<PAGE>
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)
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
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.
</TABLE>
- ---------------------
* Incorporated by reference from the Registration Statement on Form S-4
(File No.333-59089) of TLC.
<PAGE>
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
<PAGE>
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
<PAGE>
Broderbund Software, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31,
1997 1996
-------- --------
(In thousands
except share data),
<S> <C> <C>
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
========= ========
</TABLE>
See accompanying notes.
27
<PAGE>
Broderbund Software, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended August 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
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
=========== ========== ==========
</TABLE>
See accompanying notes.
28
<PAGE>
Broderbund Software, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Total
--------------------- Retained Stockholders'
Shares Amount Earnings Equity
------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
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
======= ========== ========== =========
</TABLE>
See accompanying notes
29
<PAGE>
Broderbund Software, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended August 31,
1997 1996 1995
--------- ---------- --------
(In thousands)
<S> <C> <C> <C>
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 -- --
========== ========== =========
</TABLE>
See accompanying notes.
30
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number of Exercise Price Price Per
Shares Per Share Share
---------------------------------------------
<S> <C> <C> <C>
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
==========
</TABLE>
38
<PAGE>
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:
<TABLE>
<CAPTION>
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
------------------- ----------- --------------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$ 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
=========== =============== ========= ========== ==============
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
14. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------
November February May August Fiscal
30 28/29 31 31 Year
--------- ----------- ----------- ------------ ----------
In thousands, except for per share data
<S> <C> <C> <C> <C> <C>
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
</TABLE>
42
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31, August 31,
1998 1997
-------------------------
(Unaudited)
<S> <C> <C>
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
-------------------------
-------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
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
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
-----------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
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
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
------------------------
1998 1997
------------------------
<S> <C> <C>
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
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
---------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
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
---------------------------------------------------
---------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
THE LEARNING COMPANY, INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Combined
Broderbund Adjustments Pro Forma
---------------- ----------- --------------
The Learning
Company
--------------
March 31, 1998 February 28, 1998 March 31, 1998
<S> <C> <C> <C> <C>
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
-------------- -------- ----------- --------------
-------------- -------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed consolidated financial statements.
75
<PAGE>
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)
<TABLE>
<CAPTION>
The Learning Mindscape Pro Forma Combined
Company (Preacquisition) Broderbund Adjustments Pro Forma
------------------- ----------------- ------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed consolidated financial statements.
76
<PAGE>
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)
<TABLE>
<CAPTION>
The Learning Mindscape Pro Forma Combined
Company (Preacquisition) Broderbund Adjustments Pro Forma
------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed consolidated financial statements.
77
<PAGE>
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)
<TABLE>
<CAPTION>
The Learning Pro Forma Combined
Company Broderbund Adjustments Pro Forma
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
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)
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed consolidated financial statements.
78
<PAGE>
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)
<TABLE>
<CAPTION>
The Learning Combined
Company Broderbund Pro Forma
------------- ------------- -------------
<S> <C> <C> <C>
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)
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed consolidated financial statements.
79
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
THE LEARNING COMPANY, INC.
NOTES TO PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
SERIES A
PREFERRED
STOCK COMMON STOCK SPECIAL VOTING STOCK
-------------- --------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
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
--
--
------- ------------- ------------ ---------------
------- ------------- ------------ ---------------
</TABLE>
- ------------------------
* 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
<PAGE>
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 [email protected] [email protected]
[email protected]
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.
