-----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, NFSNR2KHdB+H2oy8gDljGaaPgu17wQ3RDwiCZoWh9rbCVeK73Oyw2KdftoE+5/nG RhxIbTJLirDz3RKKAz8uuw== 0000898430-99-002302.txt : 19990624 0000898430-99-002302.hdr.sgml : 19990624 ACCESSION NUMBER: 0000898430-99-002302 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990513 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990528 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTEL INC /DE/ CENTRAL INDEX KEY: 0000063276 STANDARD INDUSTRIAL CLASSIFICATION: DOLLS & STUFFED TOYS [3942] IRS NUMBER: 951567322 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-05647 FILM NUMBER: 99637165 BUSINESS ADDRESS: STREET 1: 333 CONTINENTAL BLVD CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3102522000 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): May 13, 1999 MATTEL, INC. ------------ (Exact name of registrant as specified in its charter) Delaware 001-05647 95-1567322 - ------------------------------------------------------------------------------ (State or other jurisdiction (Commission (I.R.S. Employer of incorporation) File No.) Identification No.) 333 Continental Boulevard, El Segundo, California 90245-5012 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (310) 252-2000 -------------- N/A - ------------------------------------------------------------------------------ (Former name or former address, if changed since last report) Item 2. Acquisition or Disposition of Assets. ------------------------------------ On May 13, 1999, pursuant to an Agreement and Plan of Merger, dated as of December 13, 1999 (the "Merger Agreement"), between Mattel, Inc. ("Mattel") and The Learning Company, Inc. ("Learning Company"), Learning Company was merged with and into Mattel, with Mattel as the surviving corporation (the "Merger"). Learning Company developed and published a broad range of high-quality branded consumer software for personal computers that educated across every age category, from young children to adults. Pursuant to the Merger Agreement, each outstanding share of common stock of Learning Company, $.01 par value per share ("Learning Company Common Stock"), was converted into the right to receive 1.2 shares of common stock of Mattel, $1.00 par value per share ("Mattel Common Stock"). The formula in the Merger Agreement for determining the exchange ratio was determined through arm's length negotiations. Based on the capitalization of Learning Company as of May 13, 1999, the former Learning Company stockholders have the right to receive approximately 126 million shares of Mattel Common Stock. No fractional shares are issuable in the Merger. Learning Company stockholders otherwise entitled to receive a fraction of a share of Mattel Common Stock in the Merger instead are entitled to receive, pursuant to the Merger Agreement, an amount of cash equal to such fraction multiplied by $26.15, which is the average of the closing prices of the Mattel Common Stock on the New York Stock Exchange for 10 randomly selected trading days out of the 20 trading days ending on the fifth trading day preceding the Merger. All options to purchase Learning Company Common Stock outstanding immediately prior to the Merger were assumed by Mattel and converted into options to purchase Mattel Common Stock pursuant to the Merger Agreement. Additionally, pursuant to the Merger Agreement, each outstanding exchangeable non-voting share of Learning Company's Canadian subsidiary, Softkey Software Products Inc., remains outstanding, but under the terms of the exchangeable shares, becomes exchangeable into 1.2 shares of Mattel Common Stock. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. ------------------------------------------------------------------ (a) Financial Statements of Businesses Acquired. ------------------------------------------- The financial statements of Learning Company set forth on pages 34 through 60 of Learning Company's Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on Form 10-K for the fiscal year ended January 2, 1999 filed with the Securities and Exchange Commission on April 2, 1999 are filed as Exhibit 99.1 hereto pursuant to Rule 12b-23(a)(3) of the Exchange Act. The Financial Statements of Learning Company for the three-month period ended April 3, 1999 are not included with this initial report. Such financial information will be filed by amendment no later than July 26, 1999. (b) Pro Forma Financial Information. ------------------------------- The Unaudited Pro Forma Condensed Combined Financial Statements of Mattel and Learning Company for the years ended December 31, 1996, 1997 and 1998 are filed as Exhibit 99.2 hereto. The unaudited Pro Forma Condensed Combined Financial Statements of Mattel and Learning Company as of and for the three- month periods ended March 31, 1998 and 1999 are not included with this initial report. Such financial information will be filed by amendment no later than July 26, 1999. (c) Exhibits. -------- 2.1 Agreement and Plan of Merger dated as of December 13, 1998, between Mattel and Learning Company (incorporated by reference to Exhibit 2.1 of Mattel's Current Report on Form 8-K filed December 15, 1998) 23.1 Consent of PricewaterhouseCoopers LLP 99.1 Financial Statements of Learning Company 99.2 Unaudited Pro Forma Condensed Combined Financial Statements of Mattel and Learning Company 99.3 Press Release dated May 13, 1999 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MATTEL, INC. Registrant By: /s/ Robert Normile ------------------------- Robert Normile Date: May 28, 1999 Senior Vice President, General Counsel and ------------ Secretary EX-23.1 2 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in each of the twelve Registration Statements of Mattel, Inc. on Form S-8 (No. 33-14717, No. 33-51454, No. 33-34920, No. 33-57082, No. 33-62185, No. 333-01061, No. 333-03385, No. 333- 47459, No. 333-47641, No. 333-67493, No. 333-75145, and No. 333-79099), in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333- 68017) and in the Prospectus constituting part of the Registration Statement on Form S-4 (No. 333-71587) of our report dated March 26, 1999 relating to the financial statements and financial statement schedule of The Learning Company, Inc., which appears in The Learning Company, Inc.'s 1998 Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts May 26, 1999 EX-99.1 3 FINANCIAL STATEMENTS OF LEARNING COMPANY EXHIBIT 99.1 THE LEARNING COMPANY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants................................... 35 Consolidated Balance Sheets as of December 31, 1998 and 1997........ 36 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996............................... 37 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996................... 38 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............................... 40 Notes to Consolidated Financial Statements.......................... 42 Financial Statement Schedule of Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996........... 61
34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of The Learning Company, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Learning Company, Inc. and its subsidiaries as of January 2, 1999 and January 3, 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 26, 1999 35 THE LEARNING COMPANY, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
December 31, December 31, 1998 1997 ------------- ------------ ASSETS CURRENT ASSETS: Cash and short-term investments $ 256,759 $ 188,956 Accounts receivable, less allowances of $83,873 and $47,643, respectively 167,001 161,927 Inventories 59,912 39,382 Other current assets 56,514 35,863 ------------- ------------ 540,186 426,128 ------------- ------------ Fixed assets and other, net 54,840 51,798 Goodwill and other intangible assets, net 225,775 145,848 ------------- ------------ $ 820,801 $ 623,774 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable and accrued expenses $ 69,046 $ 101,045 Other current liabilities 52,902 52,851 Recourse accounts receivable factoring facilities 25,000 -- Line of credit 40,000 35,150 Merger related accruals 25,248 12,533 Current portion of long-term obligations 10,148 10,717 Purchase price payable 19,674 7,896 ------------- ------------ 242,018 220,192 ------------- ------------ LONG-TERM OBLIGATIONS: Long-term debt 191,244 294,356 Accrued and deferred income taxes 93,805 75,167 Other 7,548 8,069 ------------- ------------ 292,597 377,592 ------------- ------------ COMMITMENTS AND CONTINGENCIES (NOTE 7) STOCKHOLDERS' EQUITY: Series A Preferred Stock, $.01 par value - Authorized 750,000 shares, issued and outstanding 750,000 shares at December 31, 1998 and 1997 (liquidation value of $150,000) 8 8 Common stock, $0.01 par value - Authorized - 200,000,000 shares; issued and outstanding 87,277,033 and 65,524,559 shares at December 31, 1998 and 1997, respectively 873 656 Special voting share - Authorized and issued - one share representing the voting rights of 5,154,831 and 1,478,929 and outstanding Exchangeable Shares (for common stock) at -- -- December 31, 1998 and 1997, respectively Additional paid-in-capital 1,428,355 1,040,463 Accumulated deficit (1,138,099) (998,310) Accumulated other comprehensive loss (4,951) (16,827) ------------- ------------ 286,186 25,990 ------------- ------------ $ 820,801 $ 623,774 ============= ============ The accompanying notes are an integral part of these consolidated financial statements
36 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ------------- -------------- ------------- REVENUES $ 839,315 $ 620,931 $ 529,528 COSTS AND EXPENSES: Costs of production 268,798 189,219 149,304 Sales and marketing 229,613 156,797 102,071 General and administrative 60,821 48,716 39,806 Development and software costs 96,819 89,987 65,262 Amortization, merger and other charges 258,314 543,926 503,520 ------------- -------------- ------------- Total operating expenses 914,365 1,028,645 859,963 ------------- -------------- ------------- OPERATING LOSS (75,050) (407,714) (330,435) ------------- -------------- ------------- INTEREST INCOME (EXPENSE) AND OTHER: Interest income 7,787 6,330 9,280 Interest expense (17,635) (22,482) (26,703) Gains on sale of investments 11,053 -- -- ------------- -------------- ------------- 1,205 (16,152) (17,423) ------------- -------------- ------------- LOSS BEFORE TAXES (73,845) (423,866) (347,858) PROVISION FOR INCOME TAXES 31,507 71,044 28,602 ------------- -------------- ------------- NET LOSS $ (105,352) $ (494,910) $ (376,460) ============= ============== ============= NET LOSS PER SHARE: Basic and diluted $ (1.28) $ (7.48) $ (6.56) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic and diluted 82,274,000 66,183,000 57,347,000 The accompanying notes are an integral part of these consolidated financial statements
37 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Series A Preferred Common Stock Accumulated ---------------------- -------------------- Additional Other Total Paid-In Accumulated Comprehensive Stockholders' Shares Amount Shares Amount Capital Deficit Loss Equity ----------- --------- --------- ----------------------------------------------------------------- Balance, December 31, 1995 -- $ -- 46,860 $469 $ 467,236 $(129,642) $(9,470) $ 328,593 Acquisition of MECC -- -- 9,214 92 240,670 -- -- 240,762 Other acquisitions -- -- 899 9 15,247 -- -- 15,256 Conversion of debt to common stock -- -- 158 2 3,051 -- -- 3,053 Stock issued under exercise of options -- -- 3,319 32 28,661 -- -- 28,693 Conversion of Exchangeable Shares to common stock -- -- 45 -- -- -- -- -- Stock issued for settlement of expenses -- -- 500 5 13,015 -- -- 13,020 Repurchase of common stock -- -- (80) -- (3,433) (3,433) Comprehensive loss: Net loss for year -- -- -- -- -- (376,460) -- (376,460) Other comprehensive -- -- -- -- -- -- (1,593) (1,593) loss Comprehensive loss (378,053) ----------- --------- --------- ----------------------------------------------------------------- Balance, December 31, 1996 -- -- 60,915 609 764,447 (506,102) (11,063) 247,891 Net income for three months ended November 30, 1996 of Broderbund not included -- -- -- -- -- 8,895 -- 8,895 Issuance of Series A Preferred Stock 750 8 -- -- 202,025 -- -- 202,033 Issuance of special warrants -- -- -- -- 57,462 -- -- 57,462 Conversion of Exchangeable Shares to common stock -- -- 73 -- -- -- -- -- Stock issued under exercise of stock options -- -- 1,249 12 11,915 -- -- 11,927 Stock issued to settle -- -- 135 2 2,021 -- -- 2,023 earn-outs Other acquisitions -- -- 3,500 33 15,897 (6,193) -- 9,737 Stock issued under employee stock plan -- -- 52 -- 1,270 -- -- 1,270 Repurchase of common stock -- -- (400) -- (14,574) -- -- (14,574) Comprehensive loss: Net loss for year -- -- -- -- -- (494,910) -- (494,910) Other comprehensive -- -- -- -- -- -- (5,764) (5,764) loss Comprehensive loss (500,674) ----------- --------- --------- ----------------------------------------------------------------- Balance, December 31, 1997 750 $8 65,524 $656 $1,040,463 $(998,310) $(16,827) $ 25,990 The accompanying notes are an integral part of these consolidated financial statements
38 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) (continued)
Series A Accumulated Preferred Common Stock Additional Other Total ----------------------- -------------------- Paid-In Accumulated Comprehensive Stockholders' Shares Amount Shares Amount Capital Deficit Loss Equity ----------- ---------- ---------- ---------------------------------------------------------------- Balance, December 31, 1997 750 $8 65,524 $656 $1,040,463 $ (998,310) $ (16,827) $ 25,990 Net income for one month ended December 31, 1997 of Broderbund not included in combination -- -- -- -- -- 209 -- 209 Conversion of debt to common stock -- -- 3,435 34 92,968 -- -- 93,002 Stock issued under exercise of options -- -- 3,902 39 42,692 -- -- 42,731 Conversion of Exchangeable Shares to common stock -- -- 9,083 91 (91) -- -- -- Acquisition of Mindscape, Inc. -- -- 1,367 14 35,225 -- -- 35,239 Acquisition of Sofsource, Inc. -- -- 1,641 16 48,993 -- -- 49,009 Other acquisitions -- -- 1,314 13 26,681 (34,646) -- (7,952) Stock issued for settlement of earn-outs -- -- 264 3 5,569 -- -- 5,572 Stock issued under Employee Stock purchase plan -- -- 47 -- 870 -- -- 870 Issuance of special warrants -- -- -- -- 134,346 -- -- 134,346 Issuance of restricted stock -- -- 700 7 639 -- -- 646 Comprehensive loss: Net loss for the year -- -- -- -- -- (105,352) -- (105,352) Other comprehensive loss -- -- -- -- -- -- 11,876 11,876 Comprehensive loss (93,476) ------ ------ ------- ------- ---------- ----------- ---------- --------- Balance, December 31, 1998 750 $8 87,277 $873 $1,428,355 $(1,138,099) $ ( 4,951) $ 286,186 ====== ====== ======= ======= ========== =========== ========== ========= The accompanying notes are an integral part of these consolidated financial statements
39 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, ------------------------------------------------------------------- 1998 1997 1996 ---------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(105,352) $(494,910) $(376,460) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, amortization and merger 211,507 534,612 463,297 Charges for incomplete technology 56,826 32,467 64,697 Equity in earnings of joint venture -- -- (217) Provision for returns and doubtful accounts 127,024 108,159 64,193 Provision for income taxes 31,507 64,888 (1,334) Change in assets and liabilities (net of acquired assets and liabilities): Accounts receivable (125,689) (153,656) (115,570) Inventories (13,793) (15,911) 2,754 Other current assets 8,293 3,376 4,520 Other long-term assets (3,932) (8,625) (4,308) Accounts payable and accrued expenses (29,052) 35,684 5,146 Other long-term obligations (3,665) (1,629) 9,453 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 153,674 104,455 116,171 --------- --------- --------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Businesses acquired, net of cash on-hand (156,059) (106,606) 498 Purchases of property and equipment, net (272) (10,872) (8,902) Software development costs (26,786) (27,299) (12,344) Short-term investments 19,954 (43,428) (17,702) Merger related accruals (78,799) (53,832) (39,167) Payments to stockholders of The Former Learning Company -- -- (25,025) --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (241,962) (242,037) (102,642) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of stock, options and warrants 55,577 12,613 31,581 Borrowings under line of credit (2,300) 10,150 25,000 Payments on term notes -- -- (4,832) Payments on capital lease obligations (1,111) (2,676) (1,874) Repurchase of senior notes (6,000) (28,000) (18,350) Costs incurred to issue Series A Preferred Stock -- (10,701) -- Repurchase of common stock -- (14,573) (3,433) Proceeds from issue of special warrants 134,346 57,462 -- Other (5,918) 1,821 (1,092) --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 174,594 26,096 27,000 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON NET CASH 377 (2,209) (1,321) --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS 86,683 (113,695) 39,208 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 103,634 219,119 179,911 EFFECT OF BRODERBUND'S EXCLUDED RESULTS 1,074 (1,790) -- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 191,391 103,634 219,119 SHORT-TERM INVESTMENTS 65,368 85,322 41,894 --------- --------- --------- CASH AND SHORT-TERM INVESTMENTS $ 256,759 $ 188,956 $ 261,013 ========= ========= =========== The accompanying notes are an integral part of these consolidated financial statements
40 THE LEARNING COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
Years Ended December 31, --------------------------------------- 1998 1997 1996 --------------------------------------- SUPPLEMENTAL SCHEDULING OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued to acquire Mindscape $30,000 $ -- $ -- Common stock issued to acquire Sofsource 45,000 -- -- Common stock issued to settle earn-out agreements 5,572 -- -- Common stock issued in exchange for Senior Notes 96,695 -- -- Issuance of Series A Preferred Stock to retire debt -- 202,033 -- Common stock issued to settle earn-out agreements -- 2,023 -- Common stock issued to acquire MECC -- -- 221,319 Increase in APIC due to value of in-the-money employee stock options acquired in connection with acquisitions -- 2,969 19,444 Common stock issued for acquisitions -- 7,321 15,255 Conversion of debt to equity -- -- 3,053 Common stock issued for settlement of expenses -- -- 10,132 Equipment acquired under capital leases -- -- 1,262 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during period for: Interest paid $20,460 $ 29,914 $ 28,547 Income taxes paid 8,227 7,684 10,971 The accompanying notes are an integral part of these consolidated financial statements
41 THE LEARNING COMPANY, INC. Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Business The Learning Company, Inc. ("TLC" or the "Company") is a leading publisher of consumer software for personal computers. The Company sells its products in the retail channel through mass merchants, consumer electronic stores, price clubs, office supply stores, software specialty stores and distributors; to original equipment manufacturers ("OEMs"); to schools and to end-users through direct response and on-line methods. The Company's principal market is in the United States and Canada. The Company has international operations in Germany, Ireland, France, Holland, the United Kingdom, Japan and Australia. On August 31, 1998, the Company acquired Broderbund Software, Inc. ("Broderbund"), a developer and publisher of consumer software for the home and school pursuant to an agreement and plan of merger dated June 21, 1998. This transaction was accounted for using the pooling-of-interests method of accounting. The accompanying Consolidated Financial Statements of the Company have been restated to include the results and balances of Broderbund for all periods presented. The Company's fiscal year is the 52 or 53 weeks ending on or after December 31. For clarity of presentation herein, all references to December 31, 1998 relate to balances as of January 2, 1999, references to December 31, 1997 relate to balances as of January 3, 1998, the period from January 4, 1998 to January 2, 1999 is referred to as the "Year Ended December 31, 1998", the period from January 5, 1997 to January 3, 1998 is referred to as the "Year Ended December 31, 1997", and the period from January 7, 1996 to January 4, 1997 is referred to as the "Year Ended December 31, 1996". Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions regarding items such as return reserves and allowances, net realizable value of intangible assets, allocation of purchase price in acquisitions, valuation allowances for deferred tax assets that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include: return reserves, inventory reserves, valuation of acquired assets from acquisitions, valuation of deferred tax assets and valuation and useful lives of intangible assets. Actual results could differ from these estimates. The balance sheet of the Company as of December 31, 1997 has been combined with the balance sheet of Broderbund as at November 30, 1997. Retained earnings have been charged with the net income for the omitted one month period of December 31, 1997 of $682. Revenues, operating expenses and operating income for the excluded one month of December 1997 were $28,712, $27,974 and $738, respectively. The statements of operations, cash flows, and stockholders' equity of the Company for the Years Ended December 31, 1997 and 1996 have been combined with those of Broderbund for the twelve month period ended November 30, 1997 and the year ended August 31, 1996. Broderbund's results for the period from September 1, 1996 through November 30, 1996 have been omitted from the statement of operations and have been included as a separate line item in the statement of stockholders' equity. Revenue, operating income and net income of Broderbund for the period omitted were $61,491, $13,518, and $8,895, respectively. The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. 42 Revenue Recognition Revenues are primarily derived from the sale of software products and from software licensing and royalty arrangements. Revenues from the sale of software products are recognized upon shipment, provided that no significant obligations remain outstanding and collection of the receivable is probable. Costs related to insignificant post shipment obligations are accrued when revenue is recognized for the sale of the related products. Allowances for estimated returns are provided at the time of sale and allowances for price protection are provided at the time of commitment and charged against revenues. The Company evaluates the adequacy of allowances for returns and doubtful accounts primarily based upon its evaluation of historical and expected sales experience and by channel of distribution. The estimates determined for reserves for returns and allowances are based upon information available at the reporting date. To the extent the future market, sell-through experience, customer mix, channels of distribution, product pricing and general economic and competitive conditions change, the estimated reserves required for returns and allowances may also change. Revenues from royalty and license arrangements are recognized as earned based upon performance or product shipments. Advertising and Marketing Costs The Company charges direct response advertising costs to sales and marketing expense as incurred. Direct response costs eligible for capitalization are not material at December 31, 1998 or 1997. Co-operative advertising and other channel marketing programs are expensed in the period the programs are run or over the period of the specific contract for services and are included in sales and marketing expense. The Company offers various coupon rebate programs to its end-user customers. The Company provides for the expected cost of the coupon redemption at the time of sale under sales and marketing expense. The cost is estimated based upon the expected coupon redemption rate on a product-by-product basis and is adjusted at each reporting period for actual results. Fees for preferred shelf space are expensed as incurred as sales and marketing expense. Investments in Affiliates Prior to January 1997, the Company and Random House, Inc. (collectively, the "Partners") participated in a joint venture to publish story-based multimedia software for children. The joint venture, Living Books, combined resources of these two publishers and was 50% owned by each. The Company's contribution to the joint venture consisted of the Living Books product line existing at the time and the technology and people to produce more Living Books. Random House, Inc. contributed cash and access to its library of children's books and authors. The joint venture was responsible for all research and development, manufacturing and marketing costs associated with the Living Books products. The Partners each distributed Living Books products through their respective distribution channels under an affiliated label arrangement. The Company reported revenues of $1,393 and $18,041 during the Years Ended 1997 and 1996 from distribution of Living Books products as affiliated label products. Prior to January 1, 1997, the Company reported its share in earnings of Living Books using the equity method of accounting. The equity earnings were not material. As of January 1, 1997, the Company purchased Random House's 50% share in this joint venture (see Note 2 - Business Combinations). The results of Living Books after this date are reflected in the accompanying financial statements. Cash and Short-Term Investments Cash and equivalents consist of cash in banks and investments in highly liquid short-term instruments with original maturities of 90 days or less. Short-term investments consist principally of municipal bonds and U.S. government agency notes. The Company accounts for investments under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115"). Under SFAS No. 115, investments in equity and debt securities are classified in three categories and accounted for based upon the classification. The Company has accounted for and considers investments in all securities as "available-for sale" pursuant to SFAS No. 115 and has recorded such investments at fair value with unrealized gains and losses reported as a component of stockholders' equity. 43 Fair Value of Financial Instruments Cost approximates fair value for each class of financial instruments below. The carrying values of short-term investments are based upon quoted market prices.
December 31, ---------------------------- 1998 1997 ---- ---- Cash and equivalents: Cash and money market funds $174,641 $ 98,359 Commercial paper 16,750 875 Municipal securities -- 3,200 Money market preferreds -- 1,200 -------- -------- 191,391 103,634 Short-term investments: Municipal securities 36,225 72,198 Money market preferreds -- 3,012 U.S. Government agencies 27,107 7,084 Commercial paper -- 1,000 Corporate notes 2,036 2,028 -------- -------- Cash and short-term investments $256,759 $188,956 ======== ========
Any unrealized holding gains or losses or short-term investments are not material. The Company also has various marketable equity securities held for resale. At December 31, 1998, the unrealized gain on these marketable equity securities was $10,249 and is included in other comprehensive income (loss). These marketable equity securities have a cost basis of $2,695 at December 31, 1998. The Company did not have any material marketable equity securities at December 31, 1997. Accounting for Transfers and Servicing Financial Assets The Company follows Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("FAS 125"). FAS 125 applies a control-oriented, financial- components approach to financial asset transfer transactions whereby the Company (1) recognizes the financial and servicing assets it controls and the liabilities it has incurred, (2) derecognizes financial assets when control has been surrendered, and (3) derecognizes liabilities once they are extinguished. The Company, through its wholly owned subsidiary The Learning Company Funding, Inc. (a separate special purpose corporation), is party to a receivables purchase agreement whereby it can sell without recourse undivided interests in eligible pools of trade accounts receivable of up to $100,000 on a revolving basis during a five year period ending September 30, 2002, of which $75,000 and $65,000 was used at December 31, 1998 and 1997, respectively. In addition, during 1998, the Company entered into a European accounts receivable factoring facility, whereby it can sell up to $25,000 of European accounts receivable on a recourse basis to its banks, of which $25,000 was used as at January 2, 1999. The Company acts as servicing agent for the sold receivables in the collection and administration of the accounts. Continuation of both of these facilities after a change in control of the Company is subject to consent of the banks. Inventories Inventories are stated at the lower of weighted average cost or net realizable value and include third-party assembly costs, CD-ROM discs, manuals and an allocation of fixed overhead.
December 31, --------------------------------- 1998 1997 -------------- -------------- Components $ 5,622 $ 8,333 Finished goods 54,290 31,049 ------- ------- $59,912 $39,382 ======= =======
44 Property and Equipment Property and equipment are stated at the lower of cost, net of accumulated depreciation or net realizable value. Depreciation is calculated using accelerated and straight-line methods over the following useful lives:
Buildings 30 years Computer equipment 3-7 years Furniture and fixtures 3-7 years Leasehold improvements Shorter of the life of the lease or the estimated useful life
Betterments and major renewals are capitalized and included in property, plant, and equipment accounts while expenditures for maintenance and repairs and minor renewals are charged to expense. When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in income. Goodwill and Intangible Assets The excess cost over the fair value of net assets acquired, referred to as goodwill, is amortized on a straight-line basis over 10 years. The cost of identified intangible assets is generally amortized on a straight-line basis over their estimated useful lives of 2 to 10 years. Deferred financing costs are being amortized on a straight-line basis over the term of the related debt financing. The carrying value of goodwill and intangible assets is reviewed on a quarterly and annual basis for the existence of facts or circumstances both internally and externally that may suggest impairment. To date no such impairment has occurred. The Company determines whether an impairment has occurred based on gross expected future cash flows and measures the amount of the impairment based on the related future estimated discounted cash flows. The cash flow estimates that are used to determine the amount of an impairment, if any, contain management's best estimates, using appropriate and customary assumptions and projections at the time. Goodwill and other intangible assets have been presented net of accumulated amortization of $1,009,045 at the end of fiscal 1998 and $920,871 at the end of fiscal 1997.
Estimated useful life in Net balance Description years at December 31, ----------- -------------- ----------------------------------- 1998 1997 ------------ ------------ Goodwill 3 to 10 $ 86,762 $ 65,029 Acquired technology and products 2 to 10 29,064 16,771 Brands and related content rights 3 to 10 106,113 55,581 Deferred financing costs 5 493 3,828 Other intangible assets 3 3,343 4,639 --------- --------- $225,775 $ 145,848 ========= =========
Development and Software Costs Development and software costs are expensed as incurred. Costs for new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. Capitalized software development costs on a product-by-product basis are being amortized using the straight-line method over the remaining estimated economic life of the product, which is generally twelve months beginning when the product is launched, which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product. At December 31, 1998 and 1997, the Company had net capitalized software development costs of $24,280 and $13,665, respectively, which are included in other current assets. Amortization expense of software development costs was $20,208, $12,052 and $9,904 in each 45 of the Years Ended December 31, 1998, 1997 and 1996, respectively. Income Taxes Deferred tax liabilities and assets are determined based on the differences between the financial statement basis and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. FAS 109 also requires a valuation allowance against net deferred tax assets if based upon the available evidence it is more likely than not that some or all of the deferred tax assets will not be realized. Foreign Currency The functional currency of each foreign subsidiary is the local currency. Accordingly, assets and liabilities of foreign subsidiaries are translated to U.S. dollars at period end exchange rates. Revenues and expenses are translated using the average rates during the period. The effects of foreign currency translation adjustments have been accumulated and are included as a separate component of stockholders' equity. Comprehensive Income (Loss) During 1998, the Company adopted SFAS No. 130., Reporting Comprehensive Income ("SFAS No. 130"). This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income (loss), unrealized gains (losses) on securities available for resale and foreign currency translation adjustments and is presented as a component in the Consolidated Statement of Stockholders' Equity. The adoption of SFAS 130 had no impact on total shareholders' equity. Prior year financial statements have been reclassified to conform to the SFAS 130 requirements. Computation of Earnings Per Share The Company follows Statement of Accounting Standards No. 128 ("FAS 128"), which requires the presentation of Basic and Dilutive earnings per share. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Dilutive net loss per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of common stock equivalents. Common stock equivalent shares consist of convertible debentures, preferred stock, stock options and warrants. The dilutive computations do not include common stock equivalents for the years ended December 31, 1998, 1997 and 1996 as their inclusion would be antidilutive. (2) BUSINESS COMBINATIONS Mattel On December 13, 1998, the Company entered into a merger agreement with Mattel, Inc. ("Mattel") (the "Merger Agreement") pursuant to which each share of common stock of the Company will be exchanged for not less than 1.0 nor more than 1.2 shares of Mattel common stock, and the Company will be merged with and into Mattel. Subject to this minimum and maximum, the exact number of shares of Mattel common stock shares to be issued to stockholders of the Company will be determined by dividing $33.00 by an average of the closing prices of Mattel common stock on the New York Stock Exchange in accordance with procedures set forth in the Merger Agreement (the "Exchange Ratio"). Each share of Series A Preferred Stock will be converted into the right to receive a number of shares of Mattel common stock equal to the Exchange Ratio multiplied by twenty (the rate at which each share of Series A Preferred Stock is convertible into shares of common stock of the Company). Each exchangeable non-voting shares of the Company's subsidiary, SoftKey Software Products Inc., will become exchangeable for one share of Mattel common stock multiplied by the Exchange Ratio. The transaction is expected to be accounted for using the pooling-of-interests method of accounting. The closing of the transaction is subject to certain conditions, including regulatory and stockholder approvals of each company. Broderbund On August 31, 1998, the Company acquired all of the issued and outstanding common stock of Broderbund in exchange for 16,848,753 shares of common stock of the Company pursuant to an agreement and plan of merger dated June 21, 1998 whereby each share of common stock of Broderbund was exchanged into 0.80 shares of the 46 Company's common stock. This transaction was accounted for using the pooling-of- interests method of accounting. The balances as at December 31, 1997 and the results for the years ended December 31, 1997 and 1996 have been restated to include the balances and results of Broderbund. The balance sheet of the Company as at December 31, 1997 has been combined with the balance sheet of Broderbund as at November 30, 1997. Retained earnings have been charged with the net income for the omitted period of December 31, 1997 of $682. Revenues, operating expenses and operating income for the excluded month of December 1997 were $28,712, $27,974 and $738, respectively. The financial results for the Year Ended December 31, 1998 include the results of the previously separate businesses for the Six Months Ended June 30, 1998 prior to the consummation of the combination. Revenues and net loss from the previously separate operations of the Company and Broderbund were revenues of $242,853 and $108,466 and net loss of $154,159 and $24,636, respectively, in the Six Months Ended June 30, 1998, which are included in these financial statements. Results on a stand-alone basis for each Company were as follows:
Year Ended The Learning Combined December 31, 1997 Company Broderbund Adjustments Restated - ------------------------------- ------------------------------------------------------------------------------------ Revenues $ 392,438 $ 228,493 $ -- $ 620,931 Operating loss (393,055) (23,659) 9,000 (407,714) Net loss (475,667) (11,800) (7,443) (494,910) Net loss per share (9.59) (0.71) -- (7.48) Year Ended The Learning Combined December 31, 1996 Company Broderbund Adjustments Restated - ------------------------------- ----------------------------------------------------------------------------------- Revenues $ 343,321 $ 186,207 $ -- $ 529,528 Operating income (loss) (381,312) 59,877 (9,000) (330,435) Net income (loss) (405,451) 36,777 (7,786) (376,460) Net income (loss) per share (9.94) 2.22 -- (6.56)
In order to conform the application of generally accepted accounting principles between the two separate entities an adjustment to increase the valuation allowance for income tax assets of $16,443 and $1,214 was recorded in each of the Years Ended December 31, 1997 and 1996, respectively, and $14,808 was charged to opening retained earnings relating to years prior to 1996. The adjustments increase the valuation allowance for uncertainty of recoverability of income tax assets of Broderbund as it was determined that it was more likely than not that some or all of the assets would not be realized under the combined entity. There were no intercompany transactions between the two companies other than a termination fee of $18,000 paid by the Former Learning Company to Broderbund in December 1995 related to the proposed merger between the two companies that was terminated. This amount was recorded as other income by Broderbund and was included in the determination of the purchase price of the Former Learning Company by the Company. Accordingly, the termination fee has been eliminated from the Broderbund net income for the year ended August 31, 1996 and the purchase price of the Former Learning Company has been reduced, resulting in a reduction in amortization of goodwill of $9,000 in each of the Years Ended December 31, 1997 and 1996. Mindscape On March 5, 1998, the Company acquired control of Mindscape, Inc., a consumer software company, and certain affiliated companies ("Mindscape") for a total purchase price of $152,557 paid in cash of $122,557 and the remainder through the issuance of 1,366,743 shares of common stock. This transaction was accounted for using the purchase method of accounting. Sofsource On June 2, 1998, the Company acquired control of Sofsource, Inc. ("Sofsource") an educational software company, for a total purchase price of $45,000 which was settled through the issuance of 1,641,138 shares of common stock. This transaction was accounted for using the purchase method of accounting. Other 1998 Combinations On May 14, 1998, the Company acquired P.F. Magic, Inc. ("PF Magic"), a virtual life entertainment software 47 company, in exchange for the issuance of 521,021 shares of common stock. On December 3, 1998, the Company acquired Palladium Interactive, Inc. ("Palladium"), a genealogy software company, in exchange for the issuance of 788,547 shares of common stock. Each of these transactions was accounted for using the pooling-of-interests method of accounting. The Consolidated Financial Statements for years prior to December 31, 1998 do not include the results and balances of these companies as they were deemed to be immaterial to the Consolidated Financial Statements for those periods. Creative Wonders On October 23, 1997, the Company acquired control of Creative Wonders, L.L.C. ("Creative Wonders"), an educational software company that publishes, among other titles, the Sesame Street line of products, for a purchase price of $37,799 including the value of employee stock options assumed and estimated transaction costs. The purchase price included cash payments of $33,883. This transaction was accounted for using the purchase method of accounting. Pro forma results for Creative Wonders were not material. Parsons Technology On August 6, 1997, the Company acquired control of Parsons Technology ("Parsons"). Parsons is a direct-to-consumer marketing organization which publishes a range of consumer software. This transaction was accounted for under the purchase method of accounting. The purchase price was approximately $31,000 in cash, including transaction costs. Pro forma results for Parsons were not material. Living Books On January 1, 1997, the Company acquired the remaining 50% interest in the Living Books joint venture. This transaction was accounted for under the purchase method of accounting and was accomplished by a combination of cash and restricted stock, with an aggregate purchase price of approximately $18,370, including transaction costs. Pro forma results for Living Books were not material. Other 1997 Combinations On September 19, 1997, the Company acquired Learning Services Inc. ("Learning Services"), a national school software catalog for teachers, in exchange for the issuance of 709,976 shares of common stock. On September 29, 1997, the Company acquired Skills Bank Corporation ("Skills Bank"), a developer of educational and remedial software products for adult, adolescent and K to 12 students, in exchange for the issuance of 1,069,286 shares of common stock. On October 2, 1997, the Company acquired Microsystems Software, Inc. ("Microsystems"), a developer of Internet filtering software, in exchange for the issuance of 955,819 shares of common stock. On December 30, 1997, the Company acquired TEC Direct, Inc. ("TEC Direct"), an educational consumer software catalog, in exchange for the issuance of 429,733 shares of common stock. Each of these transactions was accounted for using the pooling-of- interests method of accounting. The Consolidated Financial Statements of the Company for the years prior to December 31, 1997 do not include the results of these companies as they were deemed to be immaterial to the Consolidated Financial Statements for those periods. T/Maker On August 6, 1996, the Company acquired T/Maker Company ("T/Maker"), a developer of clip art software. This transaction was accounted for using the purchase method of accounting. The purchase price was approximately $19,900 in cash, including transaction costs. Pro-forma results of T/Maker were not material. MECC On May 17, 1996, the Company acquired Minnesota Educational Computing Corporation (MECC) ("MECC"), a publisher and developer of high quality children's educational software sold to consumers and schools, in exchange for 9,214,007 shares of the Company's common stock. The total purchase price was $284,631, including estimated transaction costs, value of stock options assumed and deferred income taxes related to certain identifiable intangible assets acquired. Approximately 1,048,000 MECC employee stock options were converted into stock options to purchase approximately 1,198,000 shares of TLC common stock. This transaction was accounted for using 48 the purchase method of accounting. The purchase price for the 1998 acquisitions was allocated based on fair values as follows:
Mindscape Sofsource Total ------------------ ------------------ ------------------ Purchase price $152,557 $45,000 $197,557 Plus fair value of net liabilities assumed 6,431 6,685 13,116 -------- -------- -------- 158,988 51,685 210,673 Excess allocated to: Incomplete technology 40,000 14,924 54,924 Completed technology and products 22,000 -- 22,000 Brands and trade names 38,000 3,322 41,322 -------- -------- -------- 100,000 18,246 118,246 -------- -------- -------- Goodwill $ 58,988 $ 33,439 $ 92,427 ======== ======== ========
The purchase price for the 1997 acquisitions was allocated based on fair values as follows:
Creative Parsons Living Wonders Technology Books Total ------------------ ------------------ ------------------ ------------- Purchase price $37,799 $31,000 $18,370 $87,169 Less: fair value of net tangible assets (liabilities) (7,257) 11,689 4,267 8,699 ------- ------- ------- ------- 45,056 19,311 14,103 78,470 Excess allocated to: Incomplete technology 1,050 10,000 9,250 20,300 Customer list -- 4,600 -- 4,600 Brands and related content rights 44,006 4,711 -- 48,717 ------- ------- ------- ------- 45,056 19,311 9,250 73,617 ------- ------- ------- ------- Goodwill $ -- $ -- $ 4,853 $ 4,853 ======= ======= ======= =======
The Staff has recently issued guidance related to the valuation of in-process technology as set forth in its letter dated September 9, 1998 from the Chief Accountant of the SEC to the American Institute of Certified Public Accountants. The Company has had discussions with the staff of the SEC (the "Staff") concerning the application of the methodology to the valuation of the incomplete technology and other intangible assets and has implemented the methodology. As a result of the application of the valuation methodology the purchase price was allocated to incomplete technology, brands and trade names and complete technology and products. The amounts allocated originally at the time of acquisition were adjusted to reflect the methodology, and the Company has filed with the SEC amendments to its Quarterly Reports on Form 10-Q for fiscal 1998 to reflect the restatement. Among the factors considered by the Company to determine the allocation of the purchase price were an estimation of the stage of completion of development of each product at the date of acquisition, an estimation of cash flows that would be achieved by any buyer resulting from the expected revenues generated from such projects, a discounting of the net cash flows from the products using an effective industry-based tax rate of 35% (net of any tax benefits from the acquired assets) and a risk adjusted discount rate (which ranged from 20% to 22%) and an estimation of market royalty rates to value the brands and trade names. The in-process development consisted of consumer software products in the games, productivity and education segments. On average the in-process development projects were approximately 55% complete at the time of acquisition. The Company expects to complete the majority of the development projects by the end of fiscal 1999 and has spent approximately $18,000 to complete the development as of December 31, 1998 and expects that it will spend a further $7,000 in fiscal 1999 to complete the development. The Company expects that it will begin to receive the benefits of these in-process development projects during 1998 and beyond. There were no anticipated material changes from historical pricing, margins or expense levels in the projects under development. In order to complete the development on schedule the Company must continue to retain key development personnel. In the event that these in-process development projects are not completed or replaced with similar projects the Company may experience lower future revenues, operating margins and cash flows. 49 The Company believes that the incomplete products under development had not reached technical feasibility at the date of the acquisition, have no alternative future use and additional development is required to ensure their commercial viability. In order to develop the acquired incomplete technology into commercially viable products the Company will be required to complete development of proprietary code, development of the artistic and graphic works and design of the remaining storyboards. The remaining identified intangibles, including the value of completed technology and products and brands and trade names, will be amortized on a straight-line basis over their estimated useful lives of two and ten years, respectively. Goodwill resulting from the acquisition is being amortized using the straight-line method over ten years. Unaudited pro forma results of operations for the transactions accounted for using the purchase method of accounting as though the acquisitions had occurred at the beginning of the Years Ended December 31, 1998 and 1997 are below. The pro forma adjustments detailed below include the effect of amortization of intangible assets and goodwill related to the acquisitions over their estimated useful lives.
Sofsource Mindscape Year Ended The Learning Including Proforma Including Proforma Proforma December 31, 1998 Company Adjustments Adjustments Combined - ------------------- -------------- ----------------- ---------------- ------------ Revenues $ 839,315 $ 8,564 $ 9,090 $ 856,969 Operating loss (75,050) (1,517) (46,824) (123,391) Net loss (105,352) (1,517) (47,884) (154,753) Net loss per share $ (1.28) $ (1.77) Sofsource Mindscape Year Ended The Learning Including Proforma Including Proforma Proforma December 31, 1997 Company Adjustments Adjustments Combined - ------------------- -------------- ----------------- ---------------- ------------ Revenues $ 620,931 $ 21,478 $ 138,522 $ 780,931 Operating loss (407,714) (417) (26,978) (435,109) Net loss (494,910) (417) (27,509) (522,836) Net loss per share $ (7.48) $ (6.80)
(3) FIXED ASSETS AND OTHER
December 31, ---------------------------------------- 1998 1997 ---------------- ---------------- Buildings, land and leasehold improvements $ 15,757 $ 17,288 Computer equipment 47,700 47,356 Furniture and fixtures 9,503 15,432 ---------------- ---------------- 72,960 80,076 Less: accumulated depreciation and amortization (46,296) (41,044) ---------------- ---------------- 26,664 39,032 Other 28,176 12,766 ---------------- ---------------- $ 54,840 $ 51,798 ================ ================
Depreciation expense was $10,019, $9,066 and $9,295 in each of the Years Ended December 31, 1998, 1997 and 1996, respectively. (4) LINE OF CREDIT TLC Multimedia Inc., a wholly-owned subsidiary of the Company, has a revolving line of credit (the "Line") to provide for a maximum availability of $147,500, of which $40,000 was utilized at December 31, 1998 and was subsequently repaid. Borrowings under the Line become due on July 1, 2000 and bear interest at LIBOR plus .75% (6.4% at December 31, 1998). The Line is subject to certain financial covenants, is secured by a general security interest in the assets of The Learning Company, Inc. and certain other subsidiaries of the Company and by a pledge of the stock of certain of its subsidiaries. The Line is guaranteed by the Company. Continuation of the revolving line of 50 credit after a change in control of the Company is subject to receiving the consent of the banks. The proposed merger with Mattel will constitute such a change of control and may cause the revolving line of credit to become due. (5) LONG-TERM DEBT
December 31, ----------------------------------------------- 1998 1997 ------------------- ------------------- Senior Convertible Notes $200,955 $303,650 Obligations under capital leases 437 1,423 ------------------- ------------------- 201,392 305,073 Less: current portion (10,148) (10,717) ------------------- ------------------- $191,244 $294,356 =================== ===================
At December 31, 1998, the Company had outstanding $200,955 principal amount 5 1/2% Senior Convertible Notes due 2000 (the "Notes"), which are unsecured. The Notes are redeemable by the Company on or after November 2, 1998 at redemption prices of 102.2% on November 2, 1998, 101.1% on November 1, 1999 and 100% on or after November 1, 2000 and are convertible into common stock at a price of $53 per share. Interest is payable on the Notes semi-annually on May 1 and November 1 each year. Current portion of long-term debt includes $10,000 of the Notes as the Company intends to repurchase the amount before December 31, 1999. On June 8, 1998, the Company repurchased $96,695 of the Notes in exchange for issuance of 3,434,995 shares of the Company's common stock. (6) RELATED PARTY TRANSACTIONS On December 28, 1995, Tribune Company made an investment in the Company in the form of $150,000 principal amount 5 1/2% Senior Convertible/Exchangeable Notes due 2000 (the "Private Notes"). The Private Notes were sold by Tribune Company during 1997 in a private transaction to an investor group prior to issuance by the Company of 750,000 shares of Series A Convertible Participating Preferred Stock (the "Series A Preferred Stock") and were surrendered by the investor group for the shares of the Series A Preferred Stock. In connection with the issuance of the Series A Preferred Stock, the Company paid a transaction fee to the investor group totaling $1,845, of which $1,125 was paid to one of the investors where a former director of the Company is an officer. The loss resulting from the exchange of the Private Notes for the Series A Preferred Stock, net of tax benefit, was immaterial. (7) COMMITMENTS AND CONTINGENCIES Lease Obligations The Company leases office facilities and equipment under operating and capital leases. Rental expense for operating leases was approximately $8,196, $10,027 and $6,862 and for the Years Ended December 31, 1998, 1997 and 1996, respectively. Future annual payments under operating leases are as follows:
Operating leases ------------- 1999 $13,572 2000 11,643 2001 9,795 2002 5,060 2003 2,711 Thereafter 9,330 ------------- $52,111 =============
51 (8) COMMON AND PREFERRED STOCK Common Stock The Company has reserved 40,774,602 shares of its common stock for issuance related to the Exchangeable Shares (described below), employee stock options, the Mattel option and warrants at year end. The Exchangeable Shares are represented by the one share of Special Voting Stock. In addition, the Company has reserved a total of 18,791,604 shares of its common stock for issuance related to the Notes and the Preferred Stock at year end. Exchangeable Shares At year end there were 5,154,831 Exchangeable Non-Voting Shares ("Exchangeable Shares") of SoftKey Software Products, Inc. ("SoftKey Software"), a Canadian publicly traded Company, outstanding and not held by the Company and its subsidiaries. The Company also has outstanding a special voting share (the "Voting Share") which has a number of votes equal to the number of Exchangeable Shares outstanding. The holder of the Voting Share is not entitled to dividends and shall vote with the common stockholders as a single class. The Exchangeable Shares may be exchanged for the Company's common stock on a one-for-one basis until February 4, 2005, at which time any outstanding Exchangeable Shares automatically convert to shares of the Company's common stock. On November 6, 1997, SoftKey Software issued in a private placement in Canada 4,072,000 special warrants for net proceeds of $57,462, each of which was exercisable without additional payment for one Exchangeable Share. On February 23, 1998, each special warrant was exchanged in accordance with their provisions into one Exchangeable Share without additional payment. On March 12, 1998, SoftKey Software issued in a private placement in Canada a further 8,687,500 special warrants for net proceeds of approximately $134,000. On July 9, 1998, each special warrant was exchanged in accordance with their provisions into one Exchangeable Share without additional payment. Preferred Stock On December 4, 1997, the Company issued an aggregate of 750,000 shares of Series A Preferred Stock to an investor group in exchange for the Private Notes. Each share of the Series A Preferred Stock has an initial liquidation preference of $200 and is initially convertible into 20 shares of common stock, or 15,000,000 shares of common stock in the aggregate on an as-converted basis, subject to adjustment for certain minimum returns on investment. The Series A Preferred Stock is non-redeemable, bears no dividend, is subject to restrictions on resale for a period of at least eighteen months and is manditorily convertible into common stock upon satisfaction of certain conditions. Under the terms of the Series A Preferred Stock the resale restrictions expire on a change of control of the Company. The Company estimated the extraordinary loss for financial reporting purposes to be approximately $61,000 as at the date the Company entered into and announced the agreement on August 25, 1997. The Company also estimated that the resulting benefit for income tax purposes was approximately $61,000 as at the date of issuance of the Series A Preferred Stock on December 5, 1997. As a result, the extraordinary loss, net of tax, was determined to be immaterial. (9) STOCK OPTIONS AND WARRANTS Stock Option Plans 1990 Long-Term Equity Incentive Plan The Company has a Long-Term Equity Incentive Plan (the "LTIP"). The LTIP allows for incentive stock options, non-qualified stock options, restricted stock awards and various other stock awards. Administration of the LTIP is conducted by a special subcommittee of the Company's Compensation Committee of the Board of Directors. The Compensation Committee determines the amount and type of option or award and terms and conditions and vesting schedules (generally 3 years) of the award or option. The maximum term of an option is 10 years. Upon a change of control, as defined, all stock options then outstanding become fully vested, subject to certain limitations. Upon the consummation of the proposed merger with Mattel, stock options under the LTIP will become fully vested under the terms of the LTIP. 52 On August 31, 1998, the stockholders of the Company approved an amendment to increase the maximum number of shares of common stock issuable under the LTIP to 14,000,000 from 9,000,000. The total number of shares of common stock reserved for issuance under the LTIP at year end was 10,145,073 shares, 3,116,683 of which remained available for grant. 1996 Non-Qualified Stock Option Plan On February 5, 1996, the Board of Directors approved a non-qualified stock option plan (the "1996 Plan"). The 1996 Plan allows for non-qualified stock options and various other stock awards. Administration of the 1996 Plan is conducted by the Company's Compensation Committee of the Board of Directors. The administrator determines the amount and type of option or award and terms and conditions and vesting schedules (generally 3 years) of the award or option. The maximum term of an option is 10 years. Upon a change of control, as defined, awards and options under the 1996 Plan then outstanding become fully vested, subject to certain limitations. Upon the consummation of the proposed merger with Mattel, the awards and options under the 1996 Plan will become fully vested under the terms of the 1996 Plan. The maximum number of shares issuable under the 1996 Plan is 7,000,000. The total number of shares of common stock reserved under the 1996 Plan at year end was 5,378,702 shares, 744,974 of which remained available for grant. 1994 Non-Employee Director Stock Option Plan On April 26, 1994, the Board of Directors approved a non-employee director stock option plan (the "1994 Non-Employee Director Plan"). The 1994 Non- Employee Director Plan provides for an initial grant of 20,000 options at fair market value to be issued to each non-employee director who first became a director of the Company after February 1, 1994 ("Initial Grants"). During the Year Ended December 31, 1996, a further 26,667 options were granted to each of the non-employee directors. The maximum number of common shares issuable under the 1994 Non-Employee Director Plan is 500,000, all of which were granted at year end. Options granted to non-employee directors as Initial Grants were 100% exercisable at the time of grant and options issued as subsequent grants become exercisable over a three-year period. All such options are exercisable for a period of 10 years from date of grant. 1996 Non-Employee Director Stock Option Plan On July 31, 1996, Board of Directors approved the Company's 1996 Non- Employee Director Option Plan (the "1996 Non-Employee Director Plan"), which was approved by stockholders on December 4, 1997. Under the 1996 Non-Employee Director Plan, certain directors who are not officers or employees of the Company or any affiliate of the Company (the "Non-Employee Directors") are eligible to receive stock options. The 1996 Non-Employee Director Plan provides that each Non-Employee Director who became a director after May 16, 1996, but prior to August 16, 1996 ( the "Effective Date") was entitled to receive a non- statutory stock option (the "Initial Option") to purchase 50,000 shares of common stock on the Effective Date. The 1996 Non-Employee Director Plan further provides that each Non-Employee Director who becomes a director after the Effective Date is entitled to receive the Initial Option to purchase 50,000 shares of common stock on the date that he or she first becomes a member of the Board of Directors. In addition, the 1996 Non-Employee Director Plan provides that each Non-Employee Director is entitled to receive a non-statutory option to purchase 25,000 shares of common stock upon initial appointment to a committee of the Board of Directors (the "Committee Option"). The Board of Directors may also grant additional non-statutory options (the "Discretionary Options") to Non-Employee Directors in its or the Committee's sole discretion. Initial Options, Committee Options and Discretionary Options are exercisable in eight quarterly installments, with the first of such installments becoming exercisable three months after the date of grant (provided that, for each such installment, the optionee continues to serve as a director). The total number of shares of common stock reserved for issuance under the 1996 Non-Employee Director Plan as of year end was 396,757, of which 62,500 remain available for grant. Broderbund Stock Option Plan Under the Broderbund Stock Option Plans (the "Broderbund Plans"), incentive and non-qualified stock options may be granted to employees to purchase a maximum of 5,000,000 shares of common stock. All options are granted at an amount equal to or greater than the fair market value of the common stock at the date of grant. Options vest in annual 20% increments from the date of grant, according to the vesting schedule at the date of grant. The options generally expire ten years from the date of grant. In connection with the Company's acquisition of 53 Broderbund, each option to purchase Broderbund common stock was converted into an option to purchase 0.80 of a share of common stock of the Company. None of the other terms of the Broderbund options was changed as a result of the merger. The total number of shares of common stock reserved for issuance under the Broderbund Plan as of year end was 1,694,083. The stock options under the Broderbund Plans do not vest on a change of control. The following table summarizes the stock option activity under the LTIP, the 1996 Plan, the Broderbund Plans, the 1996 Non-Employee Director Plan and the 1994 Non-Employee Director Plan:
December 31, 1998 December 31, 1997 ---------------------------------------- ------------------------------------------ Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------------ --------------- ------------------- ---------------- Beginning 13,663,455 $17.32 12,245,151 $22.35 Assumed in acquisitions -- -- 716,856 4.78 Granted 7,482,177 18.35 8,079,373 13.34 Exercised (3,883,306) 10.52 (1,240,850) 8.91 Canceled (2,573,864) 26.04 (6,137,075) 19.34 ------------------ --------------- ------------------- ---------------- Ending 14,688,462 $17.16 13,663,455 $17.32 ================== =============== =================== ================ December 31, 1996 ----------------------------------------- Weighted Average Exercise Shares Price -------------------- -------------- Beginning 8,228,569 $17.87 Assumed in acquisitions 1,197,852 8.39 Granted 8,035,703 22.93 Exercised (3,319,276) 8.09 Canceled (1,897,697) 21.58 -------------------- -------------- Ending 12,245,151 $22.35 ==================== ==============
The following table summarizes information about stock options outstanding at year end:
Options Outstanding Options Exercisable ---------------------------------------------------- ------------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Outstanding at Contractual Exercise Exercisable Exercise Range of Exercise Prices 12/31/98 Life Price at 12/31/98 Price - --------------------------- -------------- -------------- ------------- -------------- ------------- $ 0.0005 - $ 9.2500 1,901,165 8.19 $ 4.8036 606,600 $ 5.9729 9.7500 - 15.5000 3,450,356 7.74 12.4292 2,159,143 11.2087 15.5625 - 28.7500 8,042,673 7.94 18.9471 2,004,694 22.0569 28.8750 - 41.4063 1,264,268 7.95 35.4530 712,873 35.8214 95.9063 - 95.9063 30,000 1.83 95.9063 18,002 95.9063 - ---------- ------------ -------------- -------------- ------------- -------------- ------------ $ 0.0005 - $95.9063 14,688,462 7.92 $17.1633 5,501,312 $18.0510 ========== ============ ============== ============== ============= ============== ============
Options to purchase 5,501,312, 5,961,767 and 4,631,729 shares of common stock were exercisable at December 31, 1998, 1997 and 1996, respectively. 54 The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for its plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, no compensation expense has been recognized for the stock option plans as calculated under SFAS 123. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of SFAS 123, the Company's net loss and basic and diluted net loss per share would have been increased to the pro forma amounts indicated below:
1998 1997 1996 ------------------ -------------------- ---------------------- Net loss - as reported $(105,352) $(494,910) $(376,460) Net loss - pro forma (158,473) (533,378) (405,045) Net loss per share basic and diluted - as reported (1.28) (7.48) (6.56) Net loss per share basic and diluted - pro forma (1.93) (8.06) (7.06)
The above compensation cost does not include the fair value of the stock options assumed in connection with the acquisitions accounted for under the purchase method of accounting, as the fair value of such options have been included in the purchase price of the acquired companies. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996:
1998 1997 1996 ------------------ ------------------- ------------------- Dividend yield -- -- -- Expected volatility .6800 .7500 .7857 Risk free interest rate 5.13% 6.00% 5.47% Expected lives 6 yrs 4 yrs 4 yrs Weighted average grant-date fair value of options granted $ 12.17 $ 10.57 $ 10.79
The effects of applying SFAS 123 in this disclosure are not indicative of future amounts. Additional grants in future years are anticipated. On March 13, 1997, in order to continue to provide a competitive employment environment for staff retention and hiring, the Company instituted an Option Exchange Program under which certain employees (other than employees who are directors) with options exercisable at $10.40 per share or higher were given the opportunity to exchange such options for options with an exercise price of $10.40 per share. A total of 3,627,020 employee stock options were exchanged and are included in the cancelled and re-granted employee stock options in the above table for 1997. During 1998 the Company issued 700,000 shares of restricted stock to certain senior executives at $.01 per share. The Company is recording the charge to operations of $12,900 over the vesting period of ten years on a straight line basis. These restricted shares fully vest on a change of control. Mattel Option In connection with the Merger Agreement, Mattel and the Company entered into a stock option agreement, dated as of December 13, 1998 under which the Company granted Mattel an irrevocable option to purchase up to 15,673,160 shares of the Company's common stock at a per share exercise price equal to the lesser of (1) $28.3125 and (2) the product of (A) the closing price of Mattel common stock on the New York Stock Exchange Composite Transaction Tape on the trading day prior to the day Mattel gives notice of its intent to exercise the option multiplied by (B) the Exchange Ratio on such day. The Mattel stock option is exercisable only on termination of the merger under certain conditions. 55 The stock option agreement is intended to increase the likelihood that the merger will be consummated in accordance with the terms of the Merger Agreement and is exercisable upon termination of the Merger Agreement under certain circumstances as defined in the Merger Agreement. The stock option agreement as defined in the Merger Agreement may have the effect of making an acquisition or other business combination of the Company with a third party more costly because of the increase in the number of shares outstanding of the Company common stock that would result upon exercise of the stock option. 1997 Employee Stock Purchase Plan On December 4, 1997, the Company's stockholders approved the 1997 Employee Stock Purchase Plan, which provides for six offerings, one beginning every six months commencing December 1, 1997 until and including November 30, 2000, that provides certain eligible employees with the opportunity to purchase shares of the Company's common stock at a price of 85% of the price listed on the New York Stock Exchange at various specified purchase dates. A maximum of 1,000,000 shares of common stock has been authorized for issuance under the 1997 Employee Stock Purchase Plan. During 1998, 47,116 shares of common stock were issued under the 1997 Employee Stock Purchase Plan. Warrants On November 6, 1997, the Company's Canadian subsidiary, SoftKey Software, issued in a private placement in Canada 4,072,000 special warrants for net proceeds of approximately $57,462. Each special warrant issued on November 6, 1997 was exchanged in accordance with its provisions into one Exchangeable Share on February 23, 1998. On March 12, 1998, SoftKey Software issued in a private placement in Canada a further 8,687,500 special warrants for net proceeds of approximately $134,000. On July 9, 1998, each special warrant issued on March 12, 1998 was exchanged in accordance with its provisions into one Exchangeable Share without additional payment. (10) AMORTIZATION, MERGER AND OTHER CHARGES During the Year Ended December 31, 1998, the Company completed the acquisitions of Mindscape and Sofsource using the purchase method of accounting and Broderbund, PF Magic and Palladium using the pooling-of-interests method of accounting. During the Year Ended December 31, 1997, the Company completed the acquisitions of Creative Wonders, Parsons Technology, and Living Books using the purchase method of accounting and the acquisitions of Learning Services, Skills Bank, TEC Direct and Microsystems using the pooling-of-interests method of accounting. During the year ended December 31, 1996 the Company completed the acquisitions of T/Maker, MECC and Edusoft S.A. using the purchase method. Amortization, merger and other charges were expensed as incurred. Amortization, merger and other related charges are as follows:
Years Ended December 31, ------------------------------------------------------------------ 1998 1997 1996 --------------- ---------------- --------------- Amortization of goodwill and other intangible assets $ 88,174 $455,020 $434,520 Exit and restructuring costs 96,995 54,572 4,260 Charge for incomplete technology 56,826 20,300 56,688 Provision for earn-outs 4,907 5,497 2,917 Professional fees and other costs 11,412 8,537 5,135 --------------- ---------------- --------------- $258,314 $543,926 $503,520 =============== ================ ===============
Exit and restructuring costs in connection with the Company's acquisitions for the Year ended December 31, 1998 related to charges for employee severance of $30,139, facility closure costs of $19,527, discontinued products of $27,024, termination of certain distributor relationships of $16,460 and other charges related to the Company's acquisition strategy and integration of the acquired companies of $3,845. Exit and restructuring costs for the Year Ended December 31, 1997 related to charges during the year for employee severance of $12,130, discontinued products of $23,257, termination of certain supplier relations of $10,229 and other charges related to the Company's acquisition strategy and integration of the acquired companies of $8,956. A total of 664 employees were terminated during the Year Ended December 31, 1998 in the areas of development, marketing, 56 operations, sales and administration. A total of 109 employees were terminated during the Year Ended December 31, 1997 in the areas of development, marketing, operations, sales and administration as part of the integration process. Employee severance costs in the Year Ended December 31, 1996 related to termination of employees of the Company in connection with the acquisitions of The Former Learning Company and MECC and the related changes in strategy. A total of 108 employees were terminated during the Year Ended December 31, 1996 in the areas of operations, marketing, sales, technical support and product development. The charge for incomplete technology in the Year Ended December 31, 1998 related to products being developed primarily by Mindscape and Sofsource, in the Year Ended December 31, 1997 related to products being developed by Creative Wonders, Parsons Technology, and Living Books and in the Year Ended December 31, 1996 related to products being developed by MECC. In each case, the Company believes the products under development had not reached technological feasibility at the date of acquisition, had no alternative future use and additional development would be required to complete the software technology. The provision for earn-outs related to the amounts earned by the former owners of certain acquisitions based upon the achievement of certain revenue and operating goals achieved. These amounts are expected to be paid either in common stock of the Company or cash, at the Company's option, prior to December 31, 1999. Professional fees and other transaction related costs in the Year Ended December 31, 1998 relate to the investment banking, legal and accounting costs incurred to such date for the acquisitions of Broderbund, Palladium and PF Magic. Professional fees and other costs in the Year Ended December 31, 1997 related to investment banking, legal, accounting fees and other transaction related costs incurred in connection with the acquisitions of Skills Bank, Learning Services, TEC Direct and Microsystems. Professional fees and other transaction related costs in the Year Ended December 31, 1996 relate to additional legal and accounting costs incurred in connection with the acquisition of MECC. Accrued merger related costs at December 31, 1998 were $30,548. The Company expects to pay $25,248 prior to December 31, 1999 and the remainder thereafter. (11) INCOME TAXES The Company's net loss for the years ended December 31, 1998, 1997 and 1996 includes amortization, merger and other charges of $258,314, $543,926 and $503,520, respectively, certain of which are not deductible for income tax purposes. The Company's income (loss) before income taxes consisted of the following:
Years Ended December 31, ------------------------------------------------------------------------ 1998 1997 1996 ------------------- ------------------- ------------------- United States $(83,650) $(444,061) $(364,902) Foreign 9,805 20,195 17,044 ------------------- ------------------- ------------------- $(73,845) $(423,866) $(347,858) =================== =================== ===================
The provision for income taxes consists of the following:
Years Ended December 31, ------------------------------------------------------------------ 1998 1997 1996 ---------------- ------------------ ----------------- Current income taxes: Federal $20,160 $46,860 $ 39,169 State 1,000 9,051 9,870 Foreign 11,500 2,233 4,542 --------------- ------------------ ----------------- 32,660 58,144 53,581 --------------- ------------------- ----------------- Deferred income taxes (benefit): Federal (1,009) 14,281 (24,769) State (144) (1,381) (210) --------------- ------------------ ----------------- (1,153) 12,900 (24,979) --------------- ------------------ ----------------- $31,507 $71,044 $ 28,602 =============== ================== =================
The significant components of deferred income tax expense are primarily from changes in deferred tax liabilities related to the acquired technology, depreciation, certain allowances and reserves not currently deductible, 57 and changes in the deferred tax asset valuation reserve. The Company's actual income tax as compared to the income tax computed at the statutory tax rate is as follows:
Years Ended December 31, -------------------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ---------------- Tax benefit at statutory federal income tax rate (35%) $(25,845) $(148,353) $(121,750) State income tax, net of federal benefit 4,159 4,869 10,104 Net foreign earnings taxed at rates different than federal tax 2,080 1,700 2,319 rate Effect of repatriation of foreign earnings 8,000 -- -- Non-deductible amortization, merger and other charges 65,493 119,213 181,418 Effect of change in valuation allowance (31,100) 77,677 (1,213) Utilization of prior year tax benefits -- -- (41,448) Other 8,720 15,938 (828) ---------------- ---------------- ---------------- $ 31,507 $ 71,044 $ 28,602 ================ ================ ================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
Years Ended December 31, ---------------------------------------------- 1998 1997 ------------------- -------------------- Deferred tax assets: Net operating losses and credits $ 158,360 $ 112,196 Purchased technology 6,170 10,991 Other reserves and accruals 53,277 54,527 ------------------- -------------------- 217,807 177,714 Less: valuation allowance (181,019) (161,307) ------------------- -------------------- 36,788 16,407 ------------------- -------------------- Tax liabilities: Deferred intangible assets (20,329) (10,552) Other deferred taxes (16,459) (7,007) ------------------- -------------------- (36,788) (17,559) ------------------- -------------------- Net deferred tax liability -- (1,152) Accrued tax liabilities (93,805) (74,015) ------------------- -------------------- $ (93,805) $ (75,167) =================== ====================
The valuation allowance relates to uncertainties surrounding the recoverability of deferred tax assets. In assessing the realizability of deferred assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which benefits from net operating loss carryforwards are available and temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future and historical taxable income, and other matters in making this assessment. As a result of its evaluation of these factors at December 31, 1998, the Company recorded a valuation reserve for deferred tax assets of $181,019 (including $46,900 for items related to additional paid-in-capital and $42,000 for items related to goodwill in the Year Ended December 31, 1998). At December 31, 1998, the Company had worldwide net operating loss carryforwards and other tax benefits of approximately $395,000 for income tax purposes, expiring from the year 2000 through 2012. The utilization of tax loss carryforwards is subject to limitations under Section 382 of the U.S. Internal Revenue Code, the U.S. consolidated tax return provisions and foreign country tax regulations. Accrued income tax liabilities relates to identified federal, state and foreign accrued income tax liabilities that are not currently due. 58 (12) SEGMENT INFORMATION In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The Company conducts business in one operating segment - consumer software for use with microcomputers. The following table presents geographic information concerning the Company's United States and International (including Canada) operations during the Years Ended December 31, 1998, 1997 and 1996.
United States International Eliminations Consolidated ---------------- ------------------ -------------------------- ----------------- DECEMBER 31, 1998 Revenues: Customers $ 745,503 $ 93,812 $ -- $ 839,315 Inter-company 167 18,359 (18,526) -- ---------------- ------------------ -------------------------- ----------------- Total $ 745,670 $112,171 $(18,526) $ 839,315 ================ ================== ========================== ================= Loss from operations $ (86,922) $ 11,872 $ -- $ (75,050) ================ ================== ========================== ================= Identifiable assets $ 521,271 $299,530 $ -- $ 820,801 ================ ================== ========================== ================= DECEMBER 31, 1997 Revenues: Customers $ 506,623 $114,308 $ -- $ 620,931 Inter-company 5,360 11,325 (16,685) -- ---------------- ------------------ -------------------------- ----------------- Total $ 511,983 $125,633 $(16,685) $ 620,931 ================ ================== ========================== ================= Loss from operations $(438,590) $ 30,876 $ -- $(407,714) ================ ================== ========================== ================= Identifiable assets $ 441,343 $182,431 $ -- $ 623,774 ================ ================== ========================== ================= DECEMBER 31, 1996 Revenues: Customers $ 428,242 $101,286 $ -- $ 529,528 Inter-company 2,438 4,643 (7,081) -- ---------------- ------------------ -------------------------- --------------- Total $ 430,680 $105,929 $(7,081) $ 529,528 ================ ================== ======================== =============== Loss from operations $(347,410) $ 16,975 $ -- $(330,435) ================ ================== ======================== =============== Identifiable assets $ 879,610 $ 90,283 $ -- $ 969,893 ================ ================== ======================== ===============
The Company conducts a portion of its operations outside the United States. At December 31, 1998, $15,108 of cash and cash equivalents were subject to foreign currency fluctuations. Sales and transfers between geographic areas are generally priced at market less an allowance for marketing costs. No single customer or product accounted for greater than 10% of revenues for any of the periods presented. 59 (13) QUARTERLY RESULTS OF OPERATION The following table sets forth unaudited statement of operations data for each quarterly period of the Company's last two fiscal years. The unaudited quarterly financial information has been prepared on the same basis as the annual information presented elsewhere in this Annual Report on Form 10-K and in management's opinion, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information provided. The operating results for any quarter are not necessarily indicative of results for any future period. The quarterly financial information has been restated to reflect the amendment to the allocation of the purchase price for Mindscape as discussed in Note 2 to these Consolidated Financial Statements.
Quarters Ended (In thousands, except share and per share amounts) ---------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1997 1997 1997 1997 ---------------- --------------- ----------------- ------------ Revenues $ 131,196 $ 128,599 $ 141,737 $ 219,399 Operating Expenses: Costs of production 39,278 38,687 40,326 70,928 Sales and marketing 32,079 32,981 38,746 52,991 General and administrative 12,187 11,592 10,755 14,182 Development and software costs 20,278 20,672 25,041 23,996 Amortization, merger and other costs 133,013 121,645 148,400 140,868 ---------------- --------------- ----------------- ------------ 236,835 225,577 263,268 302,965 ---------------- --------------- ----------------- ------------ Operating loss (105,639) (96,978) (121,531) (83,566) Interest expense and other, net (3,997) (3,560) (4,798) (3,797) ---------------- --------------- ----------------- ------------ Loss before taxes (109,636) (100,538) (126,329) (87,363) Provision for income taxes 7,527 (2,918) (13,167) 79,602 ---------------- --------------- ----------------- ------------ Net loss $ (117,163) $ (97,620) $ (113,162) $ (166,965) ================ =============== ================= ============ Net loss per share - basic and diluted $ (1.80) $ (1.49) $ (1.72) $ (2.50) Weighted average number of shares 65,222,000 65,568,000 65,895,000 66,773,000 outstanding - basic and diluted Quarters Ended (In thousands except share and per share amounts) ---------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1998 1998 1998 1998 ---------------- --------------- ----------------- ------------ (as restated) (as restated) (as restated) Revenues $ 179,336 $ 171,983 $ 212,723 $ 275,273 Operating Expenses: Costs of production 59,402 62,626 63,011 83,759 Sales and marketing 47,938 60,756 54,529 66,390 General and administrative 12,600 16,936 14,132 17,153 Development and software costs 22,821 25,041 24,947 24,010 Amortization, merger and other costs 97,117 63,201 67,186 30,810 ---------------- --------------- ----------------- ------------ 239,878 228,560 223,805 222,122 ---------------- --------------- ----------------- ------------ Operating income (loss) (60,542) (56,577) (11,082) 53,151 Interest expense and other, net (4,370) 1,579 (1,215) 5,211 ---------------- --------------- ----------------- ------------ Income (loss) before taxes (64,912) (54,998) (12,297) 58,362 Provision for income taxes -- -- 12,442 19,065 ---------------- --------------- ----------------- ------------ Net income (loss) $ (64,912) $ (54,998) $ (24,739) $ 39,297 ================ =============== ================= ============ Net income (loss) per share - basic $ (0.93) $ (0.72) $ (0.28) $ 0.43 Net income (loss) per share - diluted $ (0.93) $ (0.72) $ (0.28) $ 0.35 Weighted average number of shares outstanding - basic 69,430,000 75,969,000 89,457,000 91,339,000 Weighted average number of shares outstanding - diluted 69,430,000 75,969,000 89,457,000 111,582,000
60 EX-99.2 4 UNAUDITED PRO FORMA FINANCIAL INFORMATION Exhibit 99.2 MATTEL Unaudited Pro Forma Condensed Combined Financial Statements We have provided unaudited condensed combined financial statements of Mattel after giving effect to the merger, which are referred to as "pro forma" information. In presenting these unaudited pro forma condensed combined financial statements, we treated our companies as if they had always been combined for accounting and financial reporting purposes. This method is known as the "pooling of interests" method of accounting. You should be aware that these unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and may not be indicative of the operating results or financial position that would have occurred or that will occur after the consummation of the merger. We have provided an unaudited pro forma condensed combined balance sheet as of December 31, 1998 that includes the impact of transaction costs related to the merger and tax benefits relating to Learning Company's net operating loss carryforwards and deductible temporary differences. The impact of merger integration and Mattel restructuring costs to be recognized in the second quarter of 1999 are not included in this balance sheet. We have also provided unaudited pro forma condensed combined statements of operations for the years ended December 31, 1996, 1997, and 1998 assuming the merger had occurred as of January 1, 1996. The unaudited pro forma condensed combined statements of operations for all periods presented exclude the positive effects of potential cost savings that the companies may achieve upon combining the resources of Mattel and Learning Company, transaction costs of approximately $75 to $85 million, including investment banking, legal and accounting fees and contractual incentive benefits, and merger integration and Mattel restructuring costs to be recognized in the second quarter of 1999. On March 5, 1998, Learning Company purchased Mindscape, Inc. Since the acquisition of Mindscape, Inc. is material to Learning Company's results of operations, we have included the preacquisition results of Mindscape, Inc. in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 1998 as if the acquisition had occurred on January 1, 1998. The condensed annual historical statements of operations of Mattel are derived from its audited consolidated financial statements previously filed with the Securities and Exchange Commission in Mattel's 1998 Annual Report on Form 10-K. The condensed annual historical statements of operations of Learning Company are derived from its audited consolidated financial statements previously filed with the Securities and Exchange Commission in Learning Company's 1998 Annual Report on Form 10-K. MATTEL Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 1998
Historical Pro Forma ----------------- -------------------- Learning Mattel Company Adjustments Combined -------- -------- ----------- -------- (In millions) ASSETS ------ Current Assets: Cash, cash equivalents and marketable securities........................... $ 212.5 $256.8 $ -- $ 469.3 Accounts receivable, net.............. 983.0 167.0 -- 1,150.0 Inventories........................... 584.4 59.9 -- 644.3 Prepaid expenses and other current assets............................... 277.9 56.5 -- 334.4 -------- ------ ----- -------- Total current assets................ 2,057.8 540.2 -- 2,598.0 -------- ------ ----- -------- Property, plant and equipment, net...... 736.5 26.7 -- 763.2 Other noncurrent assets................. 1,467.9 253.9 64.4(a) 1,786.2 -------- ------ ----- -------- Total Assets........................ $4,262.2 $820.8 $64.4 $5,147.4 ======== ====== ===== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Short-term borrowings and current portion of long-term liabilities..... $ 167.5 $ 75.1 $ -- $ 242.6 Accounts payable, accrued liabilities and income taxes payable............. 1,149.7 166.9 50.0(b) 1,366.6 -------- ------ ----- -------- Total current liabilities........... 1,317.2 242.0 50.0 1,609.2 -------- ------ ----- -------- Long-term debt.......................... 983.5 191.2 -- 1,174.7 Other long-term liabilities............. 141.3 101.4 -- 242.7 -------- ------ ----- -------- Total long-term liabilities......... 1,124.8 292.6 -- 1,417.4 -------- ------ ----- -------- Stockholders' equity.................... 1,820.2 286.2 14.4(c) 2,120.8 -------- ------ ----- -------- Total Liabilities and Stockholders' Equity............................. $4,262.2 $820.8 $64.4 $5,147.4 ======== ====== ===== ========
See accompanying notes to unaudited pro forma condensed combined financial statements. MATTEL Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1998
Historical Pro Forma ----------------------------------- --------------------- Learning Mattel Company Mindscape Adjustments Combined -------- -------- ---------------- ----------- -------- (Preacquisition) (In millions, except per share data) Net Sales............... $4,781.9 $ 839.3 $ 9.1 $ -- $5,630.3 Cost of sales......... 2,418.9 289.0 9.8 -- 2,717.7 -------- ------- ------ ------ -------- Gross Profit............ 2,363.0 550.3 (0.7) -- 2,912.6 Advertising and promotion expenses... 813.3 104.4 12.5 -- 930.2 Other selling and administrative expenses............. 882.1 262.6 11.8 -- 1,156.5 Amortization of intangibles.......... 41.9 88.2 2.6 2.6(d) 135.3 Charge for incomplete technology........... -- 56.8 -- -- 56.8 Restructuring and other charges........ -- 113.3 16.6 -- 129.9 Special charge........ 44.0 -- -- -- 44.0 Interest expense...... 110.8 17.6 -- -- 128.4 Other expense (income), net........ 5.8 (18.8) -- -- (13.0) -------- ------- ------ ------ -------- Income (Loss) from Continuing Operations Before Income Taxes.... 465.1 (73.8) (44.2) (2.6) 344.5 Provision for income taxes................ 132.8 31.5 1.1 20.9(e) 186.3 -------- ------- ------ ------ -------- Income (Loss) from Continuing Operations.. 332.3 (105.3) (45.3) (23.5) 158.2 Preferred stock dividend requirements......... 8.0 -- -- -- 8.0 -------- ------- ------ ------ -------- Income (Loss) from Continuing Operations Applicable to Common Shares................. $ 324.3 $(105.3) $(45.3) $(23.5) $ 150.2 ======== ======= ====== ====== ======== Basic Income (Loss) Per Common Share(f): Income (Loss) Per Share from Continuing Operations............. $ 1.11 $ (1.28) $ 0.38 ======== ======= ======== Average Number of Common Shares................. 291.5 82.3 397.0 ======== ======= ======== Diluted Income (Loss) Per Common Share(f): Income (Loss) Per Share from Continuing Operations............. $ 1.10 $ (1.28) $ 0.36 ======== ======= ======== Average Number of Common and Common Equivalent Shares................. 303.2 82.3 436.3 ======== ======= ========
See accompanying notes to unaudited pro forma condensed combined financial statements. MATTEL Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1997
Historical Pro Forma ----------------- ---------------------- Learning Mattel Company Adjustments Combined -------- -------- ----------- -------- (In millions, except per share data) Net Sales............................. $4,834.6 $ 620.9 $ -- $5,455.5 Cost of sales....................... 2,434.6 201.3 -- 2,635.9 -------- ------- ------ -------- Gross Profit.......................... 2,400.0 419.6 -- 2,819.6 Advertising and promotion expenses.. 779.1 67.3 -- 846.4 Other selling and administrative expenses........................... 797.0 216.1 -- 1,013.1 Amortization of intangibles......... 32.2 455.0 -- 487.2 Charge for incomplete technology.... -- 20.3 -- 20.3 Restructuring and other charges..... 275.0 68.6 -- 343.6 Interest expense.................... 90.1 22.5 -- 112.6 Other expense (income), net......... 1.5 (6.3) -- (4.8) -------- ------- ------ -------- Income (Loss) from Continuing Operations Before Extraordinary Item and Income Taxes..................... 425.1 (423.9) -- 1.2 Provision (benefit) for income taxes.............................. 135.3 71.0 (27.0)(e) 179.3 -------- ------- ------ -------- Income (Loss) from Continuing Operations Before Extraordinary Item................................. 289.8 (494.9) 27.0 (178.1) Preferred stock dividend requirements....................... 10.5 -- -- 10.5 -------- ------- ------ -------- Income (Loss) from Continuing Operations Before Extraordinary Item Applicable to Common Shares.......... $ 279.3 $(494.9) $ 27.0 $ (188.6) ======== ======= ====== ======== Basic Income (Loss) Per Common Share(f): Income (Loss) Per Share from Continuing Operations Before Extraordinary Item................... $ 0.96 $ (7.48) $ (0.51) ======== ======= ======== Average Number of Common Shares....... 290.5 66.2 369.9 ======== ======= ======== Diluted Income (Loss) Per Common Share(f): Income (Loss) Per Share from Continuing Operations Before Extraordinary Item................... $ 0.94 $ (7.48) $ (0.51) ======== ======= ======== Average Number of Common and Common Equivalent Shares.................... 295.7 66.2 369.9 ======== ======= ========
See accompanying notes to unaudited pro forma condensed combined financial statements. MATTEL Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1996
Historical Pro Forma ------------------ ---------------------- Learning Mattel Company Adjustments Combined -------- -------- ----------- -------- (In millions, except per share data) Net Sales......................... $4,535.3 $ 529.5 $ -- $5,064.8 Cost of sales................... 2,315.5 159.2 -- 2,474.7 -------- ------- ------ -------- Gross Profit...................... 2,219.8 370.3 -- 2,590.1 Advertising and promotion expenses....................... 778.9 35.1 -- 814.0 Other selling and administrative expenses....................... 772.3 162.2 -- 934.5 Amortization of intangibles..... 32.5 434.5 -- 467.0 Charge for incomplete technology..................... -- 56.7 -- 56.7 Restructuring and other charges........................ -- 12.3 -- 12.3 Interest expense................ 100.2 26.7 -- 126.9 Other (income), net............. (0.9) (9.3) -- (10.2) -------- ------- ------ -------- Income (Loss) from Continuing Operations Before Income Taxes... 536.8 (347.9) -- 188.9 Provision (benefit) for income taxes.......................... 164.6 28.6 (26.3)(e) 166.9 -------- ------- ------ -------- Income (Loss) from Continuing Operations....................... 372.2 (376.5) 26.3 22.0 Preferred stock dividend requirements................... 7.4 -- -- 7.4 -------- ------- ------ -------- Income (Loss) from Continuing Operations Applicable to Common Shares........................... $ 364.8 $(376.5) $ 26.3 $ 14.6 ======== ======= ====== ======== Basic Income (Loss) Per Common Share(f): Income (Loss) Per Share from Continuing Operations............ $ 1.26 $ (6.56) $ 0.04 ======== ======= ======== Average Number of Common Shares... 290.4 57.4 359.2 ======== ======= ======== Diluted Income (Loss) Per Common Share(f): Income (Loss) Per Share from Continuing Operations............ $ 1.23 $ (6.56) $ 0.04 ======== ======= ======== Average Number of Common and Common Equivalent Shares......... 303.1 57.4 368.2 ======== ======= ========
See accompanying notes to unaudited pro forma condensed combined financial statements. MATTEL Notes to Unaudited Pro Forma Condensed Combined Financial Statements 1. Basis of Presentation The unaudited pro forma condensed combined financial statements assume a business combination between Mattel and Learning Company accounted for using the pooling of interests method and are based upon the respective historical financial statements and the accompanying notes of Mattel and Learning Company, as well as the historical financial statements of Mindscape, Inc. Each share of Learning Company series A preferred stock was converted into 20 shares of Learning Company common stock just prior to consummation of the merger. According to the merger agreement, each outstanding share of Learning Company common stock was then converted into the right to receive 1.2 shares of Mattel common stock. Although the transaction has been completed, the costs of the merger can only be estimated at this time. The unaudited pro forma condensed combined statements of operations for all periods presented exclude the positive effects of potential cost savings that the companies may achieve upon combining the resources of Mattel and Learning Company, transaction costs of approximately $75 to $85 million, including investment banking, legal and accounting fees and contractual incentive benefits, and merger integration and Mattel restructuring costs to be recognized in the second quarter of 1999. The unaudited pro forma condensed combined balance sheet as of December 31, 1998 includes the impact of all transactions, whether of a recurring or nonrecurring nature, that can be reasonably estimated and should be reflected as of that date. The impact of merger integration and Mattel restructuring costs to be recognized in the second quarter of 1999 are not included in this balance sheet. Certain historical Learning Company and Mindscape, Inc. results have been reclassified to conform with Mattel's basis of presentation. 2. Pro Forma Adjustments Intercompany Transactions--There were no material intercompany transactions that required elimination from the unaudited pro forma condensed combined statements of operations or balance sheet. Balance Sheet (a) Other Noncurrent Assets--The unaudited pro forma condensed combined balance sheet has been adjusted to reflect the recognition of the estimated tax benefits related to Learning Company's net operating loss carryforwards and deductible temporary differences under the combined company's income tax position. (b) Accounts Payable, Accrued Liabilities, and Income Taxes Payable--The pro forma adjustment in the amount of $50 million, net of taxes, reflects accruals in connection with the estimated transaction costs of $75 million related to the merger. These costs are not considered in the unaudited pro forma condensed combined statements of operations. These estimated transaction costs will be charged against the results of operations in the second quarter of 1999. MATTEL Notes to Unaudited Pro Forma Condensed Combined Financial Statements (Continued) (c) Stockholders' Equity--Stockholders' equity has been adjusted to reflect the following: --Common stock accounts are adjusted for the assumed issuance of approximately 123 million shares of Mattel common stock in exchange for approximately 102 million shares of Learning Company common stock (which includes shares of Learning Company common stock issued upon conversion prior to the merger of Learning Company Series A preferred stock at the rate of 20 common shares for each preferred share outstanding as of December 31, 1998) using the exchange ratio of 1.2. --Additional paid-in capital is adjusted for the effects of issuance of shares of Mattel common stock having a $1.00 par value per share in exchange for Learning Company Series A preferred stock and Learning Company common stock, each having a $0.01 par value per share, and the recognition of the tax benefits related to the exercise of Learning Company non- qualified stock options due to utilization of Learning Company's net operating losses in the unaudited pro forma condensed combined statements of operations. --Retained earnings is adjusted for the effects of: (1) accrual for the minimum of the estimated range for transaction costs related to the merger; (2) compensation expense related to the Learning Company restricted common stock; and (3) recognition of estimated tax benefits from the assessment of income tax valuation allowances under the combined company's expected income tax position. Statement of Operations (d) Amortization of Intangibles--In connection with its acquisition of Mindscape, Inc., Learning Company recorded goodwill and other intangible assets, which reflected the allocation of the purchase price paid to brands and trade names and completed technology and products. The pro forma adjustment reflects the amortization of the identifiable intangible assets acquired and goodwill over their estimated useful lives on a straight-line basis. The estimated useful lives of brands and trade names, completed technology and products, and goodwill are 10, 2 and 10 years, respectively. (e) Provision (Benefit) for Income Taxes--The unaudited pro forma adjustment reflects the reduction of valuation allowances established in Learning Company's historical financial statements resulting in the recognition of estimated benefits of net operating losses incurred by Learning Company in the unaudited pro forma condensed combined financial statements due to the combined company's expected income tax position. (f) Income (Loss) per Common Share--Historical and unaudited pro forma per share data of Mattel and Learning Company include the retroactive effects of the March 1997 merger of Tyco Toys, Inc. into Mattel, and the August 1998 merger of Broderbund Software, Inc. into Learning Company, each accounted for as a pooling of interests. Unaudited pro forma weighted average common shares outstanding for all periods presented are based upon Mattel's and Learning Company's combined historical weighted average shares, adjusted for dilutive common stock equivalents, as appropriate, and after adjustment of Learning Company's historical number of shares using the exchange ratio of 1.2. EX-99.3 5 PRESS RELEASE DATED MAY 13, 1999 EXHIBIT 99.3 FOR IMMEDIATE RELEASE CONTACT: May 13, 1999 Mattel, Inc. News Media Investor Relations Glenn Bozarth Jessica Fisher 310-252-3521 310-252-2703 MATTEL COMPLETES MERGER WITH THE LEARNING COMPANY ------------------------------------------------- LOS ANGELES, May 13--Mattel, Inc. (NYSE:MAT) today announced that it has completed its merger with The Learning Company, and that The Learning Company is now a division of Mattel. Under terms of the merger agreement, each share of Learning Company common stock will be exchanged for 1.2 shares of Mattel. Former Learning Company shareholders will receive instructions regarding the exchange of their stock certificates shortly. "This merger gives Mattel a $1 billion software division with an unparalleled portfolio of branded content and profit margins exceeding that of our traditional business," Jill E. Barad, Mattel's chairman and chief executive officer, said. "With the merger completed, we're one step closer to realizing our vision of a `Mattel.com' web destination that will bring Reader Rabbit(R), Barbie(R), Carmen Sandiego(R), Hot Wheels(R), Matchbox(R), Family Tree Maker(R), The Oregon Trail(R), American Girl(R), Fisher-Price(R) and our many other proprietary brands together at one site, where we can educate and entertain children and their families all around the world." Mattel, Inc. is a worldwide leader in the design, manufacture and marketing of family products. With headquarters in El Segundo, California, Mattel has offices and facilities in 36 countries and sells its products in more than 150 nations throughout the world. Note: Forward-looking statements included in this release are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in these statements. Such risks and uncertainties include those matters that may be disclosed from time to time in the company's public announcements and SEC filings. -###- -----END PRIVACY-ENHANCED MESSAGE-----