FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Softkey International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SKEY)") else Response.Write("(NASDAQ: SKEY)") end if %>
The Learning Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLC)") else Response.Write("(NYSE: TLC)") end if %>
One Athenaeum Street
Cambridge, MA 02142
http://www.softkey.com

UNION CITY, Ca., October 28, 1996/FOOLWIRE/ --- The Learning Company (formerly Softkey International) held their first annual investor's conference and released their third quarter 1996 results last Thursday. The company made three significant announcements. They announced the best quarter in their history, their intention to list on the New York Stock Exchange, and they announced that effective on that day they have changed their name from Softkey International to The Learning Company. The move to the NYSE is expected to happen in mid-November and the new ticker symbol will be "TLC."

THE NAME CHANGE. Because of the quality of the products and the breadth of the product line, it became clear to Softkey that they needed to revise their mission statement and focus on their strengths. To that end, they want to be the premier developer and marketer of educational and reference software for consumers and schools. That doesn't negate a commitment to the productivity businesses or the lifestyle businesses that have been very successful for them, continue to grow, and continue to be successful. But, the fact is that endorsements from media and reviewers, etc. made it clear that they cannot ignore the crown jewel of their franchise and that is why Softkey has become The Learning Company.

OVERVIEW OF THE FINANCIAL SITUATION. Revenues during the quarter were $90 million, up from the reported $41.5 million in Q3 1995; and when you combine the three businesses together, there was $69 million in Q3 1995. This represents a 30% combined revenue growth. Their gross margins as a percentage of sales were 74%, up from 70% a year ago. This results in an operating margin of 31%, which continues to increase over last year's 28%. Earnings per share before the amortization of goodwill was $0.47, up from $0.36 in the prior year and $0.03 above analyst consensus estimates.

The company continued to demonstrate strong improvement in its balance sheet and cash flows during the quarter. Cash stands at $104.5 million, up from $96.7 million in the second quarter, which is again up from $77 million in 1995. The DSOs remain flat at 61 days. Their inventory balance has declined this quarter over December 31 and over last quarter to $15.7 million. More importantly, this represents an increase in the turns in inventory which is now turning at 6 times per year versus 4 times at December 31. Their working capital position stands at $93.3 million, up from $86 million last quarter and $28 million at December 31. During the quarter, the company repurchased some of its bonds. Convertible debentures declined by a little over $10 million to $489.6 million.

REVENUE BY CATEGORY. The Learning Company has 80% of its products in education, 12% in productivity, and 8% in lifestyle. Their product strategy is to grow their education and reference product lines. These products have proven to be more sustainable revenue streams over time than hit-driven entertainment products. Their mix is not focused on entertainment products due to this hit-driven nature and the risk in development. We have all seen the recent turmoil in the traditional retail channel. This channel has seen a transition in its customer foot traffic. The Learning Company's strategy is to balance their portfolio of distribution channels and leverage their brands into these new and growing channels. The software industry today is only 15 years old. As every industry evolves, successful companies emerge to identify multiple channels to market their products to in order to reach their customers. Those successful companies will be able to anticipate new channel opportunities. The key to recognize is that only 50% of The Learning Company's revenues are derived from the retail channel. And only half of these comes from the traditional retail. In the third quarter, new retail (the clubs and office supply stores) represented $27.7 million or 31% of their mix. The traditional retail was $22.7 million (25%). Their international business generated $14.5 million in revenue. Their OEM business was $8.1 million. Their school business was $7.7 million. Their direct response business generated $8.2 million. And their tax business generated a little over $1 million.

THE RETAIL ENVIRONMENT FOR SOFTWARE TODAY. The Learning Company is in over 23,000 individual retail sites in the US. They have a direct retail sales force that provides excellent channel visibility and allows them to predict trends in their industry. The Learning Company has experienced the same issues that everyone else has in the mall chains. They have seen certain of these chains and distributors file for bankruptcy protection. But they have been able to predict those trends and carefully manage those fragile relationships. Why has this happened? Declining foot traffic in those traditional stores has reduced the number of customers. Lower and lower PC hardware prices have generally changed the demographic profile of the software buyer and where they shop. The mall chains, for The Learning Company, are down almost 50% on a year-over-year basis. This is stores like Egghead and electronic boutiques. Retail superstores such as Best Buy, CompUSA, and Circuit City have been able to sustain growth rates of approximately 20% for The Learning Company. These stores continue to attract the frequent PC software and hardware buyer in the US. Customers have gone to the mass merchants like K-Mart, Price/Costco, Office Depot, and Sam's Clubs. These stores have been the benefactors of the traffic troubles in the mall chains. The shift in consumer foot traffic and general changes in the economic profile of the PC hardware buyer, coupled with lower PC prices and software penetration rates in the home has allowed these stores to take advantage of this shift. The Learning Company was one of the first software companies to recognize this opportunity back in the early 1990s and they have established strong relationships with these new accounts. The recently announced merger between Office Depot and Staples is further evidence that these types of stores may ultimately become the Wal-Mart of the future.

INTERNATIONAL GROWTH. They have operations today in many European countries including France, Germany, and the UK, as well as Australia and the Pacific Rim. These markets are now beginning to take advantage of educational and reference technology that is available. This has resulted in a sustainable growth rate of 35% for their company. They have had a presence in many of these countries for well over ten years. They have established direct relationships with the customers in those countries. In addition to the growth in customer demand in these markets, they are moving to increase the number of original Learning Company MECC products that are introduced with foreign language and localized content throughout Europe.

DIRECT MAIL AND TELESALES. Beginning in the early 1980s, the company created a direct mail business mailing sole mail offerings to a proprietary customer base. Today this base stands at almost 5 million names. Last year alone they mailed almost 26 million pieces of mail. They continue to add to this proprietary list of names through their electronic registration process, through capturing the PC hardware buyer's name from the OEM. Early in the third quarter this year they implemented an outbound telesales program to go direct to their customer. Traditionally a successful direct mail business will achieve a 2-3% response rate. Their new telesales program has recently experienced a 17% response rate to the customer, which in turn drives new revenue growth and increased profitability. All of these factors, together with an increase in portfolio product offerings for direct mail has allowed them to achieve an annualized growth rate of 30%.

SELLING TO SCHOOLS. Today they market their products to over 86,000 school buildings in the United States. The company has been marketing educational technology to teachers for over 25 years. A high level of teacher trust is an asset that is very difficult for their competitors to reproduce. The Learning Company has entrenched brands and a strong reputation in the school market in the US. If the schools upgrade their hardware technology, there is expected to be a greater demand for high quality educational products. In addition, more young children are starting school today with a solid understanding of computers. Today, the combined company enjoys almost a 20% market share of the school technology business. The Learning Company has a large pool of proprietary content and technology to fuel this new demand. Their school channel has recently grown at a 25% growth rate. This channel represents a strategic growth area for them.

OEM RELATIONSHIPS. In order to be successful in the OEM market today, a software company must not only have a very large stable of proprietary products, but must also be able to offer foreign language translations in 7-9 different languages. Their capability to create compelling offerings for the OEM has allowed them to achieve a 40% growth rate. Companies like Sony, Compaq, Acer, and Hewlett-Packard have become mainstays in their business. The trend in the OEM channel is to a royalty-based business away from the traditional disk and documentation. This in turn allows them to earn a much higher gross margin and, in turn, a higher operating margin.

HOW THEY MAXIMIZE MARGINS. If one were to examine their retail-only business of $50 million in the third quarter as a standalone business, it would require a substantial level of sales and marketing support, administrative services, and would spend similar amounts on R&D to create its product catagories. Their ability to achieve penetration in the non-retail distribution channels allows them to leverage their infrastructure by centralizing back-office activities in Cambridge, combining previously separate sales and marketing organizations and to achieve maximum efficiency from their R&D spending by leveraging technology and sharing code between their development sites. If they had only a retail software business, it would have generated $50 million, a 72% gross margin, and resulted in a 15% operating margin based on the requirement to support the infrastructure and spending levels of the business. When you layer on incremental revenue strands, direct response brings them up to $58.6 million in revenues and their gross margins increase and operating margins go to 17%. Their international business in France, Germany, and the UK brings their revenues to $73.1 million, gross margins drop a little bit because those businesses are in smaller scale and operating margins stay about the same. Layer in the school business and revenues increase to $80.8 million, gross margins increase because you are selling to the schools and are able to get better pricing, and operating income increases to 22%. Bring into that their tax business in Canada, increases slightly. Their OEM business brings them up to $90 million in the quarter, a 74% gross margin, and a 31% operating income.

R&D AND NEW PRODUCT STRATEGY. How can the company only spend 11% of sales on R&D when most competitors in the software business spend between 20-22%? The answer is that they do spend 20%, but they are not constituted like every other software company, they go beyond just selling at retail. But, if you just take the company's retail sales and looked at the products they spend R&D money on, it would be about 20% of sales. But that same product doesn't just stay in the retail channel. It also goes into the direct mail business. You combine those two units together, and they're spending 17% of sales in R&D. Take the same product and sell it to schools, they don't have to redevelop it for that channel. They add a lab pack to it and the R&D drops to 15% of sales. They translate it into another language and combine all those divisions together, and the R&D cost drops to 12%. Many products are also very successful titles with OEMs. Combining that into the mix and the R&D price drops to 11%. The Learning Company spends almost $40 million a year developing educational and reference products. There is no company in the market that spends that much developing proprietary products. But, The Learning Company has a considerable advantage through the club they have in all of these different channels.

NEW PRODUCTS. The other issue about the industry these days is the product cycle. How quickly do you bring your products to market, how do you maintain your brand franchises, how do you extend your product line, etc. They are happy to report today that Q3 was their most prolific quarter in history in the introduction of premium proprietary franchise branded products. They had some remarkable new offerings this quarter that helped sustain and maintain their growth. For example, Interactive Reading Journey, an extension of an already very successful franchise in reading; LogiQuest, a brand new 3-D offering that is a learning game that lets you work in a learning environment in 3 dimensions; they introduced the Silver Anniversary Edition of Oregon Trail -- the oldest, most successful educational title in the history of educational software going into its 25th year. They have extended the Compton's brand this quarter with two additional products -- one in cooking and the other is an atlas product. They also brought out the new edition of the Compton's Encyclopedia. They extended, going into its 9th year, Calendar Creator. They intend to sustain this momentum and build their brand franchises going forward.

THE INTERNET AND WORLD WIDE WEB AS A DISTRIBUTION CHANNEL. You can't have a conversation about the consumer software business anymore without talking about the Internet. Perhaps the best way to look at it, according to the company, is as a remarkable new distribution opportunity. They are looking at the various ways they can use the Internet to distribute their products and services directly to their customers. They put out 22 million CDs every year. At the end of the CD they are going to include an electronic form that asks for email addresses and children's age and sex so that they can offer age appropriate products via email. When you download the file via modem, the company will spend the last 3 seconds of the transmission sending you back an initial offering. Ordering from the virtual store on the company's Web site, you can see what the products are like, right on the screen via previews.

PRODUCT MARKETING PROCESSES. The Learning Company has a 95% success rate with new products because they know how successful a product is going to be before it ships and before they write a single line of code. What differs from their competitors is how they execute in 3 key areas -- market research, parameters, positioning and product developent. They develop a product from the outside in.

The first step in market research is a product demand survey where they determine what their customers are thinking about and what kinds of educational reference and productivity products they may want by age group and by subject area. These surveys are focused on general demand areas. That way they can rank the relative importance of math and reading with the parent of a 3 year old and then turn around and compare that to the parent of an 8 year old to see if they differ. They are constantly gathering this type of information in mall surveys across the United States and are now beginning to do this internaitonally as well.

The second step of the market research process is a competitive analysis that looks at the size of a potential market, what the growth potential is and who key competitors are. They look beyond the software industry, though. They look at trends in the toy business, the game business, the book business. They take a broad view of the competitive environment.

Based on what they learn, they forecast what concepts are likely to win the hearts, minds, and pocketbooks of their customers. They take these concepts to a phase called concept validation. In this step they meet one-on-one with customers to confirm their likes and dislikes around a specific product area. By the end of these meetings, they have a clear, distilled view of the product opportunity.

The next area of differentiation is how they develop product parameters. This is the key to building products from the outside in. Their parameters process has two goals. First, develop the positioning, titling, and packaging that a core customer sees and buys when they go to the show. Second, help develop the product concept -- what the customer will see and play when they get home. This clearly defines the target positioning, the competition, the benefits and features, the development and production guidelines for the development team, the pricing, and all the financial forecasts including development time.

The product marketing and development teams work side-by-side and both continue to rely on market research. In product development they work with educators who are experts in specific areas like reading and math to make sure that they are developing a product that meets the right educational needs. They work with content experts like their editors in Chicago who are looking at what is changing in the world and continually updating their Compton's interactive encyclopedia. And they do child testing as every game is developed. They want to make sure that the product is as engaging as it is educational because if kids don't have fun, they won't play the game.

HOW THEY ARE PROGRAMMING FOR AN ONLINE WORLD. Ten years ago, The Learning Company was an Apple II company, making floppy disk products for the Apple II. Then they were making floppy disk products for DOS computers. Then they were making floppy disk products for Mac and Windows computers. Then they were making CD-ROM products for Macintosh and Windows computers. Each of those transitions, in its time, was fairly daunting and it required that they anticipate ahead of time what that would require so they could implement strategies to adjust to it. The online transition they face now will not be the last transition they face. The transition to online means they have to begin to move their products in that direction, but at the same time they have to grow their CD-ROM business. The difficulty here is that these two delivery systems imply two very different kinds of development paradigms. There is a fundamental architectural difference between products crafted for CD and products that they develop for online. Consumers expect them to fill the CD with product and they tend to have monolithic programs and very large data sets. CD allows you to put 550 to 600 megabytes of programs and data on a single CD. And that is too much to get down the thin pipe of the Internet. In fact, if you actually tried to do that with an end user on a 28.8 modem, it would probably take several days to download that much data. So, what people on the Internet have begun to do is architect products in a much more granular way. They divided these big monolithic products up into much smaller products and instead of calling them applications, they refer to them as applets. And there is a chain of progression through the applets. It doesn't need to be linear. You could start a child on applet one and depending on how they did you could jump to applet number three. So, it can be a very rich interactive experience, but you need to parcel out the code and the data a bit at a time.

These different technologies imply different production processes. There are different tools and technologies that are commonly used for developing applets instead of large multimedia applications. And, because of that, there are different staff rules and different development processes. This is potentially a problem and equates to needing two separate "factories".

The approach they plan to take to solve these problems involves a hybrid architecture and it borrows the best from both worlds. From the multimedia world, it borrows their multimedia engine. They borrowed from the online world the modular applet based architecture that will let them chain together in these parcels they can deliver online a continuous rich presentation. They discovered that they can put a set of applets on a CD-ROM and, because of the performance abilities of that medium, it still seems like the rich monolithic product people are used to from The Learning Company, but it is really applets chained together. This allows them to create one set of applets and deliver them online and on CD.

WHAT THEY ARE DOING IN THE SCHOOL DIVISION. The school business is very large -- $6 billion projected, significant growth over 1995. Print media is a very significant part of that. Electronic media is coming on very strong too. Then there is a subset called standalone software which is projected at $316 million to $380 million. That growth is fueled by more kids. There are a lot of things driving this market. Public policy is being driven by people who believe that technology is part of the solution for education. 90% of the school districts in the US own Learning Company software and the company is superbly positioned to capitalize on this growing market.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.