registrant's Telephone Number, Including Area Code)

Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
--- ---
As of October 27, 1995, there were 25,152,779 outstanding shares of the
issuer's Common Stock, par value $.01 per share.

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SOFTKEY INTERNATIONAL INC.
TABLE OF CONTENTS

Part I - Financial Information

Page
----

ITEM 1. Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets at
September 30, 1995 and December 31, 1994 . . . . . . . . . . . 3

Condensed Consolidated Statements of
Operations for the Three and Nine Months
Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . 4

Condensed Consolidated Statements of
Cash Flows for the Nine Months
Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . 5

Notes to Condensed Consolidated Financial Statements . . . . . 6

ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 9

Part II - Other Information

ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 14

ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

SOFTKEY INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

September 30, December 31,
1995 1994
---- ----

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 87,103 $ 12,205
Accounts receivable (less allowances for returns
and doubtful accounts of $8,292 and $6,744
respectively) 28,410 16,745
Inventories 13,732 9,795
Other current assets 12,176 8,247
-------- --------
141,421 46,992

Property and equipment, net 14,181 9,325
Goodwill, net 57,458 32,051
Other assets 5,359 2,447
-------- --------
$218,419 $ 90,815
======== ========

LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 31,139 $ 29,455
Current portion of long-term obligations 7,214 2,016
-------- --------
38,353 31,471

Long-term obligations 4,378 17,536

Deferred income taxes 4,339 4,323
-------- --------
47,070 53,330

STOCKHOLDERS' EQUITY 171,349 37,485
-------- --------
$218,419 $ 90,815
======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

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SOFTKEY INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1995 1994 1995 1994
---- ---- ---- ----

REVENUES $ 41,579 $ 28,029 $ 119,408 $ 90,123

COST OF REVENUES 12,656 8,318 38,563 30,065
------------ ------------ ------------ ------------

GROSS MARGIN 28,923 19,711 80,845 60,058

OPERATING EXPENSES:
Sales, marketing and support 9,425 6,854 27,570 19,794
General and administrative 5,929 5,572 18,284 16,687
Research and development 3,097 1,608 8,764 4,916
------------ ------------ ------------ ------------
18,451 14,034 54,618 41,397
------------ ------------ ------------ ------------

OPERATING INCOME 10,472 5,677 26,227 18,661

OTHER INCOME (EXPENSE), net 1,274 (626) 517 (313)
------------ ------------ ------------ ------------

INCOME BEFORE TAXES 11,746 5,051 26,744 18,348

PROVISION FOR INCOME TAXES 1,703 1,010 3,906 4,061
------------ ------------ ------------ ------------

NET INCOME $ 10,043 $ 4,041 $ 22,838 $ 14,287
============ ============ ============ ============

NET INCOME PER SHARE $ 0.36 $ 0.21 $ 0.83 $ 0.74

WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 28,266,000 20,850,000 27,447,000 20,355,000

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

5
SOFTKEY INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

Nine Months Ended
September 30,
-------------
1995 1994
---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 22,838 $ 14,287
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization 7,938 2,510
Changes in operating assets and liabilities:
Accounts receivable (12,135) (907)
Accounts payable and accruals (1,841) (18,707)
Other (17,768) (4,204)
--------- ---------
(968) (7,021)
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (23,325) --
Purchase of fixed assets, net (9,027) (2,175)
Other (1,706) (850)
--------- ---------
(34,058) (3,025)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases and long-term debt (310) (5)
Issuance of common stock, net 113,996 6,147
Proceeds from (repayment of) lines of credit (4,666) 5,000
Redemption of series B preferred stock -- (4,660)
Repayment of convertible note -- (500)
--------- ---------
109,020 5,982
--------- ---------

EFFECT OF EXCHANGE RATE CHANGES ON CASH 904 (187)
--------- ---------

NET CHANGE IN CASH AND CASH EQUIVALENTS 74,898 (4,251)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,205 22,797
--------- ---------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 87,103 $ 18,546
========= =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

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SOFTKEY INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements for the three and nine months
ended September 30, 1995 and 1994 are unaudited and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1994. The results of operations for the three and nine months ended
September 30, 1995 are not necessarily indicative of the results for the entire
year ending December 31, 1995.

The third quarter reporting period for 1995 ended on September 30, 1995 and the
third quarter reporting period for 1994 ended on October 1, 1994. For clarity of
presentation and comparison, the periods from January 1, 1995 to September 30,
1995 and from January 2, 1994 to October 1, 1994 are referred to as the "Nine
Months Ended September 30, 1995" and "Nine Months Ended September 30, 1994"
respectively, throughout these financial statements.

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, par value $.01 per share, of the Company ("Common Stock"). The results
for the Nine Months Ended September 30, 1995 reflect the pooling-of-interest
accounting treatment of the transaction. The financial statements for periods
prior to the Nine Months ended September 30, 1995 do not include amounts for
this acquisition as they were deemed to be immaterial.

Summarized results of operations for the period prior to the consummation of the
transaction, which is the Six Months Ended June 30, 1995, on a separate company
and combined basis are as follows (in thousands):

SoftKey FutureVision Combined
------- ------------ --------

Revenues $74,721 $3,108 $77,829
Operating income (loss) 21,779 (6,024) 15,755
Net income (loss) 17,973 (5,178) 12,795

2. GOODWILL

Goodwill represents the excess of purchase price over fair market value of
identifiable assets acquired. The Company evaluates the carrying value of
goodwill for possible impairment on a quarterly basis. Based upon its most
recent analysis, the Company believes that no impairment of goodwill exists at
September 30, 1995.

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3. LONG-TERM OBLIGATIONS

September 30, 1995 December 31, 1994
------------------ -----------------

Revolving lines of credit $ -- $ 7,700
Long term debt 3,034 --
Related party debt 3,003 2,123
Capital leases 2,024 2,411
Accrued minimum royalties -- 2,415
Other 3,531 4,903
-------- -------
11,592 19,552
Less: current portion (7,214) (2,016)
-------- -------
$ 4,378 $17,536
======== =======

4. INVENTORIES

Inventories consist primarily of finished goods at September 30, 1995 and
December 31, 1994.

5. MERGERS AND ACQUISITIONS

Acquisition of 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 with
a market value at the time of issuance of $3,640 and may issue additional shares
of Common Stock to a former shareholder of tewi pursuant to an earn-out
agreement. The Company also paid cash consideration of $12,688 for all of the
share capital of tewi. The transaction has been accounted for using the purchase
method of accounting.

The purchase price was allocated as follows:

Goodwill $19,699
Less: net liabilities (2,783)
-------
Stock issued and cash paid, including transaction costs $16,916
=======

The amortization of goodwill resulting from the purchase is being amortized over
its estimated useful life of 20 years on a straight-line basis.

Summarized combined results of operations for the Nine Months Ended September
30, 1995 and the Nine Months Ended September 30, 1994 are shown as if the
transaction had occurred at the beginning of the period presented.

Nine Months Ended September 30, 1995 Nine Months Ended September 30, 1994
------------------------------------ ------------------------------------
SoftKey tewi Combined SoftKey tewi Combined
------- ---- -------- ------- ---- --------

Revenues $119,408 $ 3,720 $123,128 $90,123 $7,137 $97,260
Operating income (loss) 26,227 (3,589) 22,638 18,661 (263) 18,398
Net income 22,838 (3,643) 19,195 14,287 (321) 13,966
Net income per share 0.83 -- 0.69 0.74 -- 0.72

6. COMPUTATION OF EARNINGS PER SHARE

Net income per share is computed using the weighted average number of common and
dilutive common stock equivalent shares outstanding during the period. Dilutive
common stock equivalent shares consist of convertible debentures and notes,
convertible Series A and Series B preferred stock in the Nine Months Ended
September 30, 1994 and stock options, warrants and other securities convertible
into Common Stock using the treasury stock method in both reporting periods. The
computations do not include common stock equivalents where the effect would not
be dilutive. Primary earnings per share computations do not materially differ
from fully diluted earnings per share.

7. REDEMPTION OF WARRANTS

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. As of September 30,
1995, 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.

8. COMMITMENTS AND CONTINGENCIES

Competition Act Inquiry (Canada)

On June 10, 1994, the Director of Investigation and Research under the
Competition Act (Canada) (the "Act") commenced an inquiry in Canada under the
non-criminal, reviewable practices provisions of the Act with respect to the
activities of SoftKey Software Products Inc. ("SoftKey Software") in the tax
preparation software business in Canada. On June 28, 1994, a court order
requiring SoftKey Software, along with other companies in the Canadian tax
preparation software business, to produce certain documents and information with
respect to the Canadian tax preparation software industry was issued by the
Federal Court of Canada Trial Division. SoftKey Software has had discussions
with the staff of the Canadian Bureau of Competition Policy and is currently
cooperating to provide the documents and information specified in the order. At
this time, no formal application has been made seeking remedy under the Act.
Management does not currently expect that the outcome of this inquiry will have
a material adverse effect on the Company.

Other Litigation

The Company is involved in various legal proceedings involving copyrights,
breach of contract and various other claims incident to the conduct of its
business. Management does not expect the Company to suffer any material
liability by reason of such actions.

9. SUBSEQUENT EVENTS

(a) On October 23, 1995, the Company announced that it had completed a private
offering of $350,000 principal amount 5 1/2% Senior Convertible Notes due 2000.
The Notes will be redeemable by the Company on or after November 2, 1998 at
declining redemption prices and are convertible into Common Stock at a price of
$53 per share.

(b) On October 30, 1995, the Company announced it had entered into a definitive
merger agreement in which it will acquire the Minnesota Educational Computing
Corporation ("MECC"), a publisher and distributor of high-quality educational
software for children, in a merger valued at approximately $370 million. The
transaction will be accounted for as a purchase. The closing of the transaction
is subject to certain conditions, including stockholder approval, effectiveness
of the registration statement for the Common Stock to be issued in the merger
and expiration of applicable waiting periods under premerger notification
regulations.

(c) On October 30, 1995, the Company announced that through its wholly owned
subsidiary, Kidsco Inc., it had commenced a cash tender offer of $65 per share
for 4,642,507 shares of The Learning Company, representing a

majority of The Learning Company's outstanding common stock on a fully diluted
basis. The offer is the first step in a proposed two-step acquisition of The
Learning Company by the Company. In the second step, the remaining shares of The
Learning Company common stock not owned by the Company would be converted into
Common Stock having the value, based on trading prices shortly prior to the
merger, of $65 per share, subject to a maximum exchange ratio of 1.8571 shares
of Common Stock per share of The Learning Company common stock. The Learning
Company has approximately 9.3 million shares outstanding on a fully diluted
basis, giving the transaction a total value of approximately $606 million. The
Company's offer expires on November 29, 1995 and is subject to a number of
conditions. A more full description of the Company's offer and the proposed
second-step merger transaction is included in the Company's Schedule 14D-1,
filed with the Securities and Exchange Commission on October 30, 1995, as
amended. The transaction, if completed, is expected to be accounted for as a
purchase.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994. All
dollar amounts presented in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are presented in thousands, except
per share amounts.

INTRODUCTION

SoftKey International Inc. (the "Company") is a leading developer and publisher
of value-priced, high quality consumer software for PC's, primarily produced on
CD-ROM. The Company develops, licenses, manufactures, distributes and markets a
wide range of consumer titles in the lifestyle, edutainment, productivity,
entertainment and education categories. In addition, the Company develops,
markets and distributes income tax software and provides comprehensive
nationwide tax processing for personal, corporate and trust tax returns in
Canada.

RESULTS OF OPERATIONS

NET INCOME. The Company generated net income of $10,043 ($0.36 per fully
diluted share) on revenues of $41,579 in Third Quarter 1995 and net income of
$22,838 ($0.83 per fully diluted share) on revenues of $119,408 in the Nine
Months Ended September 30, 1995 as compared to net income of $4,041 ($0.21 per
fully diluted share) on revenues of $28,029 in Third Quarter 1994 and net income
of $14,287 ($0.74 per fully diluted share) on revenues of $90,123 in the Nine
Months Ended September 30, 1994. The increase in both the Third Quarter 1995 as
compared to the Third Quarter 1994 and in the Nine Months Ended September 30,
1995 as compared to the Nine Months Ended September 30, 1994 is a result of
several factors, including increases in revenues and gross margins, reductions
in certain operating expenses as a percentage of revenue and the introduction of
new product offerings.

On August 31, 1995, the Company acquired all of the issued and outstanding
capital stock of Future Vision Holding, Inc. ("Future Vision") in exchange for
the issuance of 1,088,149 shares of Common Stock, par value $.01 per share, of
the Company ("Common Stock"). The results for the Nine Months Ended September
30, 1995 have been restated to reflect the pooling-of-interest accounting
treatment of the transaction. The financial statements for periods prior to the
Nine Months Ended September 30, 1995 do not include amounts for this acquisition
as they were deemed to be immaterial.

REVENUES. Revenues by distribution channel for the Third Quarter 1995 as
compared to the Third Quarter 1994 and for the Nine Months Ended September 30,
1995 as compared to the Nine Months Ended September 30, 1994 are as follows:

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 % 1994 % 1995 % 1994 %
---- - ---- - ---- - ---- -

Retail $20,430 49 $12,416 44 $ 53,038 45 $32,392 36
OEM 6,471 16 4,714 17 14,341 12 11,660 13
Catalog -- -- -- -- -- -- 3,176 3
Direct response 6,190 15 5,041 18 19,569 16 12,231 14
International 7,115 17 3,114 11 15,617 13 8,922 10
Tax software and services 1,373 3 975 4 16,843 14 16,804 19
Lansa software -- -- 1,769 6 -- -- 4,938 5
------- --- ------- --- -------- --- ------- ---
$41,579 100% $28,029 100% $119,408 100% $90,123 100%
======= === ======= === ======== === ======= ===

Total revenues increased 48% in Third Quarter 1995 over Third Quarter 1994 and
32% for the Nine Months Ended September 30, 1995 over the Nine Months Ended
September 30, 1994, in both cases due to several factors. Growth in the retail
channel resulted from new product offerings and from an increased number of
retail distribution outlets carrying the Company's products; international sales
increased primarily as a result of the acquisition of tewi Verlag

GmbH ("tewi") on July 21, 1995 and the increased availability of additional
translated foreign language versions of English language products and the
continued shift to Windows-based applications on CD-ROM; original equipment
manufacturer ("OEM") revenues increased due to the availability of new product
offerings appropriate for this channel arising from the acquisition of Future
Vision; direct response revenues increased as a result of an increase in the
frequency of product mailings and growth in the number of registered product end
users. Revenues for the Nine Months Ended September 30, 1994 include $3,176 of
revenues from the Company's Power Up catalog operation, which was closed in
1994. Revenues from the Third Quarter 1994 and from the Nine Months Ended
September 30, 1994 also include $1,769 and $4,938, respectively, of revenues
from the Company's subsidiary, Lansa USA, Inc. ("Lansa"), which was sold by the
Company on September 30, 1994.

COST OF REVENUES. Cost of revenues includes the cost of manuals, packaging,
diskettes, duplication, assembly and fulfillment charges. In addition, cost of
revenues includes royalties paid to third-party developers, inventory
obsolescence reserves and amortization of capitalized software development
costs. Gross margins for the Third Quarter 1995 were consistent with the margins
for the Third Quarter 1994 at 70%. Gross margins increased in the Nine Months
Ended September 30, 1995 to 68% compared to 67% in the Nine Months Ended
September 30, 1994 primarily because of the continuing shift in 1995 toward
CD-ROM based sales.

OPERATING EXPENSES. The Company's operating expenses and the respective
percentages of revenues for Third Quarter 1995 as compared to Third Quarter 1994
and for the Nine Months Ended September 30, 1995 as compared to the Nine Months
Ended September 30, 1994 are as follows:

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
% of % of % of % of
1995 Revenues 1994 Revenues 1995 Revenues 1994 Revenues
---- -------- ---- -------- ---- -------- ---- --------

Sales, marketing and support $9,425 23% $6,854 24% $27,570 23% $19,794 22%
General and administrative 5,929 14% 5,572 20% 18,284 15% 16,687 19%
Research and Development 3,097 7% 1,608 6% 8,764 7% 4,916 5%
------- -- ------- -- ------- -- ------- --
$18,451 44% $14,034 50% $54,618 45% $41,397 46%
======= == ======= == ======= == ======= ==

Total operating expenses decreased as a percentage of revenues to 44% and 45% in
Third Quarter 1995 and in the Nine Months Ended September 30, 1995,
respectively, compared with 50% and 46% in Third Quarter 1994 and in the Nine
Months Ended September 30, 1994, respectively. The decrease in both periods is
primarily the result of reductions in operating infrastructure since the
Three-Party Combination, closures of the Power Up catalog operations and the
sale of Lansa.

Sales, marketing and support expenses decreased to 23% of revenues in Third
Quarter 1995 compared to 24% of revenues in Third Quarter 1994. The decrease in
these expenses as a percentage of revenues is attributable primarily to the
overall revenue growth of the Company. These expenses increased in the Nine
Months Ended September 30, 1995 to 23% of revenues compared to 22% of revenues
in the Nine Months Ended September 30, 1994. The increase in these expenses as a
percentage of revenues is attributable to higher sales and marketing costs of
Future Vision.

General and administrative expenses decreased to 14% and 15% of revenues in
Third Quarter 1995 and in the Nine Months Ended September 30, 1995,
respectively, compared to 20% and 19% of revenues in Third Quarter 1994 and in
the Nine Months Ended September 30, 1994, respectively. The decrease in both
periods is principally attributable to a reduction in the number of employees as
a result of closure of the Power Up catalog operation and facilities in Barbados
and Marina del Rey, California and the sale of Lansa.

Research and development costs increased to 7% of revenues in both the Third
Quarter 1995 and in the Nine Months Ended September 30, 1995, compared to 6% of
revenues in the Third Quarter 1994 and 5% in the Nine Months Ended September 30,
1994. The increase in both periods is primarily the result of the development
and introduction

to the market of a number of new product offerings which have been developed and
introduced to the market in 1995 as compared to 1994 including development of
Windows95 platform based software titles.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased from $12,205 at December 31, 1994 to $87,103
at September 30, 1995. This increase is attributable primarily to the issuance
of 2,713,106 shares of Common Stock in an underwritten public offering which
generated net proceeds of $74,434 to the Company, cash generated from operations
and cash received from the exercise of employee stock options.

On October 23, 1995, the Company announced that it had completed a private
offering of $350,000 principal amount 5 1/2% Senior Convertible Notes due 2000
(The Senior Convertible Notes). The Senior Convertible Notes will be redeemable
by the Company on or after November 2, 1998 at declining redemption prices.

On September 30, 1994, SoftKey Inc., a wholly owned subsidiary of the Company,
amended its revolving line of credit (the "Line"), as amended on May 17, 1995,
to provide for a maximum availability of $20,000, subject to eligible accounts
receivable limits. Borrowings under the Line become due on July 1, 1997 and bear
interest at the prime rate. The Line is subject to certain financial covenants,
is secured by a general security interest in the assets of SoftKey Inc. and
certain other subsidiaries of the Company and is guaranteed by the Company.
There were no amounts drawn on the Line at September 30, 1995.

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. In
order to mitigate this exposure, from time to time the Company has purchased
foreign exchange option contracts, none of which are outstanding at this time.
The Company believes that its existing cash is sufficient to meet its current
and planned requirements for the foreseeable future.

On October 30, 1995, the Company announced a $65 cash tender offer for 4,642,507
shares of The Learning Company common stock. The cash component of the offer is
currently valued at approximately $302,000. If successful, the Company expects
to use a portion of the proceeds from the private offering of Senior Convertible
Notes to pay for the tender offer and transaction costs.

Cash flow from operations on a short-term basis is positively impacted by the
seasonality of the income tax software business in the first two quarters of the
calendar year. At the present time, the Company expects that its cash flows from
operations will be sufficient to finance the Company's operations for at least
the next twelve months. Longer-term cash requirements are dictated by a number
of external factors, which include the Company's ability to launch new and
competitive products, the strength of competition in the consumer software
industry and the growth of the home computer market. The Company is continuously
evaluating products and technologies for acquisitions, however, no estimation of
short-term or long-term cash requirements for such acquisitions can be made at
this time.

FUTURE OPERATING RESULTS

The Company's future operating results are subject to a number of uncertainties,
including its ability to develop and introduce new products, the introduction of
competitive products and general economic conditions. In addition, the Company
expects the level of competition in the consumer software industry to become
more intense and that companies with greater access to capital, new products and
retail shelf space may enter its market. The Company may plan to seek
acquisitions of businesses, products or technologies in the future that are
complementary to its current business. There can be no assurance that the
Company will not encounter difficulties in integrating any such business,
product or technology.

The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations is provided pursuant to applicable
regulations of the Securities and Exchange Commission and is not intended to
serve as a basis for projections of future events.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On June 10, 1994, the Director of Investigation and Research under the
Competition Act (Canada) (the "Act") commenced an inquiry in Canada under the
non-criminal, reviewable practices provisions of the Act respecting the
activities of SoftKey Software Products Inc. ("SoftKey Software") in the tax
preparation software business in Canada. SoftKey Software is an Ontario
corporation and a wholly owned subsidiary of the Company. On June 28, 1994, a
court order requiring SoftKey Software, along with other companies in the
Canadian tax preparation software business, to produce certain documents and
information respecting the Canadian tax preparation software industry was issued
by the Federal Court of Canada Trial Division. SoftKey Software has had
discussions with the staff of the Canadian Bureau of Competition Policy and is
currently cooperating to provide the documents and information specified in the
order. At this time no formal application has been made seeking a remedy under
the Act. Management does not currently expect that the outcome of this inquiry
will have a material adverse effect on the Company.

The Company is involved in various legal proceedings involving copyrights,
breach of contract and various other claims incident to the conduct of its
business. Management does not expect the company to suffer any material
liability by reason of such actions.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------

2.1 Amended and Restated Combination Agreement by and among
WordStar International Incorporated, SoftKey Software Products
Inc., Spinnaker Software Corporation and SSC Acquisition
Corporation dated as of August 17, 1993, as amended(1)

3.1 Restated Certificate of Incorporation, as amended(2)

3.2 Bylaws of the Company, as amended(3)

10.1 SoftKey Product Agreement dated April 6, 1994 by and between
the Company and R.R. Donnelley & Sons Company(4)

10.2 Employment Agreement dated May 27, 1994 by and between the
Company and Michael Perik(5)

10.3 Employment Agreement dated May 27, 1994 by and between the
Company and Kevin O'Leary(5)

10.4 Employment Agreement dated February 1, 1994 by and between the
Company and R. Scott Murray(4)

10.5 Employment Agreement dated October 8, 1993 by and between
SoftKey Software Products Inc. and David E. Patrick(3)

10.6 1991 Employee Payroll Stock Purchase Plan(4)

10.7 1994 Non-Employee Director Stock Option Plan(3)

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10.8 Employment Agreement dated September 15, 1993 by and between
WordStar International Incorporated and Edward Sattizahn(5)

10.9 Employment Agreement dated June 20, 1994 by and between the
Company and Neal S. Winneg(5)

10.10 Credit Agreement dated as of September 30, 1994 between SoftKey
Inc. and Fleet Bank of Massachusetts, N.A.(7)

10.11 Employment Agreement dated March 1, 1994 by and between SoftKey
Software Products Inc. and Robert Gagnon(3)

10.12 Amendment No. 1 dated as of March 1, 1995, to Employment
Agreement dated as of February 1, 1994 by and between R. Scott
Murray and the Company(4)

10.13 Sublease Agreement dated as of January 5, 1995 by and between
Mellon Financial Services Corporation #1 and SoftKey Inc.(3)

10.14 Continuing Guaranty of Lease dated as of January 5, 1995 by the
Company in favor of Mellon Financial Services Corporation
#1.(3)

10.15 1990 Long Term Equity Incentive Plan, as amended and restated
through June 2, 1995.(2)

10.16 1982 Employee and Consultant Stock Option and Purchase Plan(8)

10.17 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.(2)

10.18 Stock Purchase Agreement by and among the Company, Flextech
Holdings Pte Ltd, Harry Fox, Joseph Abrams, Sol Rosenberg,
Mathew Barlow, Samuel Zemsky, K.H. Trustees Ltd., Seth Altholz
and Shelly Abrahami dated July 17, 1995(2)

10.19 Share Purchase Agreement dated July 21, 1995 by and among the
Company, Ziff-Davis Verlag GmbH and Helmut Kunkel(9)

10.20 Earn-Out Agreement dated July 21, 1995 by and between the
Company and Helmut Kunkel(9)

10.21 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.

10.22 Agreement and Plan of Merger by and among the Company, SchoolCo
Inc. and Minnesota Educational Computing Corporation (MECC)
dated as of October 30, 1995.

11.1 Statement re: Computation of Per Share Earnings

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(1) Incorporated by reference to schedules included in the Company's
definitive Joint Management Information Circular and Proxy Statement
dated December 27, 1993.

(2) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 1,
1995.

(3) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.

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(4) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 2,
1994.

(5) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 2,
1994.

(6) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the Transition period ended September 30, 1992.

(7) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 1,
1994.

(8) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended June 30, 1991.

(9) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated July 21, 1995.

(b) REPORTS ON FORM 8-K

The registrant filed a current report on Form 8-K reporting the
acquisition of tewi Verlag GmbH on July 21, 1995, as amended by Form
8-K/A filed October 4, 1995. The registrant also filed a current report
on Form 8-K reporting the acquisition of Future Vision Holding, Inc. on
August 31, 1995.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SOFTKEY INTERNATIONAL INC.

November 14, 1995

/s/ R. Scott Murray
--------------------------------------------
R. Scott Murray
Chief Financial Officer
(principal financial and accounting officer)

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