-----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, EkXy/UNQ5IfoqTnq7VRIJD+9fG0iK1sd/6tPttxyRZIfM0NVQJue/DYuPnvX6wgo aNHpVdJth9JDTTcaf6vrVw== 0000950135-97-004881.txt : 19971208 0000950135-97-004881.hdr.sgml : 19971208 ACCESSION NUMBER: 0000950135-97-004881 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19971205 SROS: NYSE 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: 424B1 SEC ACT: SEC FILE NUMBER: 333-40543 FILM NUMBER: 97732781 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 424B1 1 THE LEARNING COMPANY, INC. 1 Filed pursuant to Rule 424(b)(1) Registration No. 333-40543 PROSPECTUS THE LEARNING COMPANY, INC. 2,735,081 SHARES OF COMMON STOCK --------------------- This prospectus covers the offer and sale (the "Offering") of 2,735,081 shares (the "Shares") of common stock, $.01 par value per share (the "Common Stock"), of The Learning Company, Inc. (the "Company"). The Shares may be offered and sold from time to time for the account of certain stockholders of the Company (the "Selling Stockholders"). See "The Selling Stockholders." The Shares were issued to the Selling Stockholders in connection with acquisitions by the Company of Learning Services, Inc. ("Learning Services"), Skills Bank Corporation ("Skills Bank") and Microsystems Software, Inc. ("Microsystems") on September 19, 1997, September 29, 1997 and October 2, 1997, respectively. An aggregate of 709,976 shares of Common Stock that may be sold in the Offering were issued by the Company to the sole stockholder of Learning Services in connection with the Company's acquisition of Learning Services pursuant to the terms of a stock purchase agreement. An aggregate of 1,069,286 shares of Common Stock that may be sold in the Offering were issued to the stockholders of Skills Bank in connection with the acquisition by the Company of Skills Bank pursuant to the terms of a merger agreement. The remaining 955,819 shares of Common Stock that may be sold in the Offering were issued to the stockholders of Microsystems (the "Microsystems Stockholders") in connection with the acquisition by the Company of Microsystems pursuant to the terms of an agreement and plan of merger. See "The Acquisitions." The Company will not receive any of the proceeds from the sale of the Shares covered by this Prospectus. The Company will bear all costs (excluding any underwriting discounts and commissions or expenses incurred by the Selling Stockholders for brokerage, accounting, tax or legal services or any other expenses incurred by the Selling Stockholders in taking possession of or disposing of the Shares), fees and expenses incurred in effecting the registration of the Shares covered by this Prospectus, including, without limitation, all registration and filing fees, exchange listing fees, fees and expenses of counsel for the Company, fees and expenses of accountants for the Company, printing expenses and blue sky fees and expenses. The Shares covered by this Prospectus may be sold from time to time by the Selling Stockholders, or by their pledgees, donees, transferees or other successors in interest, in the over-the-counter market, through the writing of options on the Shares, in ordinary brokerage transactions, in negotiated transactions, or otherwise, at market prices prevailing at the time of sale or at negotiated prices. See "Plan of Distribution." 2 The Selling Stockholders and intermediaries through whom the Shares are sold may be deemed "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Shares offered hereby, and any profits realized or commissions received may be deemed underwriting compensation. The Company and the Microsystems Stockholders have agreed to certain indemnification arrangements with respect to the Offering. See "Plan of Distribution." The Company's Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "TLC." On December 1, 1997, the closing sale price of the Common Stock on the NYSE was $18.5625 per share. ---------------------- THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ---------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- The date of this Prospectus is December 3, 1997. -2- 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's regional offices located at Seven World Trade Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials also may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, reports, proxy and information statements and other information concerning the Company can be inspected and copied at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. The Company is required to file electronic versions of these documents through the Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company has filed with the Commission a Registration Statement on Form S-3 (together with all amendments, supplements, exhibits and schedules thereto, the "Registration Statement") under the Securities Act, with respect to the Shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, as certain items are omitted in accordance with the rules and regulations of the Commission. For further information pertaining to the Company and the Shares, reference is made to such Registration Statement. Statements contained in this Prospectus regarding the contents of any agreement or other document are not necessarily complete, and in each instance reference is made to the copy of such agreement or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement may be inspected without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from the Commission at prescribed rates. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated herein by reference: (i) The Company's Current Report on Form 8-K dated March 21, 1997, filed with the Commission on March 21, 1997; (ii) The Company's Annual Report on Form 10-K for the year ended January 4, 1997, filed with the Commission on April 4, 1997; (iii) Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the year ended January 4, 1997, filed with the Commission on May 5, 1997; (iv) The Company's Current Report on Form 8-K dated April 30, 1997, filed with the Commission on May 14, 1997; (v) The Company's Quarterly Report on Form 10-Q for the quarter ended April 5, 1997, filed with the Commission on May 19, 1997; (vi) The Company's Quarterly Report on Form 10-Q for the quarter ended July 5, 1997, filed with the Commission on August 19, 1997; -3- 4 (vii) The Company's Current Report on Form 8-K dated, August 26, 1997, filed with the Commission on September 3, 1997; (viii) The Company's Preliminary Proxy Statement for the Annual Meeting of Stockholders to be held on October 28, 1997, filed with the Commission on September 11, 1997; (ix) The Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on December 4, 1997, filed with the Commission on October 24, 1997; (x) The Company's Quarterly Report on Form 10-Q for the quarter ended October 4, 1997, filed with the Commission on November 18, 1997; and (xi) The Company's Registration Statement on Form 8-A, filed with the Commission on October 29, 1996. All documents filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the termination of the offering of the Shares registered hereby shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the foregoing documents incorporated by reference into this Prospectus (without exhibits to such documents other than exhibits specifically incorporated by reference into such documents). All such requests shall be directed to: The Learning Company, Inc., One Athenaeum Street, Cambridge, Massachusetts 02142, Attention: Secretary, Telephone: (617) 494-1200. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION Certain statements in this Prospectus and in the documents incorporated herein constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 2B of the Exchange Act. For this purpose, any statements contained herein or incorporated herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "plans," "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements. These factors include those set forth in "Risk Factors" herein. -4- 5 THE COMPANY The Learning Company, Inc. (the "Company") develops and publishes a broad range of high quality consumer software for personal computers ("PCs") that educate across every age category, from young children to adults. The Company's primary emphasis is in education 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 families of educational products are principally sold under The Learning Company and Minnesota Educational Computing Corporation ("MECC") brands and include, among other products, the "Reader Rabbit" family, "Trail" family, "Writing and Creativity Tools" family, "College Prep" family, and the "Foreign Languages" family. In addition to consumer versions, the Company also publishes school editions of a number of these products. The Company's reference products include a line of Compton's Home Library branded products (including Compton's Interactive Encyclopedia) as well as the American Heritage Talking Dictionary, Mosby's Medical Encyclopedia and BodyWorks. The Company's premium productivity and lifestyle products are largely published under the SoftKey brand. The Company also publishes lower priced boxed products under the "Key" brand and a line of budget, jewel-case only products under the "Platinum" brand. 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's strategy is to develop and publish a broad range of high quality software products with significant unit-volume potential and to continuously introduce these new products through a wide variety of established and emerging distribution channels worldwide. Other key elements of this strategy include focusing on consumer software that is broadly sold at multiple price points, building strong relationships with the retail channel, acquiring complementary products, technologies and businesses and enhancing brand awareness and customer loyalty. The Company has a history of acquiring companies in order to broaden its product lines and sales channels. In May 1996, the Company consummated the acquisition of MECC. That acquisition, together with the acquisitions in December 1995 of The Learning Company and Compton's NewMedia, Inc. ("Compton's NewMedia"), marked the completion of a strategic initiative launched by the Company in 1995 to expand its educational software franchise. See "The Acquisitions." -5- 6 The Company was incorporated in California in October 1978 and reincorporated 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 October 1996, the Company changed its name to The Learning Company, Inc. to reflect its expanded 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. "The Learning Company, Inc." and all of the Company's logos and product names are trademarks of the Company. -6- 7 RISK FACTORS The Shares offered hereby involve a high degree of risk. The following risk factors should be considered carefully in addition to the other information included or incorporated by reference in this Prospectus before purchasing the Shares offered hereby. INTENSE COMPETITIVE ENVIRONMENT The PC consumer software industry is intensely competitive and is characterized by rapid changes in technology and customer requirements. The changing nature of the consumer software industry and rapidly changing demand for products make it difficult to predict the future success of the Company in the business of producing packaged software products for the retail market. The Company competes for retail shelf space and general consumer awareness with a number of companies that market software products. The Company encounters competition from both established companies, including the largest companies in the industry, and new companies that may develop comparable 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 delivery vehicle. To the extent that demand increases for on-line products and content, the demand for the Company's existing products and future performance may change. Furthermore, competitive pressures have resulted in price reductions throughout the industry with the result that industry-wide operating margins are likely to be adversely affected. Many large companies with sophisticated product marketing and technical abilities and financial resources that do not presently compete with the Company may enter the PC software market. For example, technology companies have begun to acquire greater access to content, and content-oriented companies have begun to acquire greater technological capabilities. Competitors in these areas include CUC Software, a division of CUC International Inc., Microsoft Corporation, Mattel, Sony, The Walt Disney Company, Viacom, IBM/Eduquest, Fisher-Price, Jostens, Electronic Arts, Mindscape, GT Interactive Software and Broderbund Software, Inc. To the extent that competitors achieve a performance, price or distribution advantage, the Company could be adversely affected. Increased consolidation in the consumer software industry creates new, larger competitors and may impact future growth potential and performance. There is no assurance that the Company will have the resources required to respond to market or technological changes or to compete successfully in the future. INTENSE COMPETITION FOR DISTRIBUTION CHANNELS The Company competes with other companies for access to retail shelf space and inclusion in OEM sales programs. Competition in this aspect of the industry is intense, and the type and number of distribution channels is increasing to include non-traditional software retailers such as book, music, video, magazine, toy, gift, convenience, drug and grocery store chains. 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. The traditional channels of distribution in the software industry have experienced increasing concentration during the past several years, in particular with respect to PC chain stores and software -7- 8 distributors. With increasing concentration in the traditional channels of distribution, the Company's customers have increased leverage in negotiating favorable terms of sale, including price discounts and product return policies. There can be no assurance that the Company will be able to continue to have access to sufficient retail marketing distribution channels or obtain adequate distribution for all of its products in the future. Accordingly, such concentration may have an adverse effect in the future on the profitability of the Company's operations. Regardless of the retail strategy chosen by the Company, the retail channels of distribution available for products are expected to be subject to rapid changes as retailers and distributors enter and exit the software market segments 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 without limitation 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 bases 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. ACQUISITIONS, BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES The Company has historically expanded its business through, among other strategies, acquisitions, business combinations and strategic alliances. Moreover, the consumer software industry as a whole has recently experienced consolidation. The Company believes that its customers will in the future demand that the Company offer increasing numbers of titles throughout the range of product categories. The Company believes that in many cases the most efficient means to acquire such titles or the ability to develop or license such titles is to enter into acquisitions, business combinations or strategic alliances with consumer software companies and others. The Company continuously evaluates and considers other businesses of varying sizes as potential strategic partners and candidates for acquisition (whether negotiated or non-negotiated) and continuously engages in discussions with certain businesses in pursuit of possible transactions. Certain of these businesses may be substantial in size as compared to the Company. There can be no assurance that the Company will enter into any such transaction or, if the Company does identify and consummate such a transaction, that the transaction will enable the Company to achieve its goals. Acquisitions or business combination transactions that would result in further expansion of the Company's business in the entertainment and educational product areas may result in a higher degree of product acceptance risk and longer development cycles for the Company's products. In addition, companies that develop entertainment software (for PC, Sega, Nintendo and 3DO platforms) typically experience lower gross margins than the Company has experienced from its current operations. Further, should purchase accounting be used by the Company for future acquisitions or business combination transactions, such accounting treatment may result in large, one-time expense charges for in-process research and development costs and short amortization periods for acquired technology and other intangible assets acquired in the transaction. Competition for suitable acquisitions, business combinations and strategic alliances and the cost of these transactions have recently been increasing. The future availability of desirable prospects for these transactions in the computer software industry is uncertain. In addition, assuming that the Company is able to identify appropriate transaction prospects, the execution and implementation of acquisitions, business combinations and strategic alliances involves a significant time commitment -8- 9 from senior management and can result in large restructuring costs. There can be no assurance that suitable opportunities will be identified, that transactions can be consummated or that assets, businesses or relationships acquired in such transactions can be integrated successfully into the Company's operations. LEVERAGE As of November 15, 1997, the Company has outstanding $303,650,000 principal amount of 5 1/2% Senior Convertible Notes due 2000 (the "Senior Convertible Notes") and $150,000,000 principal amount of Convertible/ Exchangeable Notes due 2000 held by Tribune Company (the "Tribune Notes"; collectively with the Senior Notes, the "Notes"). The Company has entered into an agreement to purchase for 750,000 shares of Series A Convertible Participating Preferred Stock, $.01 par value per share, of the Company (the "Preferred Stock"), the Tribune Notes from certain purchasers who have agreed to purchase the Tribune Notes from the Tribune. The repurchase of the Tribune Notes is subject to certain conditions, including approval of the Company's stockholders of the sale and issuance of the Preferred Stock, and there can be no assurance that such transaction will be completed. The Senior Convertible Notes and, if they are not repurchased, the Tribune Notes will be redeemable by the Company on or after November 2, 1998 at declining redemption prices. If the holders of the Senior Convertible Notes and, if not repurchased, the Tribune Notes do not convert the Notes held by them into Common Stock, there can be no assurance that the Company's operating cash flow will be sufficient to meet its debt service requirements, or that the Company will be able to repay the Notes at maturity or in accordance with their respective terms or to refinance the Notes on favorable terms or at all. MANAGEMENT OF GROWTH; INTEGRATION OF ACQUIRED BUSINESSES; KEY EMPLOYEES The Company is currently experiencing a period of rapid growth that is placing and will likely continue to place a strain on the Company's financial, management and other resources in the future. The Company's ability to continue to manage its growth effectively will require it, among other things, to continue to improve its operational, financial and management information systems and to continue to attract, train, motivate, manage and retain key employees. If the Company's management becomes unable to manage growth effectively, the Company's business, operating results and financial condition could be adversely affected. For example, over the past two years, the Company has acquired The Learning Company, Compton's NewMedia, Compton's Learning Company, MECC, Learning Services, Skills Bank and Microsystems, among other companies, and has signed an agreement to acquire Creative Wonders LLC. Should certain key employees not be retained, future operating results may be adversely affected. Additionally, as a result of such acquisitions, the Company faces challenges relating to integration of operations such as coordinating geographically separate organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. The process of combining organizations may cause an interruption of, or a loss of momentum in, the activities of the Company's business, which could have an adverse effect on the revenues and operating results of the Company, at least in the near term. The ability of software companies with significant internal development and marketing capabilities to continue to manage growth, develop competitive new products and respond to rapid technological change depends on an ability to attract, motivate, manage and retain talented developers, product marketers and other employees with valuable technological and marketing expertise. The Company's educational software products require a substantially larger internal development and marketing staff than its operations had previously required. If the Company is unable to attract, motivate, manage and retain such employees, the Company's results of operations will likely be adversely affected. 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. -9- 10 The Company's rights to license certain 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. COMPETITION FOR SHELF SPACE AND PROMOTIONAL SUPPORT Retailers of the Company's products typically have a limited amount of shelf space and promotional resources, and there is intense competition among high-quality educational software products for adequate levels of shelf space and promotional support from retailers. To the extent that the number of consumer software products and computer platforms increases, this competition for shelf space may intensify. Due to increased competition for limited shelf space, retailers and distributors are increasingly in a better position to negotiate favorable terms of sale, including price discounts and product return policies, as well as cooperative market development funds. Retailers often require software publishers to pay fees in exchange for preferred shelf space. The amounts paid to retailers by software publishers for preferred shelf space are customarily determined by arms-length negotiations on a case by case basis, and there is no general formula or industry standard for determining such fees. There can be no assurance that such retailers will continue to purchase the Company's products, provide the Company's products with adequate levels and quality of shelf space or continue to participate with the Company in cooperative advertising, promotional or market development arrangements. In addition, the Company has implemented new promotional programs, including coupon rebates and other various programs through print and television media. These programs may increase the Company's cost of marketing and reduce operating margins. SIGNIFICANT PRICE REDUCTIONS IN PERSONAL COMPUTER SOFTWARE Recently, several major publishers of PC software, including the Company, have significantly reduced the prices of their products with the goal of gaining greater market share. The retail and wholesale prices of many of the Company's products have declined and the Company has introduced new lines of lower-priced software products. There can be no assurance that such price reductions or new product lines will result in an increase in unit sales volume or that prices will not continue to decline in the future. Such a decline would lead to a decrease in the revenues from, and gross margin on, sales of such products in the future and could result in lower cash flow or operating margins. RISK OF INTERNATIONAL OPERATIONS The Company derived approximately 15% of its revenues in the year ended January 4, 1997 from sales occurring outside North America. These revenues are subject to the risks normally associated with international operations, including currency conversion risks, limitations (including taxes) on the repatriation of earnings, slower and more difficult accounts receivable collection, greater difficulty and expense in administering business abroad, complications in complying with foreign laws and the necessity of obtaining requisite export licenses, which on occasion may be delayed or difficult to obtain. In addition, while U.S. copyright law, international conventions and international treaties may provide meaningful protection against unauthorized duplication of software, the laws of foreign jurisdictions may not protect the Company's proprietary rights to the same extent as the laws of the United States. Software piracy has been, and can be expected to be, a persistent problem for participants in the "shrink-wrap" software industry, including the Company. These problems are particularly acute in certain international markets such as South America, the Middle East, the Pacific Rim and the Far East. -10- 11 PROTECTION OF PROPRIETARY RIGHTS; RISK OF INFRINGEMENT CLAIMS The Company relies on a combination of trade secret, copyright, trademark and other proprietary rights laws and license agreements to protect its rights to its software products and related documentation. The Company does not have any patents. United States copyright law, international conventions and international treaties, however, may not provide meaningful protection against unauthorized duplication of the Company's software. The Company generally licenses its externally developed products rather than transferring title and has relied on contractual arrangements with recipients and users of its products to establish certain proprietary rights and to maintain confidentiality of those products protected by trade secret law. Consistent with standard industry practice, the Company's products generally are licensed pursuant to "shrink-wrap" licenses that are not signed by the licensee. The enforceability of such licenses has not been conclusively determined. The Company's products do not contain any mechanisms to prevent or inhibit unauthorized copying. The Company has registered numerous trademarks in the United States and Canada, and a smaller number in other countries, for titles or components of its products and has trademark registrations pending in the United States and other countries for various new products. Policing unauthorized use of a broadly disseminated product such as PC software is very difficult. Software piracy can be expected to be a persistent problem for the "shrink-wrap" software industry. These problems are particularly acute in certain international markets such as South America, the Middle East, the Pacific Rim and the Far East. 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 the increased use of music and animation in CD-ROM products and the increased number of software products on the market generally, the Company is 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 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 that product. DEPENDENCE ON MAJOR SUPPLIER All duplication, assembly and fulfillment, with certain exceptions (including CD-ROMs and products reproduced by OEMs), for all of the Company's U.S. products are provided by one supplier, Bertelsmann AG ("BMG"). Any interruption in BMG's manufacturing, assembly and fulfillment services caused by such transition or otherwise could have a material adverse impact on the Company's business. Although the Company believes that suitable alternative suppliers exist, there can be no assurance that any termination or modification of the agreement with BMG would not result in a short-term business interruption for the Company. -11- 12 HISTORY OF OPERATING LOSSES A variety of factors may cause period-to-period fluctuations in the Company's operating results, including integration of operations resulting from acquisitions of companies, products or technologies, revenues and expenses related to the introduction of new products or new versions of existing products, changes in selling prices, customer delays in purchases in anticipation of upgrades to existing products, currency fluctuations, dealer and distributor order patterns, general economic trends or a slowdown of PC sales and seasonality of customer buying patterns. Historical operating results of the Company and its predecessors cannot be relied upon as indicative of the future performance of the Company. On an historical basis, the Company incurred net losses of $65,960,000 for the year ended January 6, 1996 (after amortization of $18,229,000 of goodwill) and $405,461,000 for the year ended January 4, 1997 (after amortization of $501,330,000 of good will). The Company had net income of $21,145,000 for the year ended December 31, 1994. There can be no assurance that the Company will be profitable in the future. CAPITAL RESOURCES The expansion of the Company's current business involves significant financial risk and capital investment. There is no assurance that financing will be available in the future to meet the needs of the Company for additional investment. DEPENDENCE ON CONTINUED PERSONAL COMPUTER SALES The success of the Company is dependent upon the continuing use of PCs, and especially multimedia PCs, in the consumer and school market. A general decrease in unit sales of PCs or shift to an alternative means of delivery could adversely affect the Company's future results of operations. VOLATILITY OF STOCK PRICE The Common Stock is quoted on the NYSE. The market price of the Common Stock, like that for the shares of many other high technology companies, has been and may continue to be volatile. Recently, the stock market in general and the shares of personal computer software companies in particular have experienced significant price fluctuations. These broad market fluctuations, as well as general economic and political conditions and factors such as quarterly fluctuations in results of operations, the announcement of technological innovations, the introduction of new products by the Company or its competitors and general conditions in the computer hardware and software industries may have a significant impact on the market price of the Common Stock. USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Shares by the Selling Stockholders. The Company will bear all costs (excluding any underwriting discounts and commissions or expenses incurred by the Selling Stockholders for brokerage, accounting, tax or legal services or any other expenses incurred by the Selling Stockholders in taking possession of or disposing of the Shares), fees and expenses incurred in effecting the registration of the Shares covered by this Prospectus, including, without limitation, all registration and filing fees, exchange listing fees, fees and expenses of counsel for the Company, fees and expenses of accountants for the Company, printing expenses and blue sky fees and expenses. -12- 13 THE ACQUISITIONS LEARNING SERVICES, INC. Pursuant to a Stock Purchase Agreement (the "Learning Services Agreement"), dated September 19, 1997, by and among the Company, Learning Services and John Crowder, the sole stockholder of Learning Services (the "Learning Services Stockholder"), the Company acquired all of the outstanding capital stock of Learning Services. As payment for the purchase price, the Company issued 709,976 shares of its Common Stock to the Learning Services Stockholder. In connection with the acquisition of Learning Services, the Company entered into an employment agreement with the Learning Services Stockholder under which the Learning Services Stockholder will perform certain services for the Company through March 19, 1999. Pursuant to the terms of the Learning Services Agreement, 70,997 shares of the Common Stock of the Company issued to the Learning Services Stockholder were placed in escrow as a source of indemnification for the Company. These shares are scheduled to be released from escrow upon the date of the issuance of the first independent audit report on the Company's financial statements which include the financial results of Learning Services, provided that shares will not be released from escrow to the extent necessary to secure or satisfy any claim for indemnification made by the Company prior to such date. SKILLS BANK CORPORATION Pursuant to a Merger Agreement (the "Skills Bank Agreement"), dated September 17, 1997, by and among the Company, Newco Acquisition, Inc., Skills Bank, Edison Venture Fund II, L.P., Jake LaMotta, Garry McDaniels, Jan Gombert, Len Hall, Jr., Annette McDaniels and certain other stockholders of Skills Bank (collectively, the "Skills Bank Stockholders"), the Company acquired all of the outstanding capital stock of Skills Bank. As payment for the purchase price, the Company issued 1,069,286 shares of its Common Stock to the Skills Bank Stockholders. Pursuant to the terms of the Skills Bank Agreement, 106,930 shares of the Common Stock of the Company issued to the Skills Bank Stockholders were placed in escrow as a source of indemnification for the Company. These shares are scheduled to be released from escrow upon, (i) for items expected to be encountered in the audit process, the earlier of (A) September 29, 1998; and (B) the issuance of the first independent audit report on the Company's financial statements which includes the financial results of Skills Bank; and (ii) for all other items, September 29, 1998, provided that shares will not be released from escrow to the extent necessary to secure or satisfy any claim for indemnification made by the Company prior to such date. MICROSYSTEMS SOFTWARE, INC. Pursuant to an Agreement and Plan of Merger (the "Microsystems Agreement"), dated October 2, 1997, by and among the Company, TLC Acquisition Corp. and Microsystems, the Company acquired all of the outstanding capital stock of Microsystems. As payment for the purchase price, the Company issued 955,819 shares of its Common Stock to the Microsystems Stockholders. In connection with the acquisition of Microsystems, the Company entered into employment agreements with Richard A. Gorgens ("Gorgens") and Nigel R. Spicer ("Spicer") under which Gorgens and Spicer will perform certain services for the Company through September 30, 1999. Pursuant to the terms of the Microsystems Agreement, 66,894 shares of the Common Stock of the Company issued to the Microsystems Stockholders were placed in escrow as a source of indemnification for the Company. These shares are scheduled to be released from escrow upon the earlier of (i) the date of the issuance of the audited financial statements for the Company's 1997 fiscal -13- 14 year; and (ii) October 2, 1998, provided that shares will not be released from escrow to the extent necessary to secure or satisfy any claim for indemnification made by the Company prior to such date. THE SELLING STOCKHOLDERS The following table sets forth, to the knowledge of the Company, certain information, as of October 30, 1997, with respect to the Selling Stockholders for whom the Company is registering the Shares for resale to the public. The Company will not receive any of the proceeds from the sale of the Shares. The shares of Common Stock covered by this Prospectus were issued to the Selling Stockholders in connection with the acquisitions of Learning Services, Skills Bank and Microsystems. See "The Acquisitions." To the Company's knowledge, none of the Selling Stockholders holds any position or office with, has been employed by, or has otherwise had a material relationship with the Company or any of its subsidiaries within the past three years, except that (i) in connection with the acquisition of Learning Services, the Company entered into an employment agreement with the Learning Services Stockholder under which the Learning Services Stockholder will perform certain services for the Company through March 19, 1999; and (ii) in connection with the acquisition of Microsystems, the Company entered into employment agreements with Gorgens and Spicer under which Gorgens and Spicer will perform certain services for the Company through September 30, 1999. See "The Acquisitions."
Number of Percentage of Shares of Number of Shares Shares of Common Stock Number of of Common Stock Common Stock Beneficially Shares of Beneficially Beneficially Name of Selling Owned Prior Common Stock Owned After Owned after Stockholder to Offering(1) Offered Hereby Offering(1)(2) Offering (1)(2) ----------- -------------- -------------- -------------- --------------- LEARNING SERVICES John W. Crowder(3) 709,976(4) 709,976(4) 0 0% SKILLS BANK Edison Venture Fund II, 286,361(5) 286,361(5) 0 0% L.P.(3) Jan Gombert(3) 162,774(5) 162,774(5) 0 0% Garry L. McDaniels 92,995(5) 92,995(5) 0 0% & Annette McDaniels JT Ten(3) Leonard W. Hall and 64,492(5)(6) 63,597(5) 895 * Nancy L. Hall(3) Edison Venture Fund 55,069(5) 55,069(5) 0 0% II-Pa, L.P.(3) Annette McDaniels(3) 51,214(5) 51,214(5) 0 0% Garry L. McDaniels(3) 46,092(5) 46,092(5) 0 0% Laurie Liskin 31,619(5) 31,619(5) 0 0% Leonard Hall 25,607(5) 25,607(5) 0 0% Senior Trust James R. Galloway 17,925(5) 17,925(5) 0 0% Thomas Samph 22,278(5) 17,925(5) 4,353 *
-14- 15 Jean Gombert 13,657(5) 13,657(5) 0 0% Jesse Mashbaum 12,163(5) 12,163(5) 0 0% Harry G. Schlitt 10,243(5) 10,243(5) 0 0% Robert N. Armstrong 10,706(5)(7) 8,706(5) 2,000 * and Carol Armstrong Patsy Poche 8,706(5) 8,706(5) 0 0% Wallace L. Bennett 54,715(5) 8,622(5) 46,093 * Melissa McDaniels 7,938(5) 7,938(5) 0 0% Martin H. Gerry 7,682(5) 7,682(5) 0 0% SEP/IRA Nicholas F. Rayder 7,682(5) 7,682(5) 0 0% Charles D. 71,183(5) 6,976(5) 64,207 * LaMotta (3) Nancy L. Hall and 6,970(5)(8) 6,325(5) 645 * Adam L. Hall Larry D. Davis 5,205(5) 5,205(5) 0 0% Michael M. Behrmann 5,121(5) 5,121(5) 0 0% and June K. Behrmann The Living Trust, 5,121(5) 5,121(5) 0 0% dated October 1, 1993, of Thomas R. Benefiel and Janice H. Benefiel Trustors and/or Trustees Edward G. R. Chalker, 5,121(5) 5,121(5) 0 0% II Thomas R. Cronin, as 5,121(5) 5,121(5) 0 0% Trustee of the Thomas R. Cronin Trust Dated April 10, 1992 Ms. Leona Draper 5,121(5) 5,121(5) 0 0% Nelson E. Fenwick 5,121(5) 5,121(5) 0 0% Sam F. and June S. 5,121(5) 5,121(5) 0 0% Hamra R. Hart Mcintyre 5,621(5) 5,121(5) 500 * Le Roy J. Riedy 5,121(5) 5,121(5) 0 0% Ray C. Rist and 5,121(5) 5,121(5) 0 0% Marlee C. Rist Steven G. Rustman 5,121(5) 5,121(5) 0 0% Jerry F. Steelman and 6,621(5)(9) 5,121(5) 1,500 * Peggy J. Steelman
-15- 16 Richard W. Ter Maat 5,121(5) 5,121(5) 0 0% Stewart Way 5,121(5) 5,121(5) 0 0% Todd A. Wills 5,121(5) 5,121(5) 0 0% Ed Sontag 3,585(5) 3,585(5) 0 0% Aryeh L. Sonnenberg 3,033(5) 3,033(5) 0 0% Jeffri Brookfield 2,561(5) 2,561(5) 0 0% Charles R. Campbell 2,561(5) 2,561(5) 0 0% Audrey A. Chengelis 2,561(5) 2,561(5) 0 0% Marty J. McGihon and 2,561(5) 2,561(5) 0 0% Christopher C. McGihon Kathleen Stremel 2,561(5) 2,561(5) 0 0% MLPF&S Custodian 2,561(5) 2,561(5) 0 0% for Mr. Derry R. Thompson IRRA, FBO Mr. Derry R. Thompson Roy F. Yahl and 2,561(5) 2,561(5) 0 0% Marynell Yahl William Kearney 7,818(5) 1,928(5) 5,890 * Barbara Lee Wilcox 1,793(5) 1,793(5) 0 0% Carolyn M. Sherman 1,280(5) 1,280(5) 0 0% Adam Smith 1,280(5) 1,280(5) 0 0% Jennifer Smith 1,280(5) 1,280(5) 0 0% Louis S. Barber 1,058(5) 1,058(5) 0 0% Loren Sucher 7,554(5) 896(5) 6,658 * Patricia Mullinix and 871(5) 871(5) 0 0% Carawan E. Peed Jr. David Thomas 630(5) 630(5) 0 0% Kathleen M. Hurly 26,119(5) 512(5) 25,607 * Mark K. Jones 10,755(5) 512(5) 10,243 * Edward Zaron, Jr. 512(5) 512(5) 0 0% Arthur L. Giovannetti 282(5) 282(5) 0 0% MICROSYSTEMS Richard A. Gorgens(3) 504,134(10) 504,134(10) 0 0%
-16- 17 Debra C. Gorgens(3) 209,744(10) 209,744(10) 0 0% K Gorgens Spray Trust 74,908(10) 74,908(10) 0 0% J Gorgens Spray Trust 74,908(10) 74,908(10) 0 0% Nigel Spicer(3) 74,910(10) 41,199(10) 33,711 * James Kendall 22,472(10) 22,472(10) 0 0% Reed Lewis 17,079(10) 9,887(10) 7,192 * Larry Mason 5,842(10) 3,595(10) 2,247 * Alan Smith(3) 11,986(10) 2,996(10) 8,990 * William Kilroy 4,794(10) 2,097(10) 2,697 * Janet Erickson 3,895(10) 1,947(10) 1,948 * Glenn Martyn 5,993(10) 1,498(10) 4,495 * Peter Chesla 1,123(10) 1,123(10) 0 0% Susan Getgood 5,018(10) 898(10) 4,120 * Kevin Driscoll 2,696(10) 898(10) 1,798 * Mark Stearns 1,348(10) 898(10) 450 * Amy Laflamme 2,996(10) 749(10) 2,247 * Teresa McGrath 1,947(10) 449(10) 1,498 * David Norquist 1,374(10) 449(10) 898 * Kimberly Baril 748(10) 299(10) 449 * James Mourey 2,247(10) 224(10) 2,023 * Elizabeth Gallagher 449(10) 149(10) 300 * Henry Nguyen 449(10) 149(10) 300 * Kirstie Spicer 449(10) 149(10) 300 *
- ---------------------- * Less than one percent of the number of shares of Common Stock outstanding. (1) The number of Shares beneficially owned is determined under rules promulgated by the Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any Shares as to which the individual has sole or shared voting power or investment power and also any Shares which the individual has the right to acquire within 60 days after October 30, 1997 through the exercise of any stock option or other right. The inclusion herein of such Shares, however, does not constitute an admission that the Selling Stockholders are direct or indirect beneficial owners of such Shares. The Selling Stockholders have sole voting power and investment power with respect to all Shares listed as owned by the Selling Stockholders. (2) It is unknown if, when or in what amounts a Selling Stockholder may offer Shares for sale and there can be no assurance that the Selling Stockholders will sell any or all of the Shares offered -17- 18 hereby. Because the Selling Stockholders may offer all or some of the Shares pursuant to this Offering, and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the Shares that will be held by the Selling Stockholders after completion of the Offering, no estimate can be given as to the amount of the Shares that will be held by the Selling Stockholders after completion of the Offering. However, for purposes of this table, the Company has assumed that, after completion of the Offering, no Shares will be held by the Selling Stockholders. (3) Each of these stockholders has agreed that he, she or it will not sell, transfer or otherwise dispose of, or reduce his, her or its interest or risk relating to shares of Common Stock of the Company until at such time as the Company has published (within the meaning of Accounting Series Release No. 130, as amended, of the Commission) financial results covering at least 30 days of combined operations (the "Combined Financial Results") of the Company and Learning Services, Skills Bank or Microsystems, as the case may be. The Company expects the Combined Financial Results to be published at the time of publication of the Company's year end financial results for the fiscal year ending January 3, 1998. (4) Includes 70,997 shares of Common Stock placed in escrow pursuant to the terms of the Learning Services Agreement. (5) Includes the following shares of Common Stock placed in escrow pursuant to the terms of the Skills Bank Agreement: Edison Venture Fund II, L.P. (28,587); Jan Gombert (16,277); Garry McDaniels & Annette McDaniels JT Ten (9,300); Leonard W. Hall and Nancy L. Hall (6,360); Edison Venture Fund II-Pa, L.P. (5,506); Annette McDaniels (5,121); Garry L. McDaniels (4,609); Laurie Liskin (3,162); Leonard Hall Senior Trust (2,561); James R. Galloway (1,792); Thomas Samph (1,792); Jean Gombert (1,365); Jesse Mashbaum (1,216); Harry G. Schlitt (1,024); Robert N. Armstrong and Carol Armstrong (870); Patsy Poche (870); Wallace L. Bennett (862); Melissa McDaniels (794); Martin H. Gerry SEP/IRA (768); Nicholas F. Rayder (768); Charles D. LaMotta (697); Nancy L. Hall and Adam L. Hall (633); Larry D. Davis (521); Michael M. Behrmann and June K. Behrmann (512); The Living Trust, dated October 1, 1993, of Thomas R. Benefiel and Janice H. Benefiel Trustors and/or Trustees (512); Edward G. R. Chalker, II (512); Thomas R. Cronin, as Trustee of the Thomas R. Cronin Trust Dated April 10, 1992 (512); Leona Draper (512); Nelson E. Fenwick (512); Sam F. and June S. Hamra (512); R. Hart Mcintyre (512); Le Roy J. Riedy (512); Ray C. Rist and Marlee C. Rist (512); Steven G. Rustman (512); Jerry F. Steelman and Peggy J. Steelman (512); Richard W. Ter Maat (512); Stewart Way (512); Todd A. Wills (512); Ed Sontag (358); Aryeh L. Sonnenberg (304); Jeffri Brookfield (256); Charles R. Campbell (256); Audrey A. Chengelis (256); Marty J. McGihon and Christopher C. McGihon (256); Kathleen Stremel (256); MLPF&S Custodian for Mr. Derry R. Thompson IRRA, FBO Mr. Derry R. Thompson (256); Roy F. Yahl and Marynell Yahl (256); William Kearney (193); Barbara Lee Wilcox (180); Carolyn M. Sherman (128); Adam Smith (128); Jennifer Smith (128); Louis S. Barber (106); Loren Sucher (89); Patricia Mullinix and Carawan E. Peed, Jr. (87); David Thomas (63); Kathleen M. Hurly (51); Mark K. Jones (51); Edward Zaron, Jr. (51); and Arthur L. Giovannetti (28). (6) Includes 645 shares of Common Stock beneficially owned by Nancy L. Hall and 250 shares of Common Stock beneficially owned by Leonard W. Hall. (7) Includes 2,000 shares of Common Stock beneficially owned by Robert N. Armstrong. (8) Includes 645 shares of Common Stock beneficially owned by Nancy L. Hall. (9) Includes 1,500 shares of Common Stock beneficially owned by the Peggy J. Steelman Trust. (10) Includes the following shares of Common Stock placed in escrow pursuant to the terms of the Microsystems Agreement: Richard A. Gorgens (35,289); Debra C. Gorgens (14,682); K Gorgens Spray Trust (5,243); J. Gorgens Spray Trust (5,243); Nigel Spicer (2,883); James Kendall (1,573); Reed Lewis (692); Larry Mason (251); Alan Smith (209); William Kilroy (146); Janet Erickson (136); Glenn Martyn (104); Peter Chesla (78); Susan Getgood (62); Kevin Driscoll (62); Mark Stearns (62); Amy Laflamme (52); Teresa McGrath (31); David Norquist (31); Kimberly Baril (20); James Mourey (15); Elizabeth Gallagher (10); Henry Nguyen (10); and Kirstie Spicer (10). PLAN OF DISTRIBUTION The Shares covered hereby may be offered and sold from time to time by the Selling Stockholders, or by their pledgees, donees, transferees or other successors in interest. The Selling Stockholders will act independently of the Company in making decisions with respect to the timing, manner and size of each sale. Such sales may be made in the over-the-counter market or otherwise, at prices related to the then current market price or in negotiated transactions, including pursuant to one or more of the following methods: (i) purchases by a broker-dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (ii) ordinary brokerage transactions and transactions in which the broker -18- 19 solicits purchasers; and (iii) block trades in which the broker-dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction. In effecting sales, broker-dealers engaged by the Selling Stockholders, or by their pledgees, donees, transferees or other successors in interest may arrange for other broker-dealers to participate. Broker-dealers will receive commissions or discounts from the Selling Stockholders, or from their pledgees, donees, transferees or other successors in interest in amounts to be negotiated immediately prior to the sale. In offering the Shares covered hereby, the Selling Stockholders, or their pledgees, donees, transferees or other successors in interest and any broker-dealers and any other participating broker-dealers who execute sales for the Selling Stockholders may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales, and any profits realized by the Selling Stockholders and the compensation of such broker-dealer may be deemed to be underwriting discounts and commissions. In addition, any of the Shares covered by this Prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this Prospectus. The Microsystems Stockholders have agreed to indemnify in certain circumstances the Company and certain related persons against certain liabilities, including liabilities under the Securities Act. The Company has agreed with the Selling Stockholders to keep the Registration Statement of which this Prospectus constitutes a part effective until the earlier of (i) such time as all of the Shares have been disposed of pursuant to and in accordance with such Registration Statement or pursuant to Rule 144 under the Securities Act or any other applicable exemption under the Securities Act without additional restriction upon public resale or are eligible for resale pursuant to Rule 144(k) under the Securities Act; or (ii) October 2, 1998. The Company intends to de-register any of the Shares not sold by the Selling Stockholders at the end of such period. LEGAL MATTERS The validity of the Shares offered hereby will be passed upon for the Company by Neal S. Winneg, General Counsel of the Company. Mr. Winneg owns options to purchase an aggregate of 98,750 shares of Common Stock, which are to become exercisable in periodic installments through January 1999. EXPERTS The consolidated balance sheets as of January 4, 1997 and January 6, 1996 and the consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended January 4, 1997, incorporated by reference in this prospectus, have been incorporated herein in reliance on the report of Coopers & Lybrand, L.L.P., independent accountants, given on the authority of the firm as experts in accounting and auditing. -19- 20 NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION OF AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE HEREOF. --------------- TABLE OF CONTENTS PAGE Available Information........................ 3 Incorporation of Certain Documents By Reference............................... 3 Special Note Regarding Forward-Looking Information................................ 4 The Company.................................. 5 Risk Factors................................. 7 Use of Proceeds.............................. 12 The Acquisitions............................. 13 The Selling Stockholders..................... 14 Plan of Distribution......................... 18 Legal Matters................................ 19 Experts...................................... 19 --------------- THE LEARNING COMPANY, INC. 2,735,081 SHARES COMMON STOCK -------------- PROSPECTUS -------------- December 3, 1997 -----END PRIVACY-ENHANCED MESSAGE-----