<PAGE>
EXHIBIT 99.2
RISK FACTORS
THERE ARE RISKS RELATING TO THE ISSUER'S DISCONTINUATION AND SALE OF ITS
CONSUMER SOFTWARE BUSINESS.
In May 1999, the Issuer acquired The Learning Company, Inc. ("Learning
Company") through a stock-for-stock merger. Learning Company was a developer
and seller of consumer software products for personal computers. Subsequent to
the merger, Learning Company was combined with the Issuer's existing software
business. During 1999 and the first quarter of 2000, Learning Company incurred
substantial operating losses. On March 31, 2000, the Issuer's board of
directors resolved to sell its consumer software business which is comprised
primarily of the assets of Learning Company. The Issuer does not intend,
however, to include control of any of its non-Learning Company brands in any
such sale. As a result of the decision to sell its consumer software business,
the Issuer is reporting its consumer software business as a "discontinued
operation" for U.S. accounting purposes as of March 31, 2000, and the Issuer's
consolidated financial statements have been reclassified to segregate the net
investment in and operating results of the consumer software business. The
Issuer expects to record a net gain for accounting purposes in connection with
the proposed sale of its consumer software business.
The Issuer has engaged a financial advisory firm to sell its consumer
software business. The Issuer's inability to complete the timely sale of its
consumer software business may expose the Issuer to further material operating
losses and restructuring charges related to that business. There can be no
assurance that the Issuer will be able to consummate the sale, or that such
sale can be consummated at a favorable price. In addition, if the proposed
sale is consummated, the Issuer may retain liabilities associated with
Learning Company's prior operations, including employee severance benefits and
indemnification obligations customarily contained in sale agreements.
The description of the Issuer's business contained herein does not
include a description of its consumer software business which the Issuer is
reporting as a discontinued operation for U.S. accounting purposes.
CHANGES IN THE ISSUER'S CREDIT RATING OR THE CREDIT MARKETS COULD INCREASE THE
COST OF SATISFYING ITS LONG-TERM CAPITAL NEEDS.
The Issuer expects to satisfy its future long-term capital needs in part
through a new bank credit facility, the issuance of long-term debt securities
and the Notes. The Issuer repaid U.S.$100 million of its outstanding debt
securities at maturity in May 2000, and in November 2000, the Issuer will be
required to pay back an additional U.S.$200 million of its maturing
convertible long-term debt securities. The Issuer presently intends to enter
into a new U.S.$200 million bank credit facility to replace the debt
securities maturing in November 2000. The interest rate, selling price,
initial offering discount or any premium offered by its bank credit agreement
or its debt securities will be based on a number of factors, including:
1. the Issuer's ratings with major credit rating agencies;
2. the prevailing interest rates being paid by other companies
similar to the Issuer; and
3. the overall condition of the financial and credit markets at the
time of the initial distribution of the debt securities.
The condition of the credit markets and prevailing interest rates have
fluctuated in the past and are likely to fluctuate in the future. Fluctuations
in these factors could make it difficult for the Issuer to sell debt
securities or require it to offer higher interest rates in order to sell new
debt securities. In May 2000, the Issuer, like several other issuers,
postponed a proposed issuance of U.S.$300 million of medium-term notes due to
poor market conditions in the United States.
In addition, credit rating agencies continually revise their ratings for
the companies that they follow, such as the Issuer. The credit rating agencies
also evaluate the consumer products or family entertainment industry as
<PAGE>
a whole and may change their credit rating for the Issuer based on their
overall view of its industry. Recently, the Issuer's credit rating was reduced
by several credit rating agencies and no assurances can be given that its
credit rating will not continue to be reduced. A negative change in the
Issuer's rating could make it more difficult for the Issuer to sell its debt
securities and obtain bank financing, and could require the Issuer to offer
higher interest rates. If the Issuer is required to offer higher interest
rates in order to sell its new debt securities or obtain bank financing, the
increased interest costs could have an adverse effect on its financial
condition and results of operations.
IN RESPONSE TO INDUSTRY TRENDS, THE ISSUER IS IMPLEMENTING A BUSINESS STRATEGY
EMPHASIZING INITIATIVES SUCH AS PRODUCTS INCORPORATING INTERACTIVE FEATURES,
OTHER HIGH TECHNOLOGY PRODUCTS AND THE USE OF MARKETING AND SALES OVER THE
INTERNET.
The Issuer has developed a business strategy to adapt to several trends
that in recent years have combined to change the toy business. These trends
include the increasing use of high technology; the advent of the Internet; the
mass popularity of video games and hand-held electronic games; and the
phenomenon of children outgrowing toys at younger ages, particularly in favor
of interactive and high technology products.
In response to these changes, the Issuer has increased its development of
toys which incorporate technology and interactive features and combined its
traditional brands with new play platforms. There can be no assurance that
this strategy will help the Issuer to increase or maintain its sales or
earnings in the future, or that its investments in these initiatives will be
profitable.
CONSUMER PREFERENCES ARE DIFFICULT TO PREDICT AND THE INTRODUCTION OF NEW
PRODUCTS IS CRITICAL IN THE ISSUER'S INDUSTRY.
The Issuer's business and operating results depend largely upon the
appeal of its toy products. The Issuer's continued success in the toy industry
will depend on its ability to redesign, restyle and extend its existing core
products and product lines and to develop, introduce and gain customer
acceptance of new products and product lines. However, consumer preferences in
this industry are continuously changing and are difficult to predict.
Individual products typically have short life cycles. There can be no
assurance that:
1. any of the Issuer's current products or product lines will
continue to be popular for any significant period of time;
2. any new products and product lines introduced by the Issuer will
achieve an adequate degree of market acceptance; or
3. any new products' life cycles will be sufficient to permit the
Issuer to recover development, manufacturing, marketing and other costs
of the products.
A decline in the popularity of the Issuer's existing products and product
lines or the failure of new products and product lines to achieve and sustain
market acceptance and to produce acceptable margins could have a material
adverse effect on the Issuer's business, financial condition and results of
operations.
THE ISSUER'S BUSINESS IS DEPENDENT ON ITS TWO LARGEST CUSTOMERS, WHICH
TOGETHER ACCOUNTED FOR APPROXIMATELY 36% OF THE ISSUER'S NET SALES IN FISCAL
1999.
A small number of the Issuer's customers account for a large share of its
net sales. For the year ended December 31, 1999, the Issuer's two largest
customers, Wal-Mart and Toys R Us, in the aggregate accounted for
<PAGE>
approximately 36% of net sales (excluding its consumer software business), and
the Issuer's ten largest customers in the aggregate accounted for
approximately 57% of net sales (excluding its consumer software business). If
some of these customers were to cease doing business with the Issuer, or to
significantly reduce the amount of their purchases from the Issuer, it could
have a material adverse effect on the Issuer's business, financial condition
and results of operations.
THE TOY BUSINESS IS SEASONAL AND THEREFORE THE ISSUER'S ANNUAL OPERATING
RESULTS WILL DEPEND, IN LARGE PART, ON ITS SALES DURING THE RELATIVELY BRIEF
HOLIDAY SEASON.
Sales of toy products at retail are seasonal, with a majority of retail
sales occurring during the period from September through December. This
seasonality is increasing as large toy retailers become more efficient in
their control of inventory levels through just-in-time inventory management
systems. As a result, the Issuer's annual operating results will depend, in
large part, on its sales during the relatively brief holiday season. This
seasonal pattern requires significant use of working capital mainly to
manufacture inventory during the year, prior to the holiday season, and
requires accurate forecasting of demand for products during the holiday
season. Failure to accurately predict and respond to consumer demand may have
a material adverse effect on the Issuer's business, financial condition and
results of operations.
THE ISSUER'S SALES AND MANUFACTURING OPERATIONS OUTSIDE THE UNITED STATES
SUBJECTS THE ISSUER TO RISKS NORMALLY ASSOCIATED WITH INTERNATIONAL
OPERATIONS.
The Issuer owns and operates manufacturing facilities and utilizes third-
party manufacturers principally in China, Indonesia, Malaysia and Mexico. Such
sales and manufacturing operations are subject to the risks normally
associated with international operations, including:
. currency conversion risks and currency fluctuations;
. limitations, including taxes, on the repatriation of earnings;
. political instability, civil unrest and economic instability;
. greater difficulty enforcing intellectual property rights and weaker
laws protecting such rights;
. greater difficulty and expense in conducting business abroad;
. complications in complying with foreign laws and changes in
governmental policies;
. transportation delays and interruptions; and
. the imposition of tariffs.
These risks could negatively impact the Issuer's international sales and
manufacturing operations, which could have a material adverse effect on its
business, financial condition and results of operations.
All foreign countries in which the Issuer's products are manufactured
currently enjoy "normal trade relations" ("NTR") status under United States
tariff laws, which provides a favorable category of United States import
duties. As a result of continuing concerns in the U.S. Congress regarding
China's human rights policies, and disputes regarding Chinese trade policies,
there has been, and may be in the future, opposition to the annual extension
of NTR status for China. In May 2000, a bill to make China's NTR status
permanent was passed by the House of Representatives and has been placed on
the Senate Legislative Calendar. If the legislation is enacted and if China
accedes to the World Trade Organization as anticipated, this annual threat to
the renewal of China's NTR status would be removed. If the bill is not enacted
and if China were to lose NTR status through a subsequent annual review, the
import duty on toys manufactured in China and imported into the United States
would increase substantially resulting in an increase in costs. Such increases
in import duties and costs could have a material adverse effect on the
Issuer's business, financial condition and results of operations.
<PAGE>
THE ISSUER IS DEPENDENT ON ITS INTELLECTUAL PROPERTY RIGHTS AND NO ASSURANCES
CAN BE GIVEN THAT THE ISSUER WILL BE ABLE TO SUCCESSFULLY PROTECT SUCH RIGHTS.
The Issuer relies on a combination of trade secret, copyright, trademark,
patent and other proprietary rights laws to protect its rights to valuable
intellectual property related to its brands. The Issuer also relies on license
and other agreements to establish ownership rights and to maintain
confidentiality. No assurances can be given that such intellectual property
rights can be successfully asserted in the future or will not be invalidated,
circumvented or challenged. Technological developments and the Internet may
create new risks to the Issuer's ability to protect its intellectual property.
In addition, laws of certain foreign countries in which its products may be
sold do not protect intellectual property rights to the same extent as the
laws of the United States. The failure to protect the Issuer's proprietary
information and any successful intellectual property challenges or
infringement proceedings against the Issuer could have a material adverse
effect on the Issuer's business, financial condition and results of
operations.
THE ISSUER'S BUSINESS MAY SUFFER DUE TO LOSSES OF KEY EMPLOYEES OR IF IT FAILS
TO ATTRACT AND RETAIN ADDITIONAL EMPLOYEES.
Recently, there has been substantial turnover in the Issuer's senior
management. On May 17, 2000, the Issuer announced that its board of directors
had elected Robert A. Eckert as Chairman and Chief Executive Officer. The
Issuer's future success will depend to a significant extent on Mr. Eckert's
successful leadership and the continued service of its remaining senior
management and other key employees and the hiring of new qualified employees.
In general, competition for highly-skilled business, product development,
technical and other personnel is becoming more intense due to lower overall
unemployment rates and competition with other companies. This situation makes
it difficult for the Issuer to retain and attract senior management and other
key employees to all portions of its business. Accordingly, the Issuer expects
to experience increased compensation costs that may not be offset through
either improved productivity or higher prices.
No assurances can be given that the Issuer will be successful in
continuously recruiting new personnel and in retaining existing personnel. The
loss of key employees or the Issuer's inability to attract additional
qualified employees could have a material adverse effect on the Issuer's
business, financial condition and results of operations.
THE ISSUER IS INVOLVED IN SEVERAL LITIGATION MATTERS IN WHICH THE OUTCOME IS
UNCERTAIN AND COULD ENTAIL SIGNIFICANT EXPENSE.
As described under "Description of the Issuer--Litigation," the Issuer is
currently involved in a number of litigation matters including a number of
purported securities class action claims stemming from the merger with
Learning Company and the performance of the Learning Company division in the
second half of 1999. The pending litigation against the Issuer and its
directors, regardless of the outcome, may result in substantial costs and
expenses and significantly divert the attention of its management. There can
be no assurance that the Issuer will be able to achieve a favorable settlement
of the pending litigation or obtain a favorable resolution of such litigation
if it is not settled. An unfavorable resolution of the pending litigation
could have a material adverse effect on the Issuer's business, financial
condition and results of operations.
