The Learning Company Inc.

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The Learning Company Inc.

1 Athenaeum PL
Cambridge, Massachusetts 02142
U.S.A.
(617) 494-1200
(800) 377-6567
Fax: (617) 494-1219
Web Site: http://www.learningco.com

Public Company
Incorporated: 1978 as Micropro International Corp.
Employees: 1,400
Sales: $392.4 million (1997)
Stock Exchanges: New York
Ticker Symbol: TLC

SICs: 7372 Prepackaged Software; 5045 Computers, Peripherals & Software; 7373 Computer Integrated Systems Design; 8742 Management Consulting Services

The Learning Company Inc. develops, publishes, and markets a family of premium software brands that educate across every age and area of interest, from young children to adults. The Learning Company’s products are sold in more than 23,000 stores across 40 countries through multiple distribution channels including retail, school, online, and direct marketing.

The Learning Company Inc. is America’s premier developer and marketer of educational and reference software for consumers and schools. The company develops and publishes a broad range of high-quality consumer educational software for personal computers (PCs) for all age groups, featuring some of the most well-known brand name products on the market. The company manufactures primarily education and reference software, but also offers materials focusing on lifestyle, productivity, and entertainment.

The company’s educational products are generally marketed under The Learning Company and MECC brand names, and include the “College Prep,” “Foreign Languages,” “Oregon Trail,” “Reader Rabbit,” “Treasure,” “Super Solvers,” and “Writing and Creativity Tools” lines. In addition to consumer versions of these products, the company also publishes school editions of a number of them.

The company’s reference products include a line of Compton’s Home Library brand products, including Compton’s Interactive Encyclopedia, as well as the American Heritage Talking Dictionary, Mosby’s Medical Encyclopedia, and Body-Works.

The company’s premium productivity and lifestyle products are primarily sold under the SoftKey brand name. The company also publishes lower-priced boxed products under the “Key” brand name, and a line of budget, jewel-case-only products under the “Platinum” brand name. Other lines include products bearing the Sesame Street, Madeline, and School House Rock labels.

From Micropro to WordStar, 1978-93

The company was originally incorporated in California in October 1978 as Micropro International Corp. and then incorporated again in Delaware in November 1986 as a successor to Micropro International Corp.

Based in Novato, California, the company changed its name to WordStar International Inc. in May 1989 due to its focus on developing and distributing the then-popular word processing software of the same name, an early predecessor, and then competitor with Microsoft Word and WordPerfect.

In March 1991, the company acquired Lifetree Software Inc. for $1.9 million in cash, stock, and future payments. Several months later, in July, the company created a foreign subsidiary, WordStar International S.A., France. The company grew a bit in January 1993 when it completed a merger with ZSoft.

SoftKey International Inc., 1994-96

In February 1994, WordStar International Inc. was a fading industry heavyweight whose WordStar word-processing program once dominated the market. With sagging sales, the company gave in to a lucrative three-way merger with Cambridge, Massachusetts-based Spinnaker Software Corp. and Toronto, Ontario-based SoftKey Software Products Inc. Spinnaker brought its “PFS” line of budget personal productivity software and SoftKey brought its budget titles under the “Key” brand name to the deal. The newly formed company was renamed SoftKey International Inc.

Ron Posner, the chairman of WordStar, helped engineer the merger and then stepped aside to become chairman of San Francisco-based Starpress Inc. The top management of the original SoftKey, including President Kevin O’Leary and Chairman Michael Perik, took control, set up headquarters in Cambridge, Massachusetts, and largely dismantled both Spinnaker and WordStar, retaining only a small development team to keep cranking out new products.

The new company’s breadth of business included developing personal productivity, educational/entertainment, and personal and office organizational software for home and small business users; developing income tax software and providing comprehensive nationwide tax processing for personal, corporate, and trust tax returns in Canada; and distributing and servicing LANSA software, a family of CASE products for the IBM AS/400 computer. The new company became one of the top U.S. software distributors, and the market leader in the Canadian tax software business.

Acquisitions continued in June as the company acquired Aris Multimedia Entertainment Inc. for an undisclosed amount and, the following month, the company acquired Compact Publishing, Inc. September saw the company acquiring Software Marketing Corporation of Phoenix, Arizona, in exchange for approximately 600,000 shares of common stock and the assumption of $1.6 million in long-term debt.

And, as the company itself grew, so did the industry, with sales of educational software in the United States generating $522 million in 1994.

In 1995, SoftKey went on an acquisition hayride, purchasing numerous companies in an effort to capture more of the market share in educational and entertainment software. In July, the company acquired Tewi Verlag GmbH, a German limited liability company, in exchange for approximately $11.6 million cash paid to Ziff-Davis and approximately $1.5 million cash and 99,045 shares of common stock paid to Kunkel. The following month, SoftKey acquired Future Vision Holding, Inc., a New York multimedia software business.

In December, the company gave itself a Christmas present when it acquired Fremont, California-based The Learning Co. for nearly $606 million in a hostile outbidding of Broderbund Software Inc.’s offer for approximately $552 million. Broderbund—known for its “Where in the World is Carmen San-diego?” line of products; the math-teaching program The Logical Journey of the Zoombinis; Kid Pix Studio, Math Workshop and Print Shop; and distribution of the hit game Myst—had previously been given the go-ahead for a merger with The Learning Co. in August, but the more lucrative offer from SoftKey caused the latter to give in to the hostile bid. The acquisition gave the company product lines focusing on the kids market, as Learning Co. was best known for its line of educational children’s software, especially the Reader Rabbit (in which children travel with Reader Rabbit, Mat the Mouse, and Sam the Lion through “Letter Lands” containing “Skill Houses” where they learn phonics and words through games and activities, and “Storybooks” where they are taught new words and simple sentences) and Math Rabbit (a similar math adventure) series of learning games, and its Knoxville, Tennessee division’s language education software for adults marketed under the “Learn to Speak” brand name.

The Learning Company’s products had begun achieving favorable recognition as far back as 1991, when Reader Rabbit 1 won Technology & Learning Magazine’s Language Arts Program of the Decade. The following year, the company’s products continued to gain recognition, with Reader Rabbit 2 winning a Parents’ Choice Foundation Award, the Software Publishers Association’s Award for Best Elementary Education Product, and Technology & Learning Magazine’s Award of Excellence. The year 1993 followed with Treasure Cove! and Treasure MathStorm!, both winning Innovations‘93 Software Showcase Honors at the Summer Consumer Electronics Show. In 1994, Reader Rabbit 1 won a Gold Medal from The National Association of Parenting Publications Awards (NAPPA); Reader Rabbit 2 won Technology & Learning Magazine’s Software Award for Excellence—Next in Series; and Treasure MathStorm! received an Honorable Mention—Math from Practical Home schooling’s First Annual Reader Awards and an Award of Excellence from Technology & Learning Magazine.

That same month, the company completed a merger with Compton’s NewMedia, Inc. from Tribune Company for approximately 4.7 million shares of common stock and Tribune Company made a $150 million strategic investment in the company. The company also acquired EduSoft in late 1995, finishing a $1.2 billion shopping spree for the year and reinventing the company as a category leader in educational software.

But snapping up the competition was not the only thing the company was doing to shake up the industry. With the elimination of elaborate packaging and hard-copy documentation, and the move to jewel-case formats with CD-sized booklets, SoftKey pioneered the budget line of CD-ROM products in 1995, with the company’s “Platinum” line titles carrying retail list prices of $12.99 instead of the mid-$30 range most of the premiere products carried. With the new packaging, a new distribution deal was made with SoftKey switching from Stream International to BMG, with the latter company’s subsidiary, BMG Distribution, providing fulfillment services for the budget line. The move brought the company’s products into a wide range of retail outlets, including Best Buy, Circuit City, Computer City, Egghead Software, Office Depot, Price Club/ Costco, Sam’s Club, and Staples.

SoftKey’s products were well-received in 1995, with Reader Rabbit’s Interactive Reading Journey winning a plethora of awards, including Home PCs Award of Excellence, Parenting Magazine’s Software Magic Award, The Parent Council’s Seal for outstanding product, Technology & Learning Magazine’s Award of Excellence for the School category), an approval from The Parents’Choice Foundation, Mac Home Journal’s Reader’s Choice Award, CD-ROM Today Magazine’s Best Children’s Program-Reading Award, and Home Computing & Entertainment Magazine’s Best Educational Program Award. The Reader Rabbit 1 program also won Newsweek Magazine’s Editors’Choice Award, and Reader Rabbit 2 and Reader Rabbit 3 both were winners in Only the Best: The Annual Guide to the Highest-Rated Educational Software/Multimedia, 1994/95.

With more than 15,000 titles competing for a limited amount of shelf space in a become-a-hit-in-90-days-or-die market, retail prices on software began falling. But the company’s revenues for 1995 still grew to $273.6 million, with a net income of $42.1 million.

The Learning Company Inc., 1996-Date

In May 1996, SoftKey, whose products at the time included popular consumer titles like Calendar Creator Plus and The American Heritage Talking Dictionary, acquired Minnesota Educational Computing Corporation (MECC), a publisher and distributor of high-quality educational software for children, in a stock swap worth $361 million, making the company a major force in the education software market. MECC brought to the merger its hit Oregon Trail series of products as well as other educational titles. The acquisition of MECC, combined with the previous acquisitions of The Learning Co. and Compton’s New Media, enabled Softkey to capture approximately 16 percent of the educational software market, catapulting the company to the second position behind Microsoft Corp.

The acquisitions of MECC, Compton, and The Learning Company by SoftKey were in keeping with a trend of consolidation in the educational software marketplace. Analysts predicted the hundreds of existing companies in the entertainment and educational software markets would be gobbled up by five or ten larger companies, and the trend appeared to be in full-swing as companies like Starpress Inc. merged with Irvine, California-based Graphix Zone Inc.

Following the MECC acquisition, SoftKey laid off 125 employees of New Media and began aggressively driving the prices of its educational software down to the $20 to $25 range per title, dropping from the usual $40 to $50 at which most such titles were being sold.

The name was changed from SoftKey International to The Learning Company Inc. in October 1996 and the company’s Operation Neptune made a splash at COMDEX as an excellent educational tool for children.

Again, in 1996, The Learning Company’s products garnered much recognition, with Reader Rabbit’s Interactive Reading Journey 2 winning a SuperKids Software Award for Best Reading Software, Reader Rabbit’s Interactive Math Journey winning Curriculum Administrator Magazine’s Top 100 Districts’Choice Award, and Read, Write & Type! winning Innovations‘96’s Software Showcase Honors at the Winter Consumer Electronics Show. Revenues for the company in 1996 reached $343.3 million, with net income of $72.3 million.

In June 1997, the company, firmly positioned among the top ten software manufacturers in the United States, signed another deal with BMG Entertainment for the latter company to manufacture and distribute additional CD-ROM products of The Learning Co. BMG’s manufacturing division, Sonopress, manufactured the actual products, and BMG Distribution handled the fulfillment services. The agreement allowed BMG to diversify beyond its core businesses of music and video and into the CD-ROM market, when many manufacturers of music CDs began devoting much of their production capacity to CD-ROM manufacturing as the floppy disk began losing ground to the CD-ROM, following its music analogs of records and cassette tapes to CD.

A month later, The Learning Co. introduced a double CD-ROM or deluxe edition of their reference software program, Compton’s Interactive Encyclopedia, which contained additional multimedia content, enhanced Internet links, and streamlined methods for research. The company, which ranked second in the encyclopedia category behind Microsoft’s Encarta and in front of IBM’s World Book Multimedia Encyclopedia and Grolier Interactive’s Grolier Encyclopedia, respectively, in the retail market worth approximately $45 million in 1996, also added links to Web sites and an “Ask the Librarian” feature that allowed users to e-mail their research topics to Compton’s and within 48 hours receive suggested online resources or print materials.

In October, the company acquired Microsystems Software, Inc., the creator of Cyber Patrol, the software which allows parents and teachers to choose what content on the Internet is appropriate for children, letting adults block material organized into different categories, including violence, nudity, explicit sexual material, and hate speech. The program was also customizable for up to ten different children, and contained a list of more than 40,000 inappropriate sites. In addition to blocking unsuitable content, Cyber Patrol also contained a unique ChatGard feature that prevented children from inadvertently divulging personal information, such as age, address, phone number, or school name, to strangers through Web sites and online chatrooms; managed access to chatrooms; and controlled the time that a child spent online.

By the end of December, the company announced that it had acquired all of the equity interest in Redwood City, California-based Creative Wonders LLC from New York City-based ABC Inc., a subsidiary of The Walt Disney Company and Electronic Arts Inc., for approximately $40 million in cash and stock options. The acquisition added a host of popular characters to the company’s stables, including those from The Children’s Television Workshop’s Sesame Street, as well as School House Rock, The Baby Sitters Club, and Madeline.

Growing a bit too fast, The Learning Company suffered a loss of nearly $450 million by the end of 1997. Luckily, The Thomas H. Lee Company, Bain Capital Inc., and Centre Partners Management LLC purchased The Tribune Company’s 22 percent stake, approximately 15 million shares of stock, for $123 million, and was awarded several seats on the board of directors. The reinvestment allowed the company to slash its debt by about two-thirds.

Also in December, at The Internet/Online Summit: Focus on Children, as part of a nationwide commitment to ensure that technology solutions would be easy to use and widely available, the company announced it would begin selling its popular Internet filter Cyber Patrol in retail outlets in the United States. The program, which until then had only been available for purchase via phone; the company’s Web site; and through agreements with America Online, CompuServe, Prodigy, Microsoft’s Internet Explorer Plus, and other Internet service providers; was the world’s most widely used Internet filtering software designed to help protect children in cyberspace.

The company’s products continued to achieve recognition, with Reader Rabbit’s Interactive Reading Journey 2 picking up a Silver Apple from The National Educational Media Network; and Reader Rabbit’s Interactive Math Journey winning kudos by capturing Home PCs Editor’s Choice Top 100 Software Award, a Bologna New Media Prize (cosponsored by Children’s Software Revue) as Best Math Title, and Family PC’s Recommended Software Seal.

As the company entered 1998, four of its titles appeared in PC Data’s top ten survey by sales for educational software. American Girls Premiere Special Edition ranked number one (several months in a row), Oregon Trail III came in at number three, Reader Rabbit Kindergarten was number five, and Reader Rabbit Preschool was number seven.

In March, the company acquired Mindscape Inc. from Pearson PLC for approximately $150 million, as the company continued to expand. A mere month later, the Mindscape subsidiary branched out into the genealogy software market as it purchased the “Family Heritage” line of products from IMSI for $2.5 million in cash. The Family Heritage Deluxe product contained a free one-month subscription to the highly regarded Web site for Ancestry, the most comprehensive online genealogy organization whose archives include U.S. census indexes from as far back as 1790, land records, colonial and Quaker family records, early pioneer registers, and selected military records. The Deluxe product also included The Source Research Guide, The Red Book Directory, American Genealogical Gazetteer, and The Social Security Death Index, comprised of more than 52 million death records, as well as Corel PhotoHouse for retouching photographs. The Family Heritage products contain everything needed for researching family lineages, including 160,000 surname histories and coats of arms from the respected genealogy association Swyrich, and a guided tour of more than 23,000 genealogical Web sites.

Also in March, the company’s Canadian subsidiary, SoftKey Software Products Inc., sold approximately 6.25 million special warrants to some Canadian institutional investors for approximately $104 million. So, with a strong stable of acquired software, subsidiaries, and personnel, and with its products continuing to sell well, the company appeared well poised to dominate the software market in the 21st century.

Principal Subsidiaries

Compton’s Learning Company; Compton’s NewMedia Inc.; Future Vision Holding Inc.; HyperGlot Software Company Inc.; Minnesota Educational Computing Corp.; Springboard Software Inc.; WordStar International Inc.; WordStar Atlanta Technology Center; Writing Tools Group Inc.; WordStar USA.