-----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, PWEwwLJ098x6QYbZWq9iZcFP3RtFg2a3KIzoZYSAUZ39BAAdH6hjvsA7z9dasUjt yZPMMlPiCxKWIWTxoaQZsw== 0001047469-98-034243.txt : 19980911 0001047469-98-034243.hdr.sgml : 19980911 ACCESSION NUMBER: 0001047469-98-034243 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980831 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980910 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEARNING CO INC CENTRAL INDEX KEY: 0000719612 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942562108 STATE OF INCORPORATION: DE FISCAL YEAR END: 0104 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-12375 FILM NUMBER: 98707279 BUSINESS ADDRESS: STREET 1: ONE ATHENAEUM ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6174941200 MAIL ADDRESS: STREET 1: ONE ATHENAEUM ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 FORMER COMPANY: FORMER CONFORMED NAME: SOFTKEY INTERNATIONAL INC DATE OF NAME CHANGE: 19940210 FORMER COMPANY: FORMER CONFORMED NAME: WORDSTAR INTERNATIONAL INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MICROPRO INTERNATIONAL CORP DATE OF NAME CHANGE: 19890618 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): August 31, 1998 ---------------- The Learning Company, Inc. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Delaware -------------------------------------------- (State or Other Jurisdiction of Incorporation) 1-12375 94-2562108 ---------------------- ---------------------------------- (Commission File Number) (I.R.S. Employer Identification No.) One Athenaeum Street Cambridge, MA 02142 - --------------------------------------- -------- (Address of Principal Executive Offices) (Zip Code) (617) 494-1200 -------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Not Applicable ----------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) Item 2. Acquisition or Disposition of Assets. On August 31, 1998 (the "Closing Date"), pursuant to an Agreement and Plan of Merger dated as of June 21, 1998 (the "Merger Agreement") by and among The Learning Company, Inc., a Delaware corporation ("TLC"), TLC Merger Corp., a Delaware corporation and wholly-owned subsidiary of TLC ("Sub"), and Broderbund Software, Inc., a Delaware corporation ("Broderbund"), TLC acquired Broderbund by means of a merger (the "Merger") of Sub with and into Broderbund, with Broderbund remaining as the surviving corporation in the Merger. As a result of the Merger, Broderbund became a wholly-owned subsidiary of TLC. Broderbund develops, publishes and markets interactive personal productivity, entertainment and education software for use in the home, school and small business markets. Sub was formed solely for the purpose of effecting the Merger. Pursuant to the Merger Agreement, each outstanding share of Common Stock of Broderbund, $.01 par value per share ("Broderbund Common Stock"), was converted into the right to receive 0.80 share of Common Stock of TLC, $.01 par value per share ("TLC Common Stock"). Based on the capitalization of Broderbund as of the Closing Date, Broderbund stockholders have the right to receive approximately 16,848,300 million shares of TLC Common Stock. No fractional shares are issuable in the Merger. Broderbund stockholders otherwise entitled to receive a fraction of a share of TLC Common Stock in the Merger instead are entitled to receive an amount of cash equal to such fraction multiplied by $21.675 which is the average of the last reported sales price of TLC Common Stock, as reported on the New York Stock Exchange, on each of the ten trading days immediately preceding the Closing Date. All options to purchase Broderbund Common Stock outstanding immediately prior to the Merger were effectively assumed by TLC pursuant to the Merger Agreement. TLC will register on a Registration Statement on Form S-8 approximately 2,741,258 shares of TLC Common Stock for issuance upon the exercise of stock options formerly exercisable for shares of Broderbund Common Stock. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Businesses Acquired. The financial statements of Broderbund set forth at (i) pages 26 through 42 of Broderbund's Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), on Form 10-K for the fiscal year ended August 31, 1997 filed with the Securities and Exchange Commission (the "Commission") on November 26, 1997, and (ii) pages 3 through 7 of Broderbund's Quarterly Report Pursuant to Section 13 or 15(d) of the Exchange Act on Form 10-Q for the quarterly period ended May 31, 1998 filed with the Commission on July 14, 1998, are 2 hereby incorporated by reference herein and filed as Exhibit 99.1 hereto pursuant to Rule 12b-23(a)(3) of the Exchange Act. (b) Pro Forma Financial Information. The Unaudited Pro Forma Combined Condensed Financial Statements of TLC and Broderbund set forth at pages 74 through 84 of the Joint Proxy Statement/Prospectus dated July 31, 1998 (the "Proxy Statement/Prospectus") filed as part of TLC's Registration Statement on Form S-4 (File No. 333-59089), which Proxy Statement/Prospectus was filed with the Commission on July 31, 1998, are hereby incorporated by reference herein and filed as Exhibit 99.2 hereto pursuant to Rule 12b-23(a)(3) of the Exchange Act. The Unaudited Pro Forma Combined Condensed Financial Statements of TLC and Broderbund for the six months ended June 30, 1998 are not included with this initial report. Such financial information will be filed by amendment not later than November 16, 1998. (c) Exhibits. See Exhibit Index attached hereto. 3 SIGNATURE 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. Date: September 10, 1998 THE LEARNING COMPANY, INC. By: /s/ Neal S. Winneg ------------------------------------ Neal S. Winneg Senior Vice President and General Counsel 4 EXHIBIT INDEX
Exhibit Number Description - -------- ----------- 2.1* Agreement and Plan of Merger dated as of June 21, 1998 by and among TLC, Sub and Broderbund. 23.1 Consent of Ernst & Young LLP. 99.1 Financial Statements of Broderbund. 99.2 Unaudited Pro Forma Combined Condensed Financial Statements of TLC and Broderbund. 99.3 Press Release dated August 31, 1998.
- --------------------- * Incorporated by reference from the Registration Statement on Form S-4 (File No.333-59089) of TLC. EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form 8-K) of The Learning Company Inc. of our report dated October 3, 1997, with respect to the consolidated financial statements and schedule of Broderbund Software, Inc. included in its Annual Report (Form 10-K) for the year ended August 31, 1997, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Palo Alto, California September 8, 1998 EX-99.1 3 EX-99.1 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Broderbund Software, Inc. We have audited the accompanying consolidated balance sheets of Broderbund Software, Inc. as of August 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Broderbund Software, Inc. at August 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP San Francisco, California October 3, 1997 26 Broderbund Software, Inc. Consolidated Balance Sheets
August 31, 1997 1996 -------- -------- (In thousands except share data), Assets Current assets: Cash and short-term investments $ 94,078 $150,893 Accounts receivable, net of allowances of $27,452 in 1997 and $27,611 in 1996 18,047 5,956 Inventories 4,527 3,140 Deferred income taxes 14,975 15,057 Other current assets 3,799 869 --------- ------- Total current assets 135,426 175,915 --------- ------- Property and equipment, net 18,664 7,014 Purchased technology and other intangibles 20,308 13,090 Deferred income taxes 11,002 -- Investments in affiliates -- 4,053 Other assets 1,203 360 --------- -------- Total assets $186,603 $200,432 ========= ======== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 8,928 $ 4,442 Accrued liabilities 24,567 25,149 Other current liabilities 2,996 3,831 --------- -------- Total current liabilities 36,491 33,422 --------- ------- Deferred income taxes -- 1,462 Other liabilities 2,030 -- Commitments Stockholders' equity: Common stock, $.01 par value, authorized 120,000,000 shares; issued and outstanding 20,768,132 and 20,670,060 shares, respectively 27,422 31,383 Retained earnings 120,660 134,165 --------- ------- Total stockholders' equity 148,082 165,548 --------- ------- Total liabilities and stockholders' equity $186,603 $200,432 ========= ========
See accompanying notes. 27 Broderbund Software, Inc. Consolidated Statements of Operations
Years ended August 31, ---------------------------------- 1997 1996 1995 --------- --------- --------- (In thousands, except per share data) Net revenues $ 190,787 $ 186,207 $ 171,594 Cost of revenues 65,056 58,259 60,997 Amortization of purchased technology 5,427 645 95 --------- --------- --------- Gross margin 120,304 127,303 110,502 --------- --------- --------- Operating expenses: Sales and marketing 57,311 34,381 25,143 Research and development 43,670 29,244 22,784 General and administrative 13,603 11,256 11,085 Charge for acquired in-process technology 29,297 8,009 -- Restructuring charges 1,986 -- -- --------- --------- ---------- Total operating expenses 145,867 82,890 59,012 --------- --------- ---------- Income (loss) from operations (25,563) 44,413 51,490 Interest and dividend income, net 5,556 6,499 6,364 Equity in earnings (loss) of joint venture (603) 217 3,886 Terminated merger fees, net -- 15,464 -- --------- --------- ---------- Income (loss) before income taxes (20,610) 66,593 61,740 Provision (benefit) for income taxes (7,128) 29,816 25,553 ---------- ---------- ---------- Net income (loss) $ (13,482) $ 36,777 $ 36,187 =========== ========== ========== Net income (loss) per share $ (0.65) $ 1.71 $ 1.72 =========== ========== ========== Shares used in computing per share data 20,686 21,509 21,037 =========== ========== ==========
See accompanying notes. 28 Broderbund Software, Inc. Consolidated Statements of Stockholders' Equity
Common Stock Total --------------------- Retained Stockholders' Shares Amount Earnings Equity ------- ----------- ----------- ---------- (In thousands) Balances at August 31, 1994 19,624 $ 20,321 $ 59,858 $ 80,179 Exercise of stock options 388 4,069 -- 4,069 Tax benefits relating to stock options -- 6,213 -- 6,213 Adjustment for effect of pooling-of-interests on prior periods 607 537 1,688 2,225 Foreign currency translation adjustment -- -- (20) (20) Unrealized gain on short-term investments -- -- 29 29 Net income -- -- 36,187 36,187 ------- ---------- ---------- --------- Balances at August 31, 1995 20,619 31,140 97,742 128,882 Exercise of stock options 151 2,128 -- 2,128 Tax benefits relating to stock options -- 1,548 -- 1,548 Repurchase of common stock (100) (3,433) -- (3,433) Foreign currency translation adjustment -- -- (78) (78) Unrealized loss on short-term investments -- -- (276) (276) Net income -- -- 36,777 36,777 ------- ---------- ---------- --------- Balances at August 31, 1996 20,670 31,383 134,165 165,548 Exercise of stock options 135 1,833 -- 1,833 Tax benefits relating to stock options -- 568 -- 568 Repurchase of common stock (500) (14,574) -- (14,574) Purchase of Living Books 419 7,321 -- 7,321 Shares issued under employee stock purchase plan 44 891 -- 891 Foreign currency translation adjustment -- -- (588) (588) Unrealized gain on short-term investments -- -- 565 565 Net loss -- -- (13,482) (13,482) ------- ---------- ---------- --------- Balances at August 31, 1997 20,768 $ 27,422 $ 120,660 $ 148,082 ======= ========== ========== =========
See accompanying notes 29 Broderbund Software, Inc. Consolidated Statements of Cash Flows
Years ended August 31, 1997 1996 1995 --------- ---------- -------- (In thousands) Operating activities Net income (loss) $ (13,482) $ 36,777 $ 36,187 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in (earnings) loss of joint venture 603 (217) (3,886) Depreciation and amortization 11,151 3,164 2,258 Deferred income taxes (10,874) (120) (5,394) Charge for acquired in-process technology 29,297 8,009 -- Write-off of purchased technology -- -- 1,678 Royalty advance reserve 5,192 -- -- Changes in current assets and liabilities Accounts receivable (6,050) 1,924 (5,582) Inventories 111 (578) (201) Other current assets (1,957) 317 (429) Income taxes (4,345) 9,453 669 Accounts payable 2,874 (1,652) 438 Accrued compensation (2,361) (2,268) 5,709 Other accrued liabilities (866) (4,293) 9,175 ---------- ---------- --------- Net cash provided by operating activities 9,293 50,516 40,622 ---------- ---------- --------- Investing activities Net additions to equipment and improvements (4,445) (3,963) (3,383) Dividends received from joint venture -- 1,000 2,500 Short-term investments (42,096)r (17,702)r 33,842 Business combinations, net of cash acquired (44,414) (21,020) -- Investments in affiliates (4,848) (3,450) -- Adjustment for effect of pooling-of-interests on prior periods -- -- 2,225 Other (531) 1,374 (708) ---------- ---------- --------- Net cash provided (used) for investing activities (96,334) (43,761) 34,476 ---------- ---------- --------- Financing activities Exercise of stock options 1,833 2,128 4,069 Tax benefit from exercise of stock options 568 1,548 6,213 Employee stock purchase plan 891 -- -- Repurchase of common stock (14,574) (3,433) -- ---------- ---------- --------- Net cash provided by (used) financing activities (11,282) 243 10,282 ---------- ---------- --------- Translation adjustment (588) (78) (20) ---------- ---------- --------- Increase (decrease) in cash (98,911) 6,920 85,360 Cash and equivalents, beginning of year 108,999 102,079 16,719 ---------- ---------- --------- Cash and equivalents, end of year 10,088 108,999 102,079 Short-term investments 83,990 41,894 24,468 ---------- ---------- --------- Cash and short-term investments, end of year $ 94,078 $ 150,893 $ 126,547 ========== ========== ========= Supplemental disclosure of cash flow information Income tax payments, net $ 7,617 $ 18,857 $ 24,168 ========== ========== ========= Interest payments $ 40 $ 81 $ 39 ========== ========== ========= Supplemental disclosure of non-cash investing and financing activities Issuance of restricted stock for purchase of Living Books $ 7,321 -- -- ========== ========== =========
See accompanying notes. 30 Broderbund Software, Inc. Notes to Consolidated Financial Statements August 31, 1997, 1996, and 1995 1. Accounting Policies Operations The Company currently operates in one business segment, the development and publishing of consumer software for personal computers. Basis of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. The Company has export sales from the United States and has operations in the United Kingdom. All significant intercompany accounts and transactions have been eliminated. 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 existing Living Books product line 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 were each distributing Living Books products through their respective distribution channels under an affiliated label arrangement. The Company had revenues of $8,817,000, $18,041,000 and $22,393,000 during fiscal 1997, 1996, and 1995, respectively, from distribution of Living Books products as an affiliated label product. Prior to January 1, 1997 the Company reported its share in earnings and losses of Living Books under the equity method of accounting. The Company's share was based on the partnership's most recent quarter end results, which were reported on a calendar year basis. The Company's equity (loss) in the earnings of the joint venture for the six months ended December 31, 1996 and the years ended June 30, 1996 and 1995 amounted to $(603,000), $217,000 and $3,886,000, respectively. The Company received distributions from the joint venture during fiscal 1997 and 1996 of $0 and $1,000,000, respectively, which reduced the Company's investment in the joint venture. As of January 1, 1997, the Company purchased Random House's 50% share in this joint venture (see Note 2, Business Combinations). Results of Living Books after this date are reflected in the accompanying financial statements. The Company has minority interests in Live Picture, Inc., Babycenter, Inc., Classifieds 2000, Inc., Classified Project, Inc., Cyberian Outpost, Inc., E-Ticket, Inc., Index Stock Photography, Inc., Netcentives, Inc., Net Contents, Inc., Netplay, Inc. and N/Volve, Inc. These investments are recorded at cost and were fully reserved for on the August 31, 1997 Consolidated Balance Sheet in connection with the Company's restructuring (see Note 11, Restructuring Charges). 31 1. Accounting Policies (continued) Cash and Short-Term Investments Cash and cash 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 investments in debt 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. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash, short-term investments and accounts receivable. The Company's investment portfolio consists of investment grade securities. Accounts receivable are principally from distributors and retailers of the Company's products. The Company performs ongoing credit evaluations of its customers' financial condition and maintains allowances for potential credit losses. Inventories Inventories, which consist primarily of software media, manuals and related packaging materials, are recorded at standard cost, which approximates the lower of cost, determined on the first-in, first-out basis, or market. Provisions are made in each period for the effect of inventory obsolescence. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over estimated useful lives ranging from three to seven years for equipment and improvements and thirty years for buildings. Purchased Technology and Other Intangibles Purchased technology, net of amortization, at August 31, 1997, 1996 and 1995 of $20,308,000, $11,570,000 and $761,000, respectively, includes costs of obtaining product technology which are amortized using the straight line method over periods not exceeding three years. Management evaluates the future realization of purchased technology quarterly and writes down any amounts that management deems unlikely to be recovered through future products sales. Amortization expense for fiscal 1997, 1996, and 1995 was $5,427,000, $645,000 and $95,000, respectively. Certain amounts reported in prior years have been reclassified to conform with fiscal year 1997 presentation. Advances at August 31, 1996 of $1,520,000 represent prepayments of royalties made to independent software developers under development agreements. These advances were charged to cost of revenues at the contractual royalty rate based on actual net product sales. In the fourth quarter of fiscal year 1997 the Company has reserved for 100% of advances on the balance sheet, which resulted in a pretax charge of $5.2 million. Software Development Costs Financial accounting standards provide for the capitalization of certain software development costs after technological feasibility of the software is attained. No such costs were capitalized in fiscal 1997, 1996, or 1995 because the impact on the financial statements would not be material. 32 1. Accounting Policies (continued) Net Revenues Revenue from product sales is recognized upon shipment of product, net of allowances for returns, in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position 91-1, "Software Revenue Recognition." Net revenues from sales to one customer were 12%, 11% and 22% of total net revenues in fiscal 1997, 1996 and 1995, respectively. Net revenues from sales to a different customer were 11% and 13% of total net revenues in fiscal 1996 and 1995, respectively. Royalties Royalties are accrued based on net revenues, pursuant to contractual agreements with developers of software products published by the Company. Royalty costs, which are included in cost of revenues, were $10,933,000, $11,999,000 and $13,424,000 in fiscal 1997, 1996 and 1995, respectively. Advertising Costs The Company charges advertising costs to sales and marketing expense as incurred. Advertising costs were $16,139,000, $6,383,000 and $3,025,000 in fiscal 1997, 1996 and 1995, respectively. Printing and postage related to direct mail offers are expensed over the life of the mailing, not to exceed 90 days and are included in Other current assets on the balance sheet at August 31, 1997. Foreign Currency Translation The functional currency of the Company's foreign subsidiary is its local currency. Assets and liabilities of this operation are translated into U.S. dollars using current exchange rates, and revenues and expenses are translated in U.S. dollars using average exchange rates. The effects of foreign currency translation adjustments are deferred and included as a component of stockholders' equity. Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Such amounts were not material in fiscal 1997, 1996 or 1995. Recently Issued Accounting Standards The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") effective for the fiscal year ended August 31, 1997. SFAS 121 requires that impairment losses be recorded on long-lived assets and certain identifiable intangibles when indicators of impairment are present and the undiscounted cash flows estimated by those assets are less than the assets' carrying amounts. Adoption of this standard did not have a material impact on the Company's consolidated financial statements. SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") establishes a fair value method of accounting for stock-based employee compensation plans. As permitted under SFAS 123, the Company has elected to follow Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" in accounting for stock-based awards to employees. As such, the Company has continued to measure compensation expense using the intrinsic value based method for stock-based employee compensation plans and has provided pro forma disclosures of net income and earnings per share as if the accounting provisions of SFAS 123 had been adopted (see Note 7, Stockholders' Equity). In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic and diluted earnings per share for periods ending after December 15, 1997, for all entities with complex capital structures. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. There will be no impact 33 1. Accounting Policies (continued) on the Company's primary or fully diluted earnings (loss) per share for the year ended August 31, 1997 because the Company incurred a loss for the period. The impact is expected to result in an increase in primary earnings per share for the year ended August 31, 1996 of $0.07 per share and no change to fully diluted earnings per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and displaying of comprehensive income and its components. The Company will adopt SFAS No. 130 effective September 1, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes new requirements for the reporting of information regarding operating segments, products, services, geographic areas and major customers. The Company will adopt SFAS No. 131 effective September 1, 1998. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include allowances for doubtful accounts, product returns and price protection, and estimates regarding the recoverability of inventories. Actual results could differ from those estimates. Net Income (Loss) Per Share Net income (loss) per share data is based on the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. There are no significant differences between primary and fully diluted earnings per share Reclassifications Certain amounts reported in prior years have been reclassified to conform to the fiscal 1997 presentation. 2. Business Combinations Parsons Technology On August 6, 1997, the Company acquired Parsons Technology from Intuit Inc. Parsons Technology is a leading direct-to-consumer marketing organization and has an experienced product development group. The acquisition has been accounted for under the purchase method, and had an aggregate purchase price of approximately $31,000,000 in cash, including acquisition costs. Approximately $10,000,000 of the excess of the purchase price over the fair value of the net tangible assets acquired was allocated to in-process research and development and approximately $9,311,000 to purchased technology and other intangible assets. The amount allocated to in-process research and development was charged to operations at the time of acquisition. The purchased technology and other intangible assets are being amortized over three years from the date of acquisition. The operating results of Parsons Technology, which were not material in relation to those of the Company, have been included in the consolidated financial statements for the period subsequent to the date of acquisition. Living Books As of January 1, 1997, the Company acquired the remaining 50% interest in the Living Books joint venture. The acquisition 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 $18,370,000, including acquisition costs. In connection with the acquisition, a portion of the excess purchase price, approximately $9,250,000 was allocated to in-process technology and charged to operations at the time of acquisition. Approximately $4,853,000 34 2. Business Combinations (continued) was allocated to purchased technology and is being amortized over three years from the date of acquisition. The operating results of Living Books, which are not material in relation to those of the Company, have been included in the consolidated financial statements for the period subsequent to the date of acquisition. Prior to this date, the Company and Random House, Inc. were equal partners in the joint venture to publish Living Books products. T/Maker Company On August 6, 1996, the Company completed its acquisition of T/Maker Company ("T/Maker"), a leading developer of clip art software. The acquisition has been accounted for under the purchase method, and had an aggregate purchase price of approximately $19,900,000, including acquisition costs. Approximately $8,000,000 of the excess of the purchase price over the fair value of the net tangible assets acquired was allocated to in-process research and development and approximately $11,500,000 to purchased technology. The amount allocated to in-process research and development was charged to operations at the time of acquisition. The purchased technology is being amortized over three years from the date of acquisition. The operating results of T/Maker, which were not material in relation to those of the Company, have been included in the consolidated financial statements for the periods subsequent to the date of acquisition. Banner Blue Software, Inc. On April 28, 1995, the Company acquired Banner Blue Software Incorporated ("Banner Blue"), a leading developer of genealogy software, in a transaction accounted for under the pooling-of-interests method. The Company issued 607,000 shares of common stock in exchange for all the outstanding stock of Banner Blue. The operating results for Banner Blue were not material to the combined results of the two companies for all periods prior to the acquisition and therefore results for those periods have not been restated. The operating results of Banner Blue have been included in the consolidated financial statements for all periods subsequent to the date of acquisition. 3. Fair Value of Financial Instruments The carrying amount approximates fair value for each class of financial instruments which include cash and equivalents, accounts receivable, accounts payable and accrued liabilities because of the short maturity of these instruments. The carrying values of short-term investments are based upon quoted market prices. Cash and short-term investments, at fair value, consist of the following: August 31, 1997 1996 --------- ---------- (In thousands) Cash and equivalents: Cash and money market funds $ 4,848 $ 1,149 Municipal securities -- 53,812 Commercial paper 2,240 1,500 Money market preferreds 3,000 49,200 Corporate notes -- 3,338 --------- ---------- 10,088 108,999 --------- ---------- Short-term investments: Money market preferreds 3,024 2,675 Municipal securities 65,947 22,831 Commercial paper 1,000 -- U.S. government agencies 11,530 15,884 Corporate equity fund 473 504 Corporate notes 2,016 -- --------- ---------- 83,990 41,894 --------- ---------- Cash and short-term investments $ 94,078 $150,893 ========= ========== 35 3. Fair Value of Financial Instruments (continued) Cash and short-term investments had an aggregate cost of $93,754,000 and $151,140,000 at August 31, 1997 and 1996, respectively. At August 31, 1997 cash and short-term investments included gross unrealized gains of $388,000 and losses of $70,000. At August 31, 1996 cash and short-term investments included gross unrealized gains of $139,000 and gross unrealized losses of $386,000. At August 31, 1997 short-term investments of $13,305,000 were contractually due within one year with the balance due after one year but before two years. 4. Property and Equipment Property and equipment consist of the following: August 31, 1997 1996 --------- --------- (In thousands) Computer equipment $ 14,702 $ 10,169 Furniture 8,960 6,134 Leasehold improvements 3,717 1,947 Buildings 6,194 -- Land 1,048 -- --------- --------- 34,621 18,250 Accumulated depreciation and amortization (15,957) (11,236) --------- --------- $ 18,664 $ 7,014 ========= ========= 5. Other Accrued Liabilities Other accrued liabilities consist of the following: August 31, 1996 1996 --------- --------- (In thousands) Accrued compensation $ 8,545 $ 8,794 Accrued royalties 5,701 4,101 Accrued income taxes 4,621 8,966 Accrued sales and marketing costs 3,714 3,288 Accrued restructuring 1,986 -- --------- --------- $ 24,567 $ 25,149 ========= ========= 6. Income Taxes The Company's pretax income from foreign operations for fiscal 1997, 1996 and 1995 was $901,000, $1,648,000 and $88,000, respectively. 36 6. Income Taxes (continued) Significant components of the provision for income taxes are as follows: Years ended August 31, --------------------------------- 1997 1996 1995 --------- ---------- ---------- (In thousands) Current: Federal $ 2,767 $ 22,392 $ 23,920 State 642 7,002 6,789 Foreign 337 542 238 --------- ---------- --------- Total current 3,746 29,936 30,947 Deferred: Federal (8,677) (93) (4,299) State (2,197) (27) (1,095) --------- ---------- --------- Total deferred (10,874) (120) (5,394) --------- ---------- --------- $ (7,128) $ 29,816 $ 25,553 ========= ========== ========= The principal reasons that the aggregate income tax provisions differ from taxes computed at the applicable federal statutory rate are reflected below: Years ended August 31, --------------------------------- 1997 1996 1995 --------- ---------- --------- (In thousands) Income tax provision at federal statutory rate $ (7,214) $ 23,308 $ 21,609 State income taxes, net of federal tax benefit (1,010) 4,533 3,701 Charge for acquired in-process technology 907 2,803 -- Other 189 (828) 243 --------- ---------- --------- $ (7,128) $ 29,816 $ 25,553 ========= ========== ========= Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: August 31, -------------------- 1997 1996 -------- --------- (In thousands) Deferred tax assets: Accruals and reserves not currently deductible $15,554 $14,900 Purchased technology 10,674 581 Other, net 2,758 2,142 -------- -------- 28,986 17,623 -------- -------- Deferred tax liabilities: Purchased technology 2,104 3,855 Other, net 905 173 -------- -------- 3,009 4,028 -------- -------- Net deferred tax assets $25,977 $13,595 ======== ======== Income tax benefits which accrue to the Company from the exercise of nonqualified stock options and disqualifying dispositions of incentive stock options have been recorded as increases to common stock. The Company does not provide for U.S. taxes on undistributed earnings of its foreign subsidiary. If these earnings were distributed to the parent company, foreign tax credits available under current law would substantially eliminate the resulting Federal tax liability. 37 7. Stockholders' Equity Preferred Stock The Company's Certificate of Incorporation authorizes 1,000,000 shares of preferred stock, none of which is issued or outstanding at August 31, 1997 and 1996. The Board of Directors has the authority to issue the preferred stock in one or more series and to fix the rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. Employee Stock Purchase Plan In April 1996, the Company established an Employee Stock Purchase Plan whereby eligible employees may authorize payroll deductions of up to 10% of their compensation to purchase shares at 85% of the lower of the fair market value of the Common Stock on the first or the last day of each six-month purchase period. In fiscal year 1997, 44,000 shares were issued under the plan at an average price of $20.25 per share. In fiscal year 1996, there were no shares issued under the Plan. At August 31, 1997, the Company had 206,000 shares of its Common Stock reserved for future issuance under the Plan. Stock Option Plans Under the Company's Employee and Consultant Stock Option Plans, incentive and nonqualified stock options may be granted to employees, directors and consultants to purchase a maximum of 6,250,000 common shares. 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. In connection with the acquisition of Banner Blue Software, the Company assumed the outstanding options of Banner Blue Software and converted such options into options under the Plans based upon the merger exchange ratio. 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 fiscal year 1997, the Company offered to cancel and reissue certain stock options granted in fiscal years 1996 and 1995. The Company issued 970,000 stock options in fiscal year 1997 related to this reissuance. This reissuance is included in the table below under shares granted and forfeited for fiscal year 1997. Changes in options outstanding during the three years ending August 31, 1997 are as follows:
Weighted Average Exercise Number of Exercise Price Price Per Shares Per Share Share --------------------------------------------- Options outstanding at August 31, 1994 1,792,000 $ 1.00 - $28.32 $14.59 Granted 660,000 $32.25 - $72.00 $48.18 Assumed in the acquisition of Banner Blue Software 42,000 $ 3.97 - $27.54 $13.02 Exercised (388,000) $ 1.50 - $28.32 $10.51 Forfeited (150,000) $10.62 - $32.25 $18.50 ---------- Options outstanding at August 31, 1995 1,956,000 $ 1.00 - $72.00 $26.44 Granted 1,042,000 $33.13 - $76.73 $53.85 Exercised (151,000) $ 1.00 - $32.25 $14.08 Forfeited (138,000) $10.63 - $72.00 $40.66 ---------- Options outstanding at August 31, 1996 2,709,000 $ 1.00 - $76.73 $36.98 Granted 2,067,000 $18.50 - $31.00 $27.43 Exercised (135,000) $ 1.00 - $28.32 $13.58 Forfeited (1,272,000) $10.63 - $72.00 $52.72 ---------- Options outstanding at August 31, 1997 3,369,000 $ 1.00 - $76.73 $26.11 ========== Outstanding options exercisable at August 31, 1997 870,000 ========== Options available for grant at August 31, 1997 1,613,000 ==========
38 7. Stockholders' Equity (continued) At August 31, 1997, a total of 4,982,000 shares of common stock have been reserved for issuance upon exercise of outstanding stock options and options available for issuance under the Company's plans. The following table summarizes information regarding options outstanding and options exercisable as of August 31, 1997:
Outstanding options Exercisable options ------------------------------------------- ----------------------------- Weighted average ------------------------ Contractual Weighted Range of per share Number of life Exercise Number of average exercise prices shares (in years) price shares exercise price ------------------- ----------- --------------- --------- ---------- -------------- $ 1.00 - $ 18.50 725,000 5.62 $ 12.28 533,000 $ 10.22 $ 18.66 - $ 27.50 790,000 8.42 $ 25.09 148,000 $ 22.29 $ 27.54 - $ 28.38 388,000 8.45 $ 28.34 53,000 $ 28.18 $ 28.75 - $ 28.75 896,000 9.22 $ 28.75 -- $ -- $ 31.00 - $ 76.73 570,000 7.88 $ 39.50 136,000 $ 39.76 ----------- --------------- --------- ---------- -------------- $ 1.00 - $ 76.73 3,369,000 7.94 $ 26.11 870,000 $ 17.96 =========== =============== ========= ========== ==============
Pro Forma Information Under APB 25, the intrinsic value method, the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, thus no compensation expense is recognized in the Company's financial statements. Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called "options") under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The following weighted average assumptions were used in determining the fair value of the Company's stock-based awards to employees: Options ESPP Fiscal Year Fiscal Year Fiscal Year 1997 1996 1997 ------------ ------------- ------------ Expected life (in years) 3.5 3.5 0.5 Expected volatility 51% 49% 51% Risk-free interest rate 5.9% 5.9% 5.5% Expected dividend yield 0.0% 0.0% 0.0% The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized when they occur. The weighted average estimated fair value of employee stock options granted during fiscal years 1997 and 1996 was $7.98 and $19.09 per option, respectively. The weighted average estimated fair value of shares granted under the Employee Stock Purchase Plan during fiscal year 1997 was $7.00 per share, 39 7. Stockholders' Equity (continued) respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: Fiscal Year Fiscal Year 1997 1996 --------- -------- (in thousands, except for net income (loss) per share information) Pro forma net income (loss) $ (22,882) $ 33,506 Pro forma net income (loss) per share $ (1.11) $ 1.56 The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS 123 is applicable only to options granted subsequent to August 31, 1995, the pro forma effect will not be fully reflected until fiscal year 1999. 8. Profit Sharing and Retirement Plan The Company has a 401(k) Profit Sharing Plan covering substantially all employees. The Company contributes $0.25 for every $1.00 contributed by Plan participants subject to certain limitations on individual contributions. The Company also funds annually its profit sharing expense which is at the discretion of the Board of Directors. The Company's cost of the Plan was $945,000, $2,508,000 and $2,547,000 in fiscal 1997, 1996 and 1995 respectively. 9. Lease Commitments The Company leases office and warehouse space under operating leases. Rent expense under operating leases was $5,181,000, $3,628,000 and $2,808,000 in fiscal 1997, 1996 and 1995, respectively. Future minimum lease payments under operating leases are as follows: Year ended August 31,1997 -------------- (In thousands) 1998 $ 5,898 1999 5,584 2000 4,747 2001 4,215 2002 1,192 2003 and thereafter 744 -------------- $ 22,380 ============== 10. Litigation The Company is subject to pending claims and litigation. Management, after review and consultation with counsel, considers that any liability from the disposition of such lawsuits would not have a material adverse effect upon the consolidated financial condition of the Company. 11. Restructuring Charges In accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activiy (Including Certain Costs Incurred in a Restructuring)," the Company recorded a charge to operating expenses of $1,986,000 in the fourth quarter of fiscal 1997. Restructuring charges included costs pertaining to certain restructuring programs. These restructuring programs pertained to the consolidation of facilities and discontinuation of certain projects which resulted in a 40 11. Restructuring Charges (continued) reduction of the workforce of approximately 50 people. Following is a summary of significant components of the charge: Year ended August 31, 1997 -------------- (In thousands) Restructuring Costs Employee severance $ 1,194 Exit costs, principally costs of vacating certain facilities 792 -------------- $ 1,986 ============== 12. Terminated Merger Costs In December 1995, the Company and The Learning Company terminated an agreement to merge. The Company recognized pre-tax income of $15,464,000 which consisted of an $18,000,000 payment received to terminate the merger and $2,536,000 of associated expenses. 13. Operations by Geographic Area Information regarding the Company's operations in the United States and foreign areas is presented below: August 31, 1997 1996 ---------- ----------- (In thousands) Net Revenue North America Customers in the United States $ 170,273 $ 166,426 Customers in Canada 5,793 5,664 Customers in Asia/Pacific 4,208 3,312 Other exports -- 157 Intercompany revenues 2,640 2,055 ---------- --------- 182,914 177,614 Europe 10,513 10,648 Consolidating eliminations (2,640) (2,055) ---------- --------- $ 190,787 $ 186,207 ========== ========= Income from Operations North America $ (26,349) $ 42,823 Europe 786 1,590 ---------- --------- $ (25,563) $ 44,413 ========== ========= Identifiable Assets North America $ 181,475 $ 195,347 Europe 5,128 5,085 ---------- --------- $ 186,603 $ 200,432 ========== ========= For fiscal 1995 revenues from foreign sources were less than 10% of consolidated net revenues. 41 14. Quarterly Financial Information (Unaudited)
Quarter ended -------------------------------------------------- November February May August Fiscal 30 28/29 31 31 Year --------- ----------- ----------- ------------ ---------- In thousands, except for per share data Fiscal year 1997: Net revenues $61,491 $44,316 $39,294 $45,686 $190,787 Gross margin 38,292 27,766 24,999 29,247 120,304 Net income (loss) 8,895 (3,462) 11 (18,926) (13,482) Net income (loss) per share 0.42 (0.16) -- (0.91) (0.65) Fiscal year 1996: Net revenues $70,961 $48,044 $34,993 $32,209 $186,207 Gross margin 46,041 33,009 24,706 23,547 127,303 Net income (loss) 15,936 18,839 6,180 (4,178) 36,777 Net income (loss) per share 0.73 0.87 0.29 (0.20) 1.71
42 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BRODERBUND SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MAY 31, August 31, 1998 1997 ------------------------- (Unaudited) ASSETS Current assets: Cash and short-term investments $119,841 $ 94,078 Accounts receivable, net 6,920 18,047 Inventories 5,559 4,527 Deferred income taxes 18,735 14,975 Other current assets 5,091 3,799 ------------------------- Total current assets 156,146 135,426 ------------------------- Property and equipment, net 17,095 18,664 Purchased technology and other intangibles 14,355 20,308 Deferred income taxes 12,275 11,002 Other assets 538 1,203 ------------------------- $200,409 $186,603 ------------------------- -------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,950 $ 8,928 Accrued compensation 8,143 8,545 Accrued income taxes 4,157 4,621 Other accrued expenses 13,884 14,397 ------------------------- Total current liabilities 35,134 36,491 ------------------------- Other liabilities 1,870 2,030 ------------------------- Total liabilities 37,004 38,521 ------------------------- Stockholders' equity: Common stock 30,689 27,422 Retained earnings 132,716 120,660 ------------------------- Total stockholders' equity 163,405 148,082 ------------------------- $200,409 $186,603 ------------------------- -------------------------
SEE ACCOMPANYING NOTES. 3 BRODERBUND SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATION (IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, ----------------------------------------------------- 1998 1997 1998 1997 ----------------------------------------------------- Net revenues $ 52,476 $ 39,294 $230,296 $145,101 Cost of revenues 21,634 12,868 90,652 50,303 Amortization of purchased technology 2,193 1,427 6,631 3,741 ----------------------------------------------------- Gross margin 28,649 24,999 133,013 91,057 ----------------------------------------------------- Operating expenses: Sales and marketing 22,273 12,615 69,026 37,988 Research and development 9,211 10,578 34,285 27,818 General and administrative 4,906 3,224 16,868 9,740 Charge for acquired in-process technology - - - 9,250 ----------------------------------------------------- Total operating expenses 36,390 26,417 120,179 84,796 ----------------------------------------------------- Income (loss) from operations (7,741) (1,418) 12,834 6,261 Interest and dividend income, net 1,265 1,443 3,435 4,505 Gain (loss) on sale of investment 2,298 (8) 2,311 2 Equity in losses of joint venture - - - (603) ----------------------------------------------------- Income (loss) before income taxes (4,178) 17 18,580 10,165 Provision (benefit) for income taxes (1,516) 6 6,781 4,721 ----------------------------------------------------- Net income (loss) $ (2,662) $ 11 $11,799 $ 5,444 ----------------------------------------------------- ----------------------------------------------------- Basic earnings (loss) per share $ (.13) $ .00 $ 0.57 $ 0.26 ----------------------------------------------------- ----------------------------------------------------- Diluted earnings (loss) per share $ (.13) $ .00 $ 0.56 $ 0.26 ----------------------------------------------------- ----------------------------------------------------- Common shares outstanding 20,949 20,733 20,852 20,673 ----------------------------------------------------- ----------------------------------------------------- Common shares assuming dilution 20,949 21,048 21,231 21,083 ----------------------------------------------------- -----------------------------------------------------
SEE ACCOMPANYING NOTES. 4 BRODERBUND SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited)
NINE MONTHS ENDED MAY 31, ------------------------ 1998 1997 ------------------------ OPERATING ACTIVITIES Net income $ 11,799 $ 5,444 Adjustments to reconcile net income to net cash provided by operating activities: Equity in losses of joint venture - 603 Depreciation and amortization 10,771 6,129 Deferred income taxes (1,273) (2,562) Charge for acquired in-process technology - 9,250 Changes in operating assets and liabilities 4,191 (11,253) ------------------------ Net cash provided by operating activities 25,488 7,611 ------------------------ INVESTING ACTIVITIES Additions to equipment and improvements (2,570) (2,878) Investments in affiliates - (2,683) Purchase of Living Books, net of cash - (7,594) Other (483) (5,382) ------------------------ Net cash used in investing activities (3,053) (18,537) ------------------------ FINANCING ACTIVITIES Repurchase of common stock - (14,574) Employee stock purchase plan 817 891 Exercise of stock options 1,558 841 Tax benefit from exercise of stock options 892 254 ------------------------ Net cash provided by (used in) financing activities 3,267 (12,588) ------------------------ Effect of exchange rate on cash and short-term investments 61 (259) ------------------------ Increase (decrease) in cash and short-term investments 25,763 (23,773) Cash and short-term investments, beginning of period 94,078 150,893 ------------------------ Cash and short-term investments, end of period $119,841 $127,120 ------------------------ ------------------------
SEE ACCOMPANYING NOTES. 5 BRODERBUND SOFTWARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION The condensed consolidated financial statements for Broderbund Software, Inc. (the "Company") for the nine months ended May 31, 1998 and 1997 are unaudited and reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report (Form 10-K) for the year ended August 31, 1997. The results of operations for the three months and nine months ended May 31, 1998 are not necessarily indicative of the results for the entire fiscal year ending August 31, 1998. NOTE 2. RECENTLY ISSUED ACCOUNTING PRINCIPLES In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and displaying of comprehensive income and its components. The Company will adopt SFAS No. 130 effective September 1, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes new requirements for the reporting of information regarding operating segments, products, services, geographic areas and major customers. The Company will adopt SFAS No. 131 effective September 1, 1998. In October 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." SOP 97-2 establishes standards relating to the recognition of all aspects of software revenue. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company does not expect the adoption of SOP 97-2 to have a material impact on the Company's consolidated results of operations. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes standards relating to the capitalization of internal use software. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company does not expect adoption of SOP 98-1 to have a material impact on the Company's consolidated results of operations. NOTE 3. EARNINGS PER SHARE The FASB issued SFAS No. 128, Earnings Per Share, effective for periods ending after December 15, 1997. Beginning the second quarter of fiscal 1998, the Company adopted the new standard and has restated prior period amounts to "basic" and "diluted" earnings per share. "Basic" earnings per share is calculated by dividing net income or loss by the weighted average common shares outstanding during the period. "Diluted" earnings per share reflect the net incremental shares that would be issued if outstanding stock options were exercised. 6 In the case of a net loss, it is assumed that no incremental shares would be issued because they would be anti-dilutive. In addition, certain options are considered anti-dilutive because the options' exercise price is above the average market price during the period. Anti-dilutive shares are not included in the computation of diluted earnings per share, in accordance with SFAS No. 128. The following table reflects the total potentially diluted shares that would be outstanding if such anti-dilutive shares were included. (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, --------------------------------------------------- 1998 1997 1998 1997 --------------------------------------------------- Weighted average common shares outstanding 20,949 20,733 20,852 20,673 Incremental shares - Stock options 197 315 379 410 --------------------------------------------------- Diluted shares assuming net income 21,146 21,048 21,231 21,083 Options with exercise price greater than market price 2,880 2,447 2,368 3,558 --------------------------------------------------- Total potentially diluted shares 24,026 23,495 23,599 24,641 --------------------------------------------------- ---------------------------------------------------
NOTE 4. SUBSEQUENT EVENT On June 22, 1998 the Company announced that it had entered into a definitive merger agreement with The Learning Company, Inc. (TLC). Pursuant to the agreement, subject to certain conditions described below, TLC will issue 0.80 shares of its common stock for each outstanding share of the Company's common stock. Based on the closing price of TLC's common stock on June 19, 1998, this exchange ratio implies a purchase price of $20 per share and an aggregate transaction value of approximately $420 million. The closing of the transaction is subject to certain conditions, including expiration of applicable waiting periods under pre-merger notification regulations and the approval of stockholders of both companies. The Boards of Directors of both companies have approved the transaction. The transaction is anticipated to be accounted for using the pooling-of-interests method. 7 EX-99.2 4 EXHIBIT 99.2 UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed consolidated financial statements assume a business combination between TLC and Broderbund accounted for using the pooling-of-interests method and are based upon the respective historical consolidated financial statements and the notes thereto of TLC and Broderbund, as well as the historical combined financial statements of Mindscape Group (as defined in the accompanying notes), all of which are incorporated by reference in this Joint Proxy Statement/Prospectus. All amounts presented in these pro forma combined condensed consolidated financial statements are in thousands of dollars, except for share and per share data. The pro forma combined condensed consolidated financial statements reflect the pro forma financial position of the combining entities as of March 31, 1998 and the pro forma results of operations for the three months ended March 31, 1998 and each of the three years in the period ended December 31, 1997. In preparing the pro forma combined condensed consolidated balance sheet, Broderbund's balance sheet as of February 28, 1998 has been combined with TLC's balance sheet as of March 31, 1998. The following periods have been combined for purposes of preparing the pro forma combined condensed consolidated statements of operations. Broderbund's results for the three months ended February 28, 1998 have been combined with TLC's results for the Three Months Ended March 31, 1998 and Mindscape's results for the period from January 1, 1998 to March 4, 1998; Broderbund's results for the twelve months ended November 30, 1997 have been combined with TLC's and Mindscape's results for the Year Ended December 31, 1997; Broderbund's results for the fiscal year ended August 31, 1996 have been combined with TLC's results for the Year Ended December 31, 1996; and Broderbund's results for the fiscal year ended August 31, 1995 have been combined with TLC's results for the Year Ended December 31, 1995. The pro forma combined condensed consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or operating results that would have been achieved if the Merger had been consummated as of the beginning of the periods presented, nor are they necessarily indicative of the future financial position or operating results of TLC. No pro forma adjustments are required to conform the financial reporting policies of TLC and Broderbund for the periods presented. However, on a prospective basis, TLC expects to review the accounting practices of Broderbund to ensure consistency with those of TLC. The pro forma combined condensed consolidated financial information does not give effect to any cost savings or restructuring and integration costs which may result from the integration of TLC's and Broderbund's operations. Such costs related to restructuring and integration have not yet been determined and TLC expects to charge such costs to operations during the quarter in which the proposed Merger of TLC and Broderbund is consummated. TLC expects to incur Merger related pre-tax charges for the transaction costs of the Merger, and for other related costs, principally in the quarter in which the Merger is consummated. Such pre-tax transaction charges are currently estimated to be $6 million and will include the direct transaction costs of the Merger, including primarily fees to financial advisors, legal counsel and independent accountants as well as printing costs. These pro forma combined condensed consolidated financial statements are based on, and should be read in conjunction with, the historical consolidated financial statements and the related notes thereto of TLC and Broderbund, as well as the historical combined financial statements of Mindscape Group, all of which are incorporated by reference in this Joint Proxy Statement/Prospectus. See "Available Information" and "Incorporation of Certain Documents by Reference." 74 THE LEARNING COMPANY, INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (In thousands) (Unaudited)
Pro Forma Combined Broderbund Adjustments Pro Forma ---------------- ----------- -------------- The Learning Company -------------- March 31, 1998 February 28, 1998 March 31, 1998 ASSETS CURRENT ASSETS: Cash and short-term investments $ 107,710 $ 137,058 $ -- $ 244,768 Accounts receivable, net 94,428 11,505 -- 105,933 Inventories 38,087 7,892 -- 45,979 Other current assets 45,289 28,219 -- 73,508 -------------- -------- ----------- -------------- 285,514 184,674 -- 470,188 Fixed assets and other, net 37,224 30,593 -- 67,817 Goodwill and other intangible assets, net 143,085 16,236 -- 159,321 -------------- -------- ----------- -------------- $ 465,823 $ 231,503 $ -- $ 697,326 -------------- -------- ----------- -------------- -------------- -------- ----------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities $ 169,274 $ 63,868 $ 6,000(a) $ 239,142 -------------- -------- ----------- -------------- LONG-TERM OBLIGATIONS: Long-term debt 287,650 -- -- 287,650 Accrued and deferred income taxes 58,512 -- -- 58,512 Other 9,414 1,950 -- 11,364 -------------- -------- ----------- -------------- 355,576 1,950 -- 357,526 STOCKHOLDERS' EQUITY (DEFICIT) (59,027) 165,685 (6,000)(a) 100,658 -------------- -------- ----------- -------------- $ 465,823 $ 231,503 $ -- $ 697,326 -------------- -------- ----------- -------------- -------------- -------- ----------- --------------
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 75 THE LEARNING COMPANY, INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (In thousands, except share and per share amounts) (Unaudited)
The Learning Mindscape Pro Forma Combined Company (Preacquisition) Broderbund Adjustments Pro Forma ------------------- ----------------- ------------------- ------------- -------------- Period from January 1, 1998 Three Months Three Months Ended to Three months ended Ended March 31, 1998 March 4, 1998 February 28, 1998 March 31, 1998 REVENUES $ 113,602 $ 9,090 $ 78,623 $ -- $ 201,315 COSTS AND EXPENSES: Costs of production 33,964 9,846 34,381 -- 78,191 Sales and marketing 28,145 15,869 19,734 -- 63,748 General and administrative 7,574 3,013 5,078 -- 15,665 Development and software costs 10,993 5,446 12,062 -- 28,501 Amortization, merger and other charges 156,820 19,186 2,217 1,748(b) 179,971 ------------------- ----------------- ------------------- ------------- -------------- Total operating expenses 237,496 53,360 73,472 1,748 366,076 ------------------- ----------------- ------------------- ------------- -------------- OPERATING INCOME (LOSS) (123,894) (44,270) 5,151 (1,748) (164,761) INTEREST AND OTHER INCOME (EXPENSE), NET (5,514) 6 965 -- (4,543) ------------------- ----------------- ------------------- ------------- -------------- INCOME (LOSS) BEFORE TAXES (129,408) (44,264) 6,116 (1,748) (169,304) PROVISION FOR INCOME TAXES -- 1,066 2,232 -- 3,298 ------------------- ----------------- ------------------- ------------- -------------- NET INCOME (LOSS) $ (129,408) $ (45,330) $ 3,884 $ (1,748) $ (172,602) ------------------- ----------------- ------------------- ------------- -------------- ------------------- ----------------- ------------------- ------------- -------------- NET INCOME (LOSS) PER SHARE: Basic $ (2.45) $ (4.97) $ .23 $ (2.20) Diluted $ (2.45) $ (4.97) $ .23 $ (2.20) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 52,732,000 9,117,600(d) 16,697,600(d) 78,547,200(d) Diluted 52,732,000 9,117,600(d) 17,000,000(d) 78,547,200(d)
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 76 THE LEARNING COMPANY, INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (In thousands, except share and per share amounts) (Unaudited)
The Learning Mindscape Pro Forma Combined Company (Preacquisition) Broderbund Adjustments Pro Forma ------------- -------------- ------------- -------------- ------------- December 31, December 31, November 30, December 31, 1997 1997 1997 1997 REVENUES $ 392,438 $ 138,520 $ 228,493 $ -- $ 759,451 COSTS AND EXPENSES: Costs of production 111,703 54,515 77,516 -- 243,734 Sales and marketing 86,621 43,771 70,176 -- 200,568 General and administrative 31,135 8,035 17,581 -- 56,751 Development and software costs 41,018 22,853 48,969 112,840 Amortization, merger and other charges 515,016 15,625 37,910 10,485(b) 570,036 (9,000 (c) ------------- -------------- ------------- -------------- ------------- Total operating expenses 785,493 144,799 252,152 1,485 1,183,929 ------------- -------------- ------------- -------------- ------------- OPERATING LOSS (393,055) (6,279) (23,659) (1,485) (424,478) INTEREST AND OTHER INCOME (EXPENSE), NET (21,378) (531) 5,226 -- (16,683) ------------- -------------- ------------- -------------- ------------- LOSS BEFORE TAXES (414,433) (6,810) (18,433) (1,485) (441,161) PROVISION (BENEFIT) FOR INCOME TAXES 61,234 -- (6,633) -- 54,601 ------------- -------------- ------------- -------------- ------------- NET LOSS $ (475,667) $ (6,810) $ (11,800) $ (1,485) $ (495,762) ------------- -------------- ------------- -------------- ------------- ------------- -------------- ------------- -------------- ------------- NET LOSS PER SHARE: Basic and Diluted $ (9.59) $ (.75) $ (.71) $ (6.58) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic and Diluted 49,613,000 9,117,600(d) 16,569,900(d) 75,300,500(d)
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 77 THE LEARNING COMPANY, INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (In thousands, except share and per share amounts) (Unaudited)
The Learning Pro Forma Combined Company Broderbund Adjustments Pro Forma ------------- ------------- -------------- ------------- December 31, August 31, December 31, 1996 1996 1996 REVENUES $ 343,321 $ 186,207 $ -- $ 529,528 COSTS AND EXPENSES: Costs of Production 91,045 58,259 -- 149,304 Sales and marketing 67,690 34,381 -- 102,071 General and administrative 28,550 11,256 -- 39,806 Development and software costs 36,018 29,244 -- 65,262 Amortization, merger and other charges 501,330 (6,810) 9,000(c) 503,520 ------------- ------------- -------------- ------------- Total operating expenses 724,633 126,330 9,000 859,963 ------------- ------------- -------------- ------------- OPERATING INCOME (LOSS) (381,312) 59,877 (9,000) (330,435) INTEREST AND OTHER INCOME (EXPENSE), NET (24,139) 6,716 -- (17,423) ------------- ------------- -------------- ------------- INCOME (LOSS) BEFORE TAXES (405,451) 66,593 (9,000) (347,858) PROVISION FOR INCOME TAXES -- 29,816 -- 29,816 ------------- ------------- -------------- ------------- NET INCOME (LOSS) $ (405,451) $ 36,777 $ (9,000) $ (377,674) ------------- ------------- -------------- ------------- ------------- ------------- -------------- ------------- NET INCOME (LOSS) PER SHARE: Basic $ (9.94) $ 2.22 $ (6.59) Diluted $ (9.94) $ 2.14 $ (6.59) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 40,801,000 16,545,600(d) 57,346,600(d) Diluted 40,801,000 17,207,200(d) 57,346,600(d)
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 78 THE LEARNING COMPANY, INC. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands, except share and per share amounts) (Unaudited)
The Learning Combined Company Broderbund Pro Forma ------------- ------------- ------------- December 31, August 31, December 31, 1995 1995 1995 REVENUES $ 167,042 $ 171,594 $ 338,636 COSTS AND EXPENSES: Costs of production 53,070 60,997 114,067 Sales and marketing 38,370 25,143 63,513 General and administrative 20,813 11,085 31,898 Development and software costs 12,487 22,784 35,271 Amortization, merger and other charges 103,172 95 103,267 ------------- ------------- ------------- Total operating expenses 227,912 120,104 348,016 OPERATING INCOME (LOSS) (60,870) 51,490 (9,380) INTEREST AND OTHER INCOME, NET 705 10,250 10,955 ------------- ------------- ------------- INCOME (LOSS) BEFORE TAXES (60,165) 61,740 1,575 PROVISION FOR INCOME TAXES 5,795 25,553 31,348 ------------- ------------- ------------- NET INCOME (LOSS) $ (65,960) $ 36,187 $ (29,773) ------------- ------------- ------------- ------------- ------------- ------------- NET INCOME (LOSS) PER SHARE: Basic $ (2.65) $ 2.26 $ (.73) Diluted $ (2.65) $ 2.15 $ (.73) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 24,855,000 16,021,600(d) 40,876,600(d) Diluted 24,855,000 16,829,600(d) 40,876,600(d)
The accompanying notes are an integral part of these pro forma combined condensed consolidated financial statements. 79 THE LEARNING COMPANY, INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) (Unaudited) A. PRO FORMA BASIS OF PRESENTATION AND ADJUSTMENTS The unaudited pro forma combined condensed consolidated financial statements assume a business combination between The Learning Company, Inc. ("TLC") and Broderbund Software, Inc. ("Broderbund") accounted for using the pooling-of-interests method and are based upon the respective historical consolidated financial statements and the notes thereto of TLC and Broderbund, as well as the historical combined financial statements of Mindscape Group. Pursuant to the Merger Agreement, TLC will issue 0.80 shares (the "Exchange Ratio") of TLC Common Stock in exchange for each outstanding share of Broderbund Common Stock, upon consummation of the Merger. TLC expects to account for the proposed Merger using the pooling-of-interests method. On March 27, 1998, pursuant to a Stock Purchase Agreement, dated as of March 5, 1998 (the "Mindscape Agreement"), by and between TLC, on the one hand, and Mindscape Holding Company, Pearson Overseas Holdings Ltd. and Pearson Netherlands, BV (collectively, the "Sellers"), on the other hand, TLC completed its acquisition from the Sellers of all of the outstanding capital stock of Mindscape, Inc., Mindscape International Ltd. and Mindscape France SARL (collectively, "Mindscape" or "Mindscape Group"). Prior to any potential adjustment in accordance with the terms of the Mindscape Agreement, the total purchase price for the acquisition was $155,854, including cash, other consideration consisting of TLC Common Stock, transaction related costs and net liabilities assumed. The purchase price is subject to adjustment based upon the balance of Mindscape's working capital, as defined in the Mindscape Agreement, at the closing date of the acquisition. TLC Common Stock issued to the Sellers in connection with the acquisition of Mindscape and the special warrants of TLC's Canadian subsidiary, Softkey Software Products Inc. ("SoftKey"), issued in connection with the financing of the acquisition (assuming exercise of SoftKey's special warrants for SoftKey's exchangeable non-voting shares (the "TLC Exchangeable Shares") and exchange thereof for TLC Common Stock) represent, in the aggregate, approximately 9,117,600 shares of TLC Common Stock. TLC accounted for the acquisition using the purchase method. TLC's fiscal year is the 52 or 53 weeks ending on or after December 31. For clarity of presentation herein, with regard to TLC, all references to March 31, 1998 relate to balances as of April 4, 1998, all references to December 31, 1997 relate to balances as of January 3, 1998, the period from January 4, 1998 to April 4, 1998 is referred to as the Three Months Ended March 31, 1998, the period from January 5, 1997 to January 3, 1998 is referred to as the Year Ended December 31, 1997, the period from January 7, 1996 to January 4, 1997 is referred to as the Year Ended December 31, 1996 and the period from January 1, 1995 to January 6, 1996 is referred to as the Year Ended December 31, 1995. Broderbund's fiscal year ends on August 31. In preparing the pro forma combined condensed consolidated balance sheet, Broderbund's balance sheet as of February 28, 1998 has been combined with TLC's balance sheet as of March 31, 1998. The following periods have been combined for purposes of preparing these pro forma combined condensed consolidated statements of operations. Broderbund's results for the three months ended February 28, 1998 have been combined with TLC's results for the Three Months Ended March 31, 1998 and Mindscape's results for the period from January 1, 1998 to March 4, 1998; Broderbund's results for the twelve months ended November 30, 1997 have been combined with TLC's and Mindscape's results for the Year Ended December 31, 1997; Broderbund's results for the fiscal 80 THE LEARNING COMPANY, INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share amounts) (Unaudited) year ended August 31, 1996 have been combined with TLC's results for the Year Ended December 31, 1996; and Broderbund's results for the fiscal year ended August 31, 1995 have been combined with TLC's results for the Year Ended December 31, 1995. Broderbund's statement of operations for the twelve months ended November 30, 1997 has been compiled from Broderbund's unaudited condensed consolidated statements of operations for the quarterly periods ended November 30, 1997, August 31, 1997, May 31, 1997 and February 28, 1997. Broderbund's results of operations for the three months ended November 30, 1996 have been excluded from the pro forma combined condensed consolidated statements of operations. Broderbund's unaudited revenues, operating income and net income were $61,491, $13,518 and $8,895, respectively, in that period. The pro forma combined condensed consolidated balance sheet sets forth the pro forma financial position of TLC and Broderbund at March 31, 1998 as if the proposed merger of TLC and Broderbund had occurred on March 31, 1998. The pro forma combined condensed consolidated statements of operations for the Three Months Ended March 31, 1998 and the Year Ended December 31, 1997 set forth the pro forma results of operations of TLC, Mindscape and Broderbund as if the acquisition of Mindscape by TLC and the proposed merger of TLC and Broderbund had occurred at the beginning of that three month period and year, respectively. The pro forma combined condensed consolidated statements of operations for the Years Ended December 31, 1996 and 1995 set forth the pro forma results of operations of TLC and Broderbund, as if the proposed merger of TLC and Broderbund had occurred at the beginning of each of those years, respectively. The pro forma combined condensed consolidated financial statements are unaudited, are intended for informational purposes and are not necessarily indicative of the consolidated financial position or results of operations of the combined entity which would have been reported had either the acquisition of Mindscape by TLC or the proposed merger of TLC and Broderbund occurred at the beginning of the periods presented, nor are they necessarily indicative of the future consolidated financial position or results of operations of the combined entity upon consummation of the proposed merger. These pro forma combined condensed consolidated financial statements should be read in conjunction with TLC's consolidated financial statements included in TLC's Quarterly Report on Form 10-Q for the quarterly period ended April 4, 1998 and TLC's Annual Report on Form 10-K for the fiscal year ended January 3, 1998; Mindscape Group's combined financial statements included in TLC's Amendment No. 4 to Current Report on Form 8-K/A dated March 27, 1998; Broderbund's consolidated financial statements included in Broderbund's Quarterly Reports on Form 10-Q for the quarterly periods ended February 28, 1998, November 30, 1997, May 31, 1997, February 28, 1997 and November 30, 1996 and Broderbund's Annual Report on Form 10-K for the fiscal year ended August 31, 1997. B. PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (a) The pro forma adjustment to current liabilities and stockholders' equity (deficit), in the amount $6,000, reflects accruals in connection with the estimated transaction costs related to the proposed Merger of TLC and Broderbund. These estimated transaction costs consist primarily of fees to financial advisors, legal counsel and independent accountants as well as printing costs. These costs are not considered in the 81 THE LEARNING COMPANY, INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share amounts) (Unaudited) pro forma combined condensed consolidated statements of operations. These estimated transaction costs will be charged against the results of operations during the quarter in which the proposed Merger of TLC and Broderbund is consummated. (b) In connection with the acquisition of Mindscape by TLC, TLC recorded goodwill and other intangible assets, in the amount of $52,854, which reflected the allocation of the purchase price for that acquisition to brands and trade names, in the amount of $30,000, completed technology and products, in the amount of $13,000, and goodwill, in the amount of $9,854. The allocation of the purchase price reflected a nonrecurring charge, in the amount of $103,000, for the fair value of in-process research and development. The nonrecurring charge, in the amount of $103,000, for the fair value of in-process research and development is not considered in the pro forma combined condensed consolidated statement of operations for the Year Ended December 31, 1997. In connection with the acquisition of Mindscape by TLC, for the Three Months Ended March 31, 1998 and the Year Ended December 31, 1997, the pro forma adjustments to amortization, merger and other charges in the amounts of $1,748 and $10,485, respectively, reflect amortization of the identified intangible assets acquired and goodwill over the estimated useful lives of the assets on a straight-line basis. The estimated useful lives of brands and trade names, completed technology and products and goodwill are ten, two and ten years, respectively. (c) In December 1995, the Former Learning Company terminated an agreement to merge with Broderbund and merged with TLC. In connection with the termination of the agreement with Broderbund, the Former Learning Company paid a termination fee, in the amount of $18,000, to Broderbund, which was included in TLC's allocation of the purchase price for the Former Learning Company and amortized over two years. The pro forma adjustment, in the amount of $9,000 for the Year Ended December 31, 1996, reflects elimination of the $18,000 termination fee, net of the corresponding reduction in amortization of goodwill in connection with TLC's purchase of the Former Learning Company. The pro forma adjustment, in the amount of $9,000 for the Year Ended December 31, 1997, reflects elimination of the remaining amortization of goodwill which resulted from the termination fee. There were no other significant intercorporate transactions which required elimination. (d) In connection with the acquisition of Mindscape by TLC, for the Three Months Ended March 31, 1998 and the Year Ended December 31, 1997, the pro forma adjustments to the weighted average number of shares outstanding reflect the issuance of TLC Common Stock and SoftKey's special warrants (assuming exercise of SoftKey's special warrants for TLC Exchangeable Shares and exchange thereof for TLC Common Stock), which represent in the aggregate approximately 9,117,600 shares of TLC Common Stock. Based upon the terms of the Mindscape Agreement, as amended, $30,000 of the purchase price was paid to the Sellers in TLC Common Stock. The number of shares of TLC Common Stock issued to the Sellers was based upon the average closing price of TLC Common Stock during the five trading days ended two days prior to the closing date of the acquisition. Accordingly, TLC issued 1,366,700 shares of TLC Common Stock to the Sellers in connection with the acquisition of Mindscape by TLC. On March 6, 1998, SoftKey agreed to sell to certain Canadian institutional investors 8,687,500 special warrants for proceeds of approximately $134,500. The pro forma adjustments for the Three Months Ended March 31, 1998 and the Year Ended December 31, 1997 reflect TLC's receipt and use of $120,000 of the proceeds in connection with the acquisition of Mindscape by TLC. Each SoftKey special warrant is 82 THE LEARNING COMPANY, INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share amounts) (Unaudited) exercisable without additional payment for one TLC Exchangeable Share. TLC has issued a special voting share (the "Voting Share") which has a number of votes equal to the number of TLC Exchangeable Shares outstanding (other than TLC Exchangeable Shares owned by TLC or any entity controlled by TLC), and which may be voted by a trustee on behalf of such holders of TLC Exchangeable Shares. The holder of the Voting Share is not entitled to dividends and, upon receiving voting instructions from holders of the TLC Exchangeable Shares, shall vote with the common stockholders as a single class. The TLC Exchangeable Shares are exchangeable on a one-for-one basis for TLC Common Stock without additional payment. The exercise of the special warrants for TLC Exchangeable Shares is subject to certain conditions, including receipt of certain regulatory approvals. In connection with the acquisition of Mindscape by TLC and for presentation in the pro forma combined condensed consolidated statements of operations for the Three Months Ended March 31, 1998 and Year Ended December 31, 1997, TLC included 1,366,700 shares of TLC Common Stock issued to the Sellers and the issuance of special warrants for $120,000, representing approximately 7,750,900 shares of TLC Common Stock, in the computation of basic and diluted earnings per share as if the special warrants had been exercised for TLC Exchangeable Shares, the TLC Exchangeable Shares had been exchanged for TLC Common Stock and the Sellers' TLC Common Stock had been issued at the beginning of that three month period and year, respectively. In connection with the proposed Merger of TLC and Broderbund and for presentation in the pro forma combined condensed consolidated statements of operations for all periods presented, TLC included the issuance of the number of TLC's common shares that would have been issued at the Exchange Ratio based upon the weighted average number of shares of Broderbund Common Stock outstanding in each period in the computation of basic and diluted earnings. The computation of earnings per share in the pro forma combined condensed consolidated statements of operations for all periods presented reflects all adjustments necessary for presentation in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. For clarity of presentation herein, the following table sets forth the authorized, issued and outstanding capital stock of TLC as of March 31, 1998, and on a pro forma basis as of March 31, 1998 to reflect (i) the issuance of SoftKey's special warrants (assuming exercise of SoftKey's special warrants for TLC Exchangeable Shares and exchange thereof for TLC Common Stock) which represent approximately 7,750,900 shares of TLC Common Stock in connection with the acquisition of Mindscape by TLC and (ii) the issuance of approximately 16,747,300 shares of TLC Common Stock in connection with the proposed Merger of TLC and Broderbund. 83 THE LEARNING COMPANY, INC. NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share amounts) (Unaudited)
SERIES A PREFERRED STOCK COMMON STOCK SPECIAL VOTING STOCK -------------- --------------------------- ---------------------------------- REPRESENTING THE SHARES SHARE VOTING RIGHTS AUTHORIZED, SHARES AUTHORIZED, OF ISSUED ISSUED ISSUED OUTSTANDING TLC AND SHARES AND AND EXCHANGEABLE OUTSTANDING AUTHORIZED OUTSTANDING OUTSTANDING SHARES -------------- ------------- ------------ ----------------- --------------- TLC, March 31, 1998................. 750,000 120,000,000 51,636,020* 1 5,550,929 Pro Forma Adjustments: Mindscape........................... -- -- -- -- 7,750,900 Broderbund.......................... -- -- 16,747,300 -- -- -- ------- ------------- ------------ --------------- TLC, Pro Forma...................... 750,000 120,000,000 68,383,320 1 13,301,829 -- -- ------- ------------- ------------ --------------- ------- ------------- ------------ ---------------
- ------------------------ * Balance includes approximately 1,366,700 shares of TLC Common Stock issued to the Sellers in satisfaction of the stock portion of the purchase price in connection with the acquisition of Mindscape by TLC prior to March 31, 1998. 84 EX-99.3 5 EXHIBIT 99.3 FOR IMMEDIATE RELEASE Monday, August 31, 1998 CONTACTS R. Scott Murray Press Contact: Investor Relations: Chief Financial Officer and Susan Getgood John Suske Executive Vice President (617) 494-5674 (617) 494-5816 (617) 494-5861 sgetgood@learningco.com jsuske@learningco.com smurray@learningco.com The Learning Company, Inc. Completes Merger with Broderbund Software, Inc. CAMBRIDGE, MA - The Learning Company, Inc. (NYSE: TLC) today announced the completion of its previously announced merger with Broderbund Software, Inc. (NASDAQ: BROD). The transaction was approved today by the stockholders of The Learning Company and Broderbund at each company's respective special meeting of stockholders. As a result of the merger, Broderbund has become a wholly-owned subsidiary of The Learning Company. In the merger, each outstanding share of Broderbund common stock was converted into the right to receive 0.8 shares of Learning Company common stock. As of the record date of July 22, 1998 there were 21,024,689 shares of Broderbund common stock outstanding. The transaction is structured as a tax-free reorganization for federal income tax purposes and as a pooling of interests for accounting purposes. Broderbund Software, Inc. develops, publishes and markets a broad line of interactive software for use in homes, schools and small businesses. Its award-winning, major franchises include Carmen Sandiego, The Print Shop, Living Books, and Family Tree Maker Since its founding in 1980, Broderbund has repeatedly broken new ground, conceiving and developing families of software products with enduring customer appeal based on creativity, innovation and ease-of-use. The Learning Company, Inc. (NYSE: TLC) is one of the country's leading developers of consumer software for the entire family. The company publishes some of the best-known education, reference, personal productivity and family entertainment brands in the U.S., including Reader Rabbit, Oregon Trail, Sesame Street, Mavis Beacon, Princeton Review, National Geographic, Compton's, PrintMaster and Chessmaster. The company's products are sold in more than 23,000 retail stores in North America and through multiple distribution channels including school sales, online, direct marketing and OEM. The Learning Company also develops, publishes and distributes products internationally through subsidiaries in France, Germany, the United Kingdom, Holland, Japan and Australia, and with distributors throughout Europe, Latin America and the Pacific Rim. The Company's headquarters are located at One Athenaeum Street, Cambridge, Mass. 02142; telephone 617-494-1200; fax 617-494-1219. The corporate Web site is located at www.learningco.com, and Customer Service can be reached at 617-761-3000. NOTE: All trademarks are the property of their respective holders. -----END PRIVACY-ENHANCED MESSAGE-----