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 April 4, 1998
Commission File Number 1-12375
THE LEARNING COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-2562108
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(Address of Principal Executive Offices)
(617) 494-1200
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 1998, there were 53,509,734 outstanding shares of the
issuer's common stock, par value $.01 per share.
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THE LEARNING COMPANY, INC.
TABLE OF CONTENTS
Part I - Financial Information
------------------------------
Page
----
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997............................. 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 1998 and 1997.......................................... 4
Condensed Consolidated Statements of
Cash Flows for the Three Months
Ended March 31, 1998 and 1997.................................... 5
Notes to Condensed Consolidated Financial Statements............. 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................10
Part II - Other Information
---------------------------
ITEM 1. Legal Proceedings.................................................14
ITEM 2. Changes in Securities.............................................14
ITEM 6. Exhibits and Reports on Form 8-K..................................15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $107,710 $ 95,137
Accounts receivable (less allowances for returns
of $26,732 and $29,226, respectively) 94,428 99,677
Inventories 38,087 29,600
Other current assets 45,289 32,590
-------- ---------
285,514 257,004
Intangible assets, net 143,085 127,481
Other long-term assets 37,224 32,306
-------- ---------
$465,823 $ 416,791
======== =========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities $169,274 $ 160,356
-------- ---------
LONG-TERM OBLIGATIONS:
Long-term debt 287,650 294,356
Accrued and deferred income taxes 58,512 59,746
Other long-term obligations 9,414 6,119
-------- ---------
355,576 360,221
-------- ---------
STOCKHOLDERS' DEFICIT (59,027) (103,786)
-------- ---------
$465,823 $ 416,791
======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
------------------------------
1998 1997
----------- -----------
REVENUES $ 113,602 $ 86,881
COSTS AND EXPENSES:
Costs of production 33,964 24,020
Sales and marketing 28,145 20,859
General and administrative 7,574 8,577
Development and software costs 10,993 10,751
Amortization, merger and other charges 156,820 124,721
----------- -----------
237,496 188,928
----------- -----------
OPERATING LOSS (123,894) (102,047)
INTEREST EXPENSE, net 5,514 5,521
----------- -----------
LOSS BEFORE INCOME TAXES (129,408) (107,568)
PROVISION FOR INCOME TAXES: -- (250)
----------- -----------
NET LOSS $ (129,408) $ (107,318)
=========== ===========
NET LOSS PER SHARE-basic and diluted $ (2.45) $ (2.20)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING-basic and diluted 52,732,000 48,742,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(129,408) $(107,318)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, amortization and other 55,269 126,101
Provisions for returns and doubtful accounts 12,874 8,449
Charge for incomplete technology 103,000 --
Changes in operating assets and liabilities:
Accounts receivable (146) 2,335
Accounts payable and accruals (18,395) (14,078)
Other (2,381) (5,598)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,813 9,891
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets and other (11,489) (3,882)
Businesses acquired, net of cash acquired (116,972) --
Acquisition related items (18,019) (7,898)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (146,480) (11,780)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases and
other long-term debt (266) (207)
Repurchase of Senior Convertible Notes (6,000) (7,000)
Proceeds from issuance of common stock
related to exercise of stock options, net 12,582 516
Proceeds from the issuance of special warrants, net 134,346 --
Other (2,207) (67)
--------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES 138,455 (6,758)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (215) (1,444)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 12,573 (10,091)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 95,137 110,120
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 107,710 $ 100,029
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
--------------------
1998 1997
------- ------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued to acquire Mindscape $30,000 $ --
Common stock issued to settle note payable to related party -- 3,053
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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THE LEARNING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Learning Company, Inc.
("TLC" or the "Company") for the three months ended March 31, 1998 and 1997 are
unaudited and reflect all adjustments, consisting of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended January 3, 1998. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the results for the entire year ending December 31, 1998. The
results for the three months ended March 31, 1997 have been restated to reflect
the acquisitions of Skills Bank Corporation, Learning Services, Inc. and
Microsystems Software, Inc. which were accounted for using the
pooling-of-interest method of accounting.
The first quarter reporting period for 1998 ended on April 4, 1998, and the
first quarter reporting period for 1997 ended on April 5, 1997. The periods from
January 4, 1998 to April 4, 1998 and from January 7, 1997 to April 5, 1997 are
referred to as the "First Quarter 1998" and the "First Quarter 1997" or the
"Three Months Ended March 31, 1998" and the "Three Months Ended March 31, 1997",
respectively throughout these financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions regarding items
such as return reserves and allowances, net realizable value of intangible
assets and valuation allowances for deferred tax assets that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates in
these financial statements include: return reserves, inventory reserves,
valuation of deferred tax assets and valuation and useful lives of intangible
assets. Actual results could differ from these estimates.
2. ACQUISITIONS
On March 5, 1998, the Company acquired control of Mindscape, Inc. and certain
affiliated companies ("Mindscape") for a total purchase price of $152,557
payable in cash of $122,557 and the remainder through the issuance of 1,366,743
shares of common stock. This acquisition was accounted for using the purchase
method of accounting. The purchase price for Mindscape was allocated as follows:
Purchase price $152,557
Plus: fair value of net liabilities 3,297
--------
Excess to allocate 155,854
Less: excess allocated to
Incomplete technology 103,000
Completed technology and products 13,000
Brands and trade names 30,000
--------
146,000
--------
Goodwill $ 9,854
========
The Company primarily used the income approach to determine the fair value of
the identified intangible assets acquired. The debt-free cash flows, net of
provision for operating expenses, were discounted to a net present value. The
Company believes that the in-complete products under development had not reached
technical feasibility at the date of the acquisition, had no alternative future
use and additional development is required to ensure their commercial viability.
In order to develop the acquired incomplete technology into commercially viable
products the Company will be required to complete development of proprietary
code, development of the
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artistic and graphic works and design of the remaining storyboards. Complete
technology is being amortized using the straight-line method over its estimated
useful life of two years and goodwill and brands and trade names are being
amortized using the straight-line method over its estimated useful life of ten
years.
Summarized pro forma combined results of operations for the Three Months Ended
March 31, 1998 and 1997 are shown as if the transaction had occurred at the
beginning of the period presented. Pro forma adjustments relate primarily to
amortization of goodwill and complete technology. These pro forma combined
results of operations include the historical results from Mindscape and do not
reflect any reductions in operating costs derived from consolidation of
functional departments. In addition, the pro forma combined operating loss
includes pro forma amortization of acquired intangible assets resulting from the
acquisition of Mindscape for the Three Months Ended March 31, 1998 and 1997 of
$2,621.
Mindscape
Three Months Ended The Learning Including Pro Forma Pro Forma
March 31, 1998 Company, Inc. Adjustments Combined
- ------------------ ------------- ------------------- ----------
Revenues $ 113,602 $ 9,090 $ 122,692
Operating loss (123,894) (44,270) (168,164)
Net loss (129,408) (45,330) (174,738)
Net loss per share $ (2.45) $ (2.83)
Mindscape
Three Months Ended The Learning Including Pro Forma Pro Forma
March 31, 1997 Company, Inc. Adjustments Combined
- ------------------ ------------- ------------------- ----------
Revenues $ 86,881 $ 14,143 $ 101,024
Operating loss (102,047) (18,847) (120,894)
Net loss (107,318) (18,841) (126,159)
Net loss per share $ (2.20) $ (2.18)
3. ISSUANCE OF SPECIAL WARRANTS
On March 12, 1998, the Company's Canadian subsidiary, Softkey Software Products
Inc. ("SoftKey"), issued in a private placement in Canada 8,687,500 special
warrants for net proceeds of approximately $134,000. Each special warrant will
be exercisable without additional payment for one (or, in certain circumstances,
1.07) exchangeable non-voting share of SoftKey (an "Exchangeable Share")
following clearance from the various regulatory bodies in Canada. The
Exchangeable Shares are exchangeable at the option of the holder on a
one-for-one basis for common stock of the Company without additional payment.
4. BORROWINGS
On May 6, 1998, the Company amended its revolving line of credit (the "Line") to
provide a maximum availability of $148,500, of which $35,000 is outstanding at
March 31, 1998. Borrowings under the line are due July 1, 2000 and bear interest
at variable rates. The Line is subject to certain financial covenants, is
secured by a general security interest in certain operating subsidiaries of the
Company and by a pledge of the stock of certain of its subsidiaries.
5. COMPREHENSIVE LOSS
Effective January 4, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income." The Company's comprehensive
loss was as follows:
Three Months Ended March 31,
------------------------------
1998 1997
--------- ---------
Net loss $(129,408) $(107,318)
Other comprehensive loss (2,760) (1,448)
--------- ---------
Total comprehensive loss $(132,168) $(108,766)
========= =========
Other comprehensive loss represents losses on foreign currency translation.
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6. INVENTORIES
Inventories are stated at the lower of weighted average cost or net realizable
value and include third-party assembly costs, CD-ROM discs, manuals and an
allocation of fixed overhead.
March 31, December 31,
1998 1997
--------- ------------
Components $ 1,930 $ 4,243
Finished goods 36,157 25,357
------- -------
$38,087 $29,600
======= =======
7. COMPUTATION OF EARNINGS PER SHARE
For the year ended December 31, 1997, the Company adopted Statement of
Accounting Standard No. 128 ("FAS 128"), which requires the presentation of
Basic and Dilutive earnings per share, which replaces primary and fully diluted
earnings per share. Basic net loss per share is computed using the weighted
average number of common shares outstanding during the period. Dilutive net loss
per share is computed using the weighted average number of common shares
outstanding during the period, plus the dilutive effect of common stock
equivalents. Common stock equivalents consist of convertible debentures,
preferred stock, stock options and warrants. The dilutive computations do not
included common stock equivalents for the Three Months Ended March 31, 1998 and
1997 as their inclusion would be antidilutive. Dilutive elements would include
the 750,000 shares of Series A Preferred Stock (which is ultimately convertible
into 15,000,000 shares of common stock) issued on December 5, 1997, 8,687,500
special warrants to acquire Exchangeable Shares and employee stock options
totaling 13,048,000 and 9,790,000 at March 31, 1998 and 1997, respectively.
8. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended January 3, 1998. All
dollar amounts presented in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are presented in thousands, except
per share amounts. Certain of the information contained in this Quarterly Report
on Form 10-Q which are not historical facts may include "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company's actual results may differ
materially from those set forth in such forward-looking statements. Certain
risks and uncertainties including, but not limited to, those discussed below in
"Factors Affecting Future Operating Results," as well as in the Company's Annual
Report on Form 10-K for the 1997 fiscal year as filed with the Securities and
Exchange Commission (the "SEC"), as well as other factors, may also cause actual
results to differ materially from those projected. The Company assumes no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations is provided pursuant to applicable
regulations of the SEC and is not intended to serve as a basis for projections
of future events.
INTRODUCTION
The Learning Company, Inc. ("TLC" or the "Company") develops and publishes a
broad range of high quality branded consumer software for personal computers
("PCs") that educate and entertain across every age category, from young
children to adults. The Company's primary emphasis is in educational,
productivity and reference software, but it also offers a selection of lifestyle
and entertainment products, both in North America and internationally.
The Company has a history of acquiring companies in order to broaden its product
lines and sales channels. During the first quarter of 1998, the Company acquired
Mindscape, Inc. and certain affiliated companies ("Mindscape"). Mindscape is a
leading developer, publisher and distributor of consumer software.
The Company distributes its products through retail channels, including direct
sales to computer electronics stores, office superstores, mass merchandisers,
discount warehouse stores and software specialty stores which control over
23,000 North American storefronts. The Company also sells its products directly
to consumers through the mail, telemarketing and the Internet, and directly to
schools. The Company's international sales are conducted from subsidiaries in
Germany, France, Holland, Ireland, the United Kingdom, Australia and Japan. The
Company also derives revenue from licensing its products to original equipment
manufacturers ("OEMs"), which bundle the Company's products for sale with
computer systems or components and through on-line offerings.
RESULTS OF OPERATIONS
NET LOSS. The Company incurred a net loss of $129,408 ($2.45 per share)
on revenues of $113,602 in the First Quarter 1998 as compared to a net loss of
$107,318 ($2.20 per share) on revenues of $86,881 in the First Quarter 1997. The
net loss in the First Quarter 1998 and 1997 is a result of the effect of the
amortization, merger and other charges of $156,820 and $124,721, respectively.
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REVENUES. Revenues by distribution channel for the First Quarter 1998 as
compared to the First Quarter 1997 and the respective percentage of revenues are
as follows:
Three Months Ended March 31,
--------------------------------------
1998 % 1997 %
-------- --- ------- ---
Retail $ 55,858 49% $36,313 42%
OEM 8,544 8% 6,435 7%
School 11,628 10% 10,162 12%
Direct response 12,398 11% 10,975 13%
International 19,828 17% 16,634 19%
Tax software and services 5,346 5% 6,362 7%
-------- --- ------- ---
$113,602 100% $86,881 100%
======== === ======= ===
Retail sales increased in dollars and as a percentage of total revenue for the
Three Months Ended March 31, 1998 as compared to the Three Months Ended
March 31, 1997 primarily due to growth in the demand for consumer software and
the Company's increased market share. Retail revenues also were higher than the
prior year due to the acquisition of Mindscape and the launch of several new
products which included: Reader Rabbit's Second Grade, Success Builder: Math
Library, CyberPatrol, Compton's Reference Suite, and Compton's 3D Atlas. OEM
sales increased in dollars for the Three Months Ended March 31, 1998 as compared
to the Three Months Ended March 31, 1997 primarily due to additional demand from
PC manufacturers across the industry. International sales increased in dollars
for the Three Months Ended March 31, 1998 as compared to the Three Months Ended
March 31, 1997 primarily as a result of the higher PC sales in Europe and an
extension of a distribution license in Australia. Direct response revenues
increased in dollars for the Three Months Ended March 31, 1998 as compared to
the Three Months Ended March 31, 1997 due to growth in the Company's catalog
based sales to end users. School sales increased in dollars for the Three Months
Ended March 31, 1998 as compared to the Three Months Ended March 31, 1997 as a
result of the higher growth in revenues from the acquisitions of Skills Bank
Corporation and Learning Services, Inc. in 1997 and due to the increasing demand
for software in American schools. Revenues from the Tax Division decreased in
dollars and as a percentage of total revenue for the Three Months Ended
March 31, 1998 as compared to the Three Months Ended March 31, 1997 due to
greater competition in the Canadian home tax software market and lower Canadian
dollar exchange rates.
COSTS AND EXPENSES. The Company's costs and expenses and the respective
percentages of revenues for the First Quarter 1998 as compared to the First
Quarter 1997 are as follows:
Three Months Ended March 31,
--------------------------------------
1998 % 1997 %
-------- --- ------- ---
Costs of $33,964 30% $24,020 28%
production
Sales and marketing 28,145 25% 20,859 24%
Development and
Software costs 10,993 10% 10,751 12%
General and
Administrative 7,574 6% 8,577 10%
------- --- ------- ---
$80,676 71% $64,207 74%
======= === ======= ===
Costs of production includes the cost of manuals, packaging, diskettes,
duplication, assembly and fulfillment charges. In addition, costs of production
includes royalties paid to third-party developers and inventory obsolescence
reserves. Costs of production as a percentage of revenues increased in the First
Quarter 1998 as compared to the First Quarter 1997 from 28% to 30%. The increase
in costs of production as a percentage of revenues in First Quarter 1998 from
First Quarter 1997 was caused by sale of products from the acquisitions of
Mindscape and Creative Wonders that have higher production costs and royalties
plus the higher cost of purchasing third-party product that is sold through
catalog distribution.
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Sales and marketing expenses increased to 25% of revenues in the First Quarter
1998 as compared to 24% of revenues in the First Quarter 1997. The increase
relates to higher spending on coupon rebate promotions, retail channel marketing
and trade promotion programs.
Development and software costs decreased to 10% of revenues in the First Quarter
1998 as compared to 12% of revenues in the First Quarter 1997 due to the timing
of product introduction.
General and administrative expenses decreased to 6% of revenues in the First
Quarter 1998 as compared to 10% of revenues in the First Quarter 1997 due to
continued efforts to reduce both fixed costs and employee headcount related to
the combinations of the Company's acquisitions.
The Company reported merger, amortization and other charges in the First Quarter
1998 and the First Quarter 1997 of $156,820 and $124,721, respectively,
resulting primarily from the acquisitions. The charges in the Three Months Ended
March 31, 1998 include $103,000 related to in-process technology write-offs,
with the remainder relating to amortization of goodwill, amortization of
acquired technology related assets and other expenses. 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.
In order to develop the acquired incomplete technology into commercially viable
products the Company will be required to complete development of proprietary
code, development of the artistic and graphic works and design of the remaining
storyboards.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased from $95,137 at December 31, 1997 to
$107,710 at March 31, 1998. This increase was attributable to the Company's
Canadian subsidiary, Softkey Software Products Inc. ("SoftKey"), issuing
8,687,500 special warrants in a private placement for proceeds of approximately
$134,000 offset by the cash paid for the acquisition of Mindscape of
approximately $120,000. Other financing activities generated approximately
$4,455 and investing activities used approximately $26,480 offset by cash
generated from operations of approximately $20,813.
As of May 6, 1998 the Company has outstanding $297,650 principal amount Senior
Convertible Notes ($10,000 is included as current). The Senior Convertible Notes
will be redeemable by the Company on or after November 2, 1998 at declining
redemption prices. Should the Senior Convertible Notes not convert under their
terms into common stock, there can be no assurances that the Company will have
sufficient cash flows from future operations to meet payment requirements under
the debt or be able to re-finance the notes under favorable terms or at all.
On May 6, 1998, the Company amended its revolving line of credit (the "Line") to
provide a maximum availability of $148,500, of which $35,000 is outstanding at
March 31, 1998. Borrowings under the line are due July 1, 2000 and bear interest
at variable rates. The Line is subject to certain financial covenants, is
secured by a general security interest in certain operating subsidiaries of the
Company and by a pledge of the stock of certain of its subsidiaries.
The Company, through its wholly owned subsidiary The Learning Company Funding,
Inc. (a separate special purpose corporation), is party to a receivables
purchase agreement whereby it can sell without recourse undivided interests in
eligible pools of trade accounts receivable on a revolving basis during a five
year period ending September 30, 2002 of up to $75,000. The Company acts as
servicing agent for the sold receivables in the collection and administration of
the accounts.
Income generated by the Company's subsidiaries in certain foreign countries
cannot be repatriated to the Company in the United States without payment of
additional taxes since the Company does not currently receive a U.S. tax credit
with respect to income taxes paid by the Company (including its subsidiaries) in
those foreign countries.
At the present time, the Company expects that its cash flows from operations
will be sufficient to finance the Company's operations for at least the next
twelve months. Longer-term cash requirements are dictated by a
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number of external factors, which include the Company's ability to launch new
and competitive products, the strength of competition in the consumer software
industry and the growth of the home computer and software markets. In addition,
the Company's Senior Convertible Notes mature November 1, 2000. If not converted
to common stock, the Company may be required to secure alternative financing
sources. There can be no assurance that alternative financing sources will be
available on terms acceptable to the Company in the future or at all. The
Company continuously evaluates products and technologies for acquisitions,
however no estimation of short-term or long-term cash requirements for such
acquisitions can be made at this time.
FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment that is subject to many
risks and uncertainties. Some of the important risks and uncertainties which may
cause the Company's operating results to differ materially or adversely are
discussed below and in the Company's Annual Report on Form 10-K for the 1997
fiscal year on file with the SEC.
The Company's future operating results are subject to a number of uncertainties,
including its ability to develop and introduce new products, the introduction of
competitive products and general economic conditions. In addition, the Company
competes for retail shelf space and general consumer awareness with a number of
companies that market consumer software, including competitors and potential
competitors that possess significantly greater capital, marketing resources and
brand recognition than the Company. Furthermore, the rapid changes in the market
and the increasing number of new products available to consumers have increased,
and are expected to continue to increase, the degree of consumer acceptance risk
with respect to any specific title that the Company may publish.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to various pending claims. Management, after review and
consultation with counsel, considers that any liability from the disposition of
such lawsuits in the aggregate would not have a material adverse effect upon the
consolidated financial position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES.
On March 27, 1998, the Company issued 1,366,743 shares of the Company's common
stock to the former stockholder of Mindscape in connection with the Company's
acquisition of Mindscape.
On January 21, 1998, the Company issued 5,723 shares of its common stock to five
former stockholders of TEC Direct, Inc. to complete the Company's acquisition of
TEC Direct, Inc.
On April 15, 1998, the Company issued (i) 98,428 shares of its common stock to
Michel Bussac, a former stockholder of Edusoft, S.A., a subsidiary of the
Company; (ii) 19,164 shares of its common stock to Helmut Kunkel, a former
stockholder of tewi Verlag GmbH, a subsidiary of the Company; (iii) an aggregate
of 62,583 shares of its common stock to three former stockholders of Domus
Software B.V., a subsidiary of the Company; (iv) 42,387 shares of its common
stock to Jean-Pierre Nordman, a former stockholder of Personal Soft S.A., a
subsidiary of the Company; and (v) 21,397 shares of its common stock to Rainer
Rossipaul, a former stockholder of Rossipaul Medien GmbH, a subsidiary of the
Company. All of such shares of common stock were issued as additional
consideration for the Company's purchase of Edusoft, S.A., tewi Verlag GmbH,
Domus Software B.V., Personal Soft S.A. and Rossipaul Medien GmbH (the
"Subsidiaries") pursuant to the earn-out provisions of the respective stock
purchase agreements among the Company and the former stockholders of the
Subsidiaries.
For each issuance described above the Company has relied upon 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 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement, dated as of March 5, 1998, by and
between the Company and Mindscape Holding Company, Pearson
Overseas Holdings Ltd. and Pearson Netherlands, BV, as
amended(1)
3.1 Restated Certificate of Incorporation, as amended(2)
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(3)
3.3 Bylaws of the Company, as amended(4)
4.1 Indenture dated as of October 16, 1995 between the Company and
State Street Bank and Trust Company, as Trustee, for 5 1/2%
Senior Convertible Notes due 2000 (the "Indenture")(5)
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(6)
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")(6)
4.4 Letter Agreement dated November 22, 1995 amending the
Registration Rights Agreement(6)
4.5 Form of Securities Resale Registration Rights Agreement by and
among the Company and Tribune Company(7)
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(8)
4.7 Plan of Arrangement of SoftKey Software Products Inc. under
Section 182 of the Business Corporations Act (Ontario)(8)
4.8 Special Warrant Indenture dated March 12, 1998 between SoftKey
Software Products Inc. and CIBC Mellon Trust Company
4.9 Registration Rights Agreement dated as of August 26, 1997 among
the Company and Thomas H. Lee Company, Thomas H. Lee Equity Fund
III, L.P., Thomas H. Lee Foreign Fund III, L.P., Bain Capital
Fund V, L.P., Bain Capital V-B. L.P., BCIP Associates, L.P.,
BCIP Trust Associates, L.P., Centre Capital Investors II, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., Centre Capital
Offshore Investors II, L.P. , State Board of Administration of
Florida, Centre Parallel Management Partners, L.P. and Centre
Partners Coinvestment, L.P.(4)
10.1 Employment Agreement dated as of March 19, 1998 by and between
the Company and Kathryn Quinby-Johnson*
10.2 Letter Agreement dated January 30, 1998 between the Company and
Michael J. Perik*
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10.3 Restricted Stock Agreement dated January 30, 1998 between the
Company and Michael J. Perik*
10.4 Letter Agreement dated January 30, 1998 between the Company and
Kevin O'Leary*
10.5 Restricted Stock Agreement dated January 30, 1998 between the
Company and Kevin O'Leary*
10.6 Registration Rights Agreement, dated as of March 27, 1998, by
and between the Company and Mindscape Holding Company(4)
27.1 Financial Data Schedule
- -------------------------
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated March 27, 1998.
(2) Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 6, 1996.
(3) Incorporated by reference to exhibits filed with the Company's
Definitive Proxy Statement filed October 24, 1997.
(4) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 3, 1998.
(5) Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995.
(6) Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-3 (Reg . No. 333-145) filed January 26,
1996.
(7) 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.
(8) Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-3 (Reg . No. 333-40549) filed December
3, 1997.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated March 27, 1998
reporting the completion of its acquisition of Mindscape pursuant to a Stock
Purchase Agreement between the Company and Mindscape Holding Company, Pearson
Overseas Holdings Ltd. and Pearson Netherlands, BV. On April 29, 1998, the
Company filed Amendment No. 1 to such Current Report on Form 8-K/A amending the
unaudited pro forma combined condensed consolidated financial statements of the
Company.
The Company filed a Current Report on Form 8-K dated March 12, 1998
reporting the sale by SoftKey Software Products Inc., a Canadian subsidiary of
the Company, of 8,687,500 Special Warrants to certain Canadian institutional
investors through Griffiths McBurney & Partners and First Marathon Securities
Limited for a purchase price of Cdn $22.80 per Special Warrant.
16
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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.
THE LEARNING COMPANY, INC.
/s/ R. Scott Murray
--------------------------------------------
R. Scott Murray
Executive Vice President and Chief Financial
Officer
(principal financial and accounting officer)
May 12, 1998
17
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement, dated as of March 5, 1998, by
and between the Company and Mindscape Holding Company,
Pearson Overseas Holdings Ltd. and Pearson Netherlands,
BV, as amended(1)
3.1 Restated Certificate of Incorporation, as amended(2)
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(3)
3.3 Bylaws of the Company, as amended(4)
4.1 Indenture dated as of October 16, 1995 between the
Company and State Street Bank and Trust Company, as
Trustee, for 5 1/2% Senior Convertible Notes due 2000
(the "Indenture")(5)
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(6)
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")(6)
4.4 Letter Agreement dated November 22, 1995 amending the
Registration Rights Agreement(6)
4.5 Form of Securities Resale Registration Rights Agreement
by and among the Company and Tribune Company(7)
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(8)
4.7 Plan of Arrangement of SoftKey Software Products Inc.
under Section 182 of the Business Corporations Act
(Ontario)(8)
4.8 Special Warrant Indenture dated March 12, 1998 between
SoftKey Software Products Inc. and CIBC Mellon Trust
Company
4.9 Registration Rights Agreement dated as of August 26,
1997 among the Company and Thomas H. Lee Company, Thomas
H. Lee Equity Fund III, L.P., Thomas H. Lee Foreign Fund
III, L.P., Bain Capital Fund V, L.P., Bain Capital V-B.
L.P., BCIP Associates, L.P., BCIP Trust Associates,
L.P., Centre Capital Investors II, L.P., Centre Capital
Tax-Exempt Investors II, L.P., Centre Capital Offshore
Investors II, L.P. , State Board of Administration of
Florida, Centre Parallel Management Partners, L.P. and
Centre Partners Coinvestment, L.P.(4)
10.1 Employment Agreement dated as of March 19, 1998 by and
between the Company and Kathryn Quinby-Johnson*
10.2 Letter Agreement dated January 30, 1998 between the
Company and Michael J. Perik*
10.3 Restricted Stock Agreement dated January 30, 1998
between the Company and Michael J. Perik*
10.4 Letter Agreement dated January 30, 1998 between the
Company and Kevin O'Leary*
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19
10.5 Restricted Stock Agreement dated January 30, 1998 between the
Company and Kevin O'Leary*
10.6 Registration Rights Agreement, dated as of March 27, 1998, by
and between the Company and Mindscape Holding Company(4)
27.1 Financial Data Schedule
- -------------------------
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated March 27, 1998.
(2) Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 6, 1996.
(3) Incorporated by reference to exhibits filed with the Company's
Definitive Proxy Statement filed October 24, 1997.
(4) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 3, 1998.
(5) Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995.
(6) Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-3 (Reg . No. 333-145) filed January 26,
1996.
(7) 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.
(8) Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-3 (Reg . No. 333-40549) filed
December 3, 1997.
19