<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 4 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): March 27, 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) (IRS Employer Identification No.)
One Athenaeum Street, Cambridge, Massachusetts 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> 2
Item 7 is amended in its entirety as set forth below:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
The audited financial statements of Mindscape Group as of and
for the year ended December 31, 1997 are filed herewith as Exhibit
99.3.
(b) Pro Forma Financial Information
The Unaudited Pro Forma Combined Condensed Consolidated
Financial Statements of the Company as of and for the fiscal year ended
January 3, 1998 are filed herewith as Exhibit 99.4.
(c) Exhibits.
See Index to Exhibits attached hereto.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 28, 1998 THE LEARNING COMPANY, INC.
(Registrant)
By: /s/ Neal S. Winneg
---------------------------------------
Neal S. Winneg
Sr. Vice President and General Counsel
-3-
<PAGE> 4
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2.1 Stock Purchase Agreement, dated as of March 5, 1998, by and
between The Learning Company, Inc. and Mindscape Holding
Company, Pearson Overseas Holdings Ltd. and Pearson
Netherlands, BV, as amended
10.1 Registration Rights Agreement, dated as of March 27, 1998, by
and between The Learning Company, Inc. and Mindscape Holding
Company
99.1 Press Release issued by The Learning Company, Inc. on March 6,
1998
99.2 Press Release issued by The Learning Company, Inc. on
March 27, 1998
99.3* Audited Financial Statements of Mindscape Group as of and for
the year ended December 31, 1997
99.4 The Unaudited Pro Forma Combined Condensed Consolidated
Financial Statements of the Company as of and for the fiscal
year ended January 3, 1998.
- ------
* Filed herewith; all other exhibits previously filed
-4-
<PAGE> 1
Exhibit 99.3
------------
MINDSCAPE GROUP
(Indirect wholly-owned
subsidiaries of Pearson plc)
Combined Financial Statements
December 31, 1997
<PAGE> 2
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
INDEX TO COMBINED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.............................................2
Combined Balance Sheet........................................................3
Combined Statement of Operations..............................................4
Combined Statement of Shareholder's Equity....................................5
Combined Statement of Cash Flows..............................................6
Notes to Combined Financial Statements........................................7
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Mindscape Group
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of the
Mindscape Group at December 31, 1997, and the results of their operations and
their cash flows for the year, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the management
of the Group companies; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
March 2, 1998
2
<PAGE> 4
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
COMBINED BALANCE SHEET
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,331
Accounts receivable, net 33,071
Inventories 9,391
Royalty advances 5,851
Other current assets 1,030
---------
Total current assets 52,674
Property and equipment, net 3,479
Intangible assets, net 2,080
Other assets 1,538
---------
$ 59,771
=========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 11,848
Accrued royalties 6,734
Accrued expenses 15,512
Short-term borrowings - related party 300
---------
Total current liabilities 34,394
---------
Commitments and contingencies (Note 9)
Shareholder's equity:
Preferred Stock, $1.64 par value (aggregate liquidation amount $9,020),
5,500,000 shares authorized, issued and outstanding 9,020
Common Stock, various par values, 8,230,282 shares authorized,
8,229,282 shares issued and outstanding 13,646
Additional paid-in capital 573,092
Accumulated deficit (569,346)
Cumulative translation adjustment (1,035)
---------
Total shareholder's equity 25,377
---------
$ 59,771
=========
</TABLE>
The accompanying notes are in integral part of these combined financial
statements.
3
<PAGE> 5
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
COMBINED STATEMENT OF OPERATIONS
(amounts in thousands)
YEAR ENDED
DECEMBER 31,
1997
------------
Net revenues $ 138,520
Cost of net revenues 54,515
---------
Gross margin 84,005
---------
Costs and expenses:
Selling and marketing 43,771
Research and development 22,853
General and administrative 8,035
Amortization of intangible assets 3,727
Restructuring costs 11,898
---------
Total costs and expenses 90,284
---------
Loss from operations (6,279)
Interest expense - related party (531)
---------
Net loss $ (6,810)
=========
The accompanying notes are in integral part of these combined financial
statements.
4
<PAGE> 6
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
COMBINED STATEMENT OF SHAREHOLDER'S EQUITY
(amounts in thousands except share data)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ------------------ ADDITIONAL CUMULATIVE TOTAL
PAID-IN ACCUMULATED TRANSLATION SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
--------- ------ --------- ------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 - $ - 8,229,282 $13,646 $503,061 $(562,536) $ (13) $(45,842)
Issuance of Preferred Stock
to Shareholder 5,500,000 9,020 - - - - - 9,020
Capital contribution from
Shareholder - - - - 70,031 - - 70,031
Currency translation
adjustment - - - - - - (1,022) (1,022)
Net loss - - - - - (6,810) - (6,810)
--------- ------ --------- ------- -------- --------- ------- --------
Balance at December 31, 1997 5,500,000 $9,020 8,229,282 $13,646 $573,092 $(569,346) $(1,035) $ 25,377
--------- ------ --------- ------- -------- --------- ------- --------
</TABLE>
The accompanying notes are in integral part of these combined financial
statements.
5
<PAGE> 7
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
COMBINED STATEMENT OF CASH FLOWS
(amounts in thousands)
YEAR ENDED
DECEMBER 31,
1997
------------
Cash flows from operating activities:
Net loss $ (6,810)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 3,392
Provision for returns and price protection 29,300
Provision for doubtful accounts 1,315
Amortization of intangible assets 3,727
Provision for restructuring costs 6,697
Acquired in-process technology 975
Changes in assets and liabilities:
Accounts receivable, net (40,408)
Inventories (3,186)
Royalty advances 354
Other current assets (261)
Other assets (836)
Accounts payable 1,977
Accrued royalties (2,616)
Accrued expenses 3,068
--------
Net cash used in operating activities (3,312)
--------
Cash flows from investing activities:
Property and equipment purchases (1,705)
Cash paid for acquired businesses (2,181)
--------
Net cash used in investing activities (3,886)
--------
Cash flows from financing activities:
Short-term borrowings - related party 510
Repayment of short-term borrowings - related party (64)
Issuance of Preferred Stock to Shareholder 9,020
Contribution from Shareholder 331
--------
Net cash provided by financing activities 9,797
--------
Effect of exchange rates on cash (560)
--------
Net increase in cash and cash equivalents 2,039
Cash and cash equivalents at beginning of year 1,292
--------
Cash and cash equivalents at end of year $ 3,331
========
Supplemental disclosure of cash flow information:
Cash paid for interest - related party $ 1,631
========
Supplemental disclosure of noncash financing activity:
Conversion of short-term borrowing - related party to capital $ 69,700
========
The accompanying notes are in integral part of these combined financial
statements.
6
<PAGE> 8
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
NOTE 1 - THE COMPANY:
Mindscape Group (the "Group") develops, markets and distributes
consumer software in the educational, home and entertainment markets. The Group
sells its products in the retail channel through mass merchants, consumer
electronic stores, price clubs, office supply stores, distributors, to original
equipment manufacturers ("OEMs") and to end users through direct response
methods. The Group's principal market is in the United States. The Group has
international operations in the United Kingdom, Germany, France, Australia and
Japan.
NOTE 2 - BASIS OF PRESENTATION:
The current Mindscape, Inc. entity was incorporated originally as the
Software Toolworks ("Toolworks") in Delaware on February 2, 1988. Another
entity, the original Mindscape Inc., was acquired by Toolworks in 1989 when it
was merged with GD Acquisition, Inc., a wholly-owned subsidiary of Toolworks. In
April 1994, the outstanding capital stock of Toolworks was acquired by Pearson,
Inc., the wholly-owned United States subsidiary of Pearson plc for total
consideration of $475,678. On October 24, 1994, the original Mindscape Inc.
entity was merged with and into Toolworks, which simultaneously changed its name
to Mindscape, Inc.
The Toolworks acquisition by Pearson, Inc. was accounted for using the
purchase method. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. A portion of the purchase price was allocated to acquired
in-process technology, which represents the estimated fair value, using a
risk-adjusted income approach, of specifically identified technologies which had
not yet reached technological feasibility and had no alternative future use.
Prior to 1997, Group management assessed the carrying value of goodwill
for possible impairment based on a number of factors, including turnover of the
acquired workforce and the undiscounted value of expected future operating cash
flows in relation to the net carrying amount of goodwill. As a result of this
assessment, Group management determined that the entire net carrying amount of
goodwill associated with the Pearson, Inc. acquisition was impaired and charged
the amount to operations.
7
<PAGE> 9
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
The accompanying combined financial statements include the accounts of
the following entities, which are under the common ownership of the ultimate
parent, Pearson plc (collectively the Mindscape Group):
MINDSCAPE, INC. ("MINDSCAPE US") - Mindscape US is headquartered in
Novato, California and is responsible for worldwide product development,
publishing, management and North American sales and marketing.
MINDSCAPE INTERNATIONAL LIMITED ("MINDSCAPE UK") - Mindscape UK is
headquartered in West Sussex, England and operates as the Group's primary
European sales and marketing entity.
MINDSCAPE INTERNATIONAL SOFTWAREVERTRIEB GMBH ("MINDSCAPE GERMANY") -
Mindscape Germany is headquartered in Muelheim, Germany and operates as the
Group's German sales and marketing entity.
MINDSCAPE INTERNATIONAL PTY LIMITED ("MINDSCAPE AUSTRALIA") - Mindscape
Australia is headquartered in Castle Hill, New South Wales, Australia and
operates as the Group's primary Australian and Asia Pacific sales and marketing
entity.
MINDSCAPE INTERNATIONAL JAPAN, LNC. ("MINDSCAPE JAPAN") - Mindscape
Japan is a dormant entity with insignificant activity.
MINDSCAPE FRANCE SARL ("MINDSCAPE FRANCE") - Mindscape France is
headquartered in Rennes, France and operates as the Group's primary French sales
and marketing entity.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
the Mindscape Group. All significant intercompany balances and transactions have
been eliminated.
8
<PAGE> 10
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are primarily derived from the sale of software products and
from software licensing to OEMs.
Revenues from the sale of software products are recognized upon
shipment, provided that no significant obligations remain outstanding and
collection of the related receivable is considered probable. Costs related to
insignificant post-shipment technical support and other obligations are accrued
when revenue is recognized for the sale of related products. Allowances for
estimated returns and doubtful accounts are provided at the time of sale. The
Group evaluates the adequacy of allowances for returns and doubtful accounts
based upon its historical experience with customers and various distributions
channels. The amounts provided for returns and allowances are estimates and are
based upon information available at the reporting date. To the extent the future
market, sell-through experience, channels of distribution and general economic
conditions change, the provisions required for estimated returns and allowances
may also change.
Revenues from software licensing to OEMs are recognized on a
sell-through basis upon cash receipt and completion of any significant
obligations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term highly liquid investments
with original maturities of three months or less when purchased.
9
<PAGE> 11
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
INVENTORIES
Inventories consist of raw materials for packaging and finished goods
and are stated at the lower of cost, determined on a first-in, first-out basis,
or market value.
ROYALTY ADVANCES
Royalty advances represent prepayments made to independent software
developers under development agreements and are expensed at the contractual
royalty rate as cost of sales based on actual net product sales. Management
evaluates the future realization of royalty advances at each reporting period,
and charges to research and development expense any amounts that are unlikely to
be amortized at the contract royalty rate through product sales. During the year
ended December 31, 1997, the Group recorded charges to restructuring costs of
$6,312 for development efforts abandoned prior to achieving technological
feasibility.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
provided for using the straight-line method over the estimated useful lives of
three years for all assets.
INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net
assets acquired in acquisitions of various third party software companies.
Management estimates that such goodwill is primarily associated with the
acquired product, workforce and technological know how. As a result of the rapid
technological changes occurring in the consumer software industry and the
intense competition for qualified software professionals, recorded goodwill is
amortized on a straight-line basis over the estimated periods of benefit,
generally three years.
In the event that facts and circumstances indicate that the carrying
value of recorded goodwill may be impaired, the estimated future undiscounted
cash flows associated with the goodwill are compared to the goodwill's carrying
amount. If the carrying amount of the goodwill is greater than the undiscounted
cash flows, then the cash flows are discounted and the carrying amount is
written down to its
10
<PAGE> 12
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
discounted cash flow value. During the year ended December 31, 1997, the Group's
analysis did not identify any material goodwill impairment.
Costs of in-process technology acquired prior to the achievement of
technological feasibility, determined using the working model approach, are
expensed in the period incurred. During the year ended December 31, 1997, the
Group charged $975 to research and development expense associated with the
acquisition of certain technology assets.
INCOME TAXES
Income taxes are accounted for on a separate return basis using an
asset and liability approach which requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in the Group's
financial statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of the enacted tax law; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
As discussed in Note 7, through December 31, 1997, the Group companies
operated as reporting units of Pearson plc and were included in the consolidated
tax returns of Pearson plc and its subsidiaries. Certain net operating losses
generated by the Group have been utilized by Pearson plc or its subsidiaries.
Accordingly, the consolidated income tax benefits realized by Pearson plc have
been reflected as capital contributions in the accompanying combined financial
statements.
SOFTWARE DEVELOPMENT COSTS
Financial accounting standards provide for the capitalization of
certain software development costs after technological feasibility of the
software is attained. The capitalized software costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. No costs
were capitalized during the year ended December 31, 1997, as the impact on the
combined financial statements was not considered significant.
11
<PAGE> 13
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Group's foreign operations is the local
currency of each respective Group company. Assets and liabilities of each
foreign operation are translated into U.S. dollars at exchange rates in effect
at the balance sheet date. Income and expense items are translated at average
exchange rates during the period. Cumulative translation adjustments are
recorded in shareholder's equity. At December 31, 1997, the carrying amount of
cash and cash equivalents was denominated entirely in foreign currencies.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Group to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are deposited with high
credit quality financial institutions. The Group's revenues are derived from
transactions with customers in the United States, United Kingdom, Germany,
Australia and France. Concentrations of credit risk with respect to trade
receivables are mitigated, to some extent, by the fact that the Group's customer
base is highly diversified.
At December 31, 1997, two customers each accounted for 10 percent of
gross accounts receivable.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The adoption of both statements is required
for fiscal years beginning after December 15, 1997. Under SFAS No. 130,
companies are required to report in the financial statements, in addition to net
income, comprehensive income including, as applicable, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. SFAS No. 131 requires that companies
report separately, in the financial statements, certain financial and
descriptive information about operating segments, if applicable. The Group does
not expect the adoption of SFAS No. 130 or SFAS No. 131 to have a material
impact on its combined financial statements.
12
<PAGE> 14
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
In October 1997, the AICPA issued SoP 97-2, "Software Revenue
Recognition," which provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SoP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997. Earlier application is encouraged as of the beginning of fiscal years
or interim periods for which financial statements or information have not been
issued. Retroactive application of the provisions of this SoP is prohibited. The
Group has assessed the provisions of SoP 97-2 and does not expect that adoption
will have a material impact on its combined financial statements.
In March 1998, the AICPA issued SoP 98-1, "Software for Internal Use,"
which provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SoP 98-1 applies to all nongovernmental
entities and is effective for financial statements for fiscal years beginning
after December 15, 1998. The Group does not expect the adoption of SoP 98-1 to
have a material impact on its combined financial statements.
NOTE 4 - TRANSACTIONS WITH RELATED PARTIES:
SHORT-TERM BORROWINGS
To maintain its cash flow requirements, the Group periodically enters
into short-term borrowing arrangements with various wholly-owned Pearson plc
subsidiaries. Amounts outstanding at December 31, 1997 totaled $300 with
interest rates ranging from 4.0 to 6.5 percent.
During 1997, $69,700 of short-term borrowings from a Pearson plc
affiliate was converted to permanent capital.
ALLOCATION OF CORPORATE OVERHEAD COSTS
Pearson plc and its affiliates provide the Group with certain services,
including insurance, legal, finance and other corporate functions. During 1997,
the Group was not charged for these services as the aggregate amount was
insignificant. The Group is periodically charged a pro rata share of expenses
paid by Pearson plc on its behalf for such items as insurance premiums, audit
fees and other administrative costs. The total costs allocated from Pearson plc
in 1997 totaled $173. Management believes that
13
<PAGE> 15
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
the methodologies used to allocate these charges are reasonable and included
these charges in general and administrative expense.
During 1997, Mindscape US charged Headland Digital Media ("Headland"),
a wholly-owned subsidiary of Pearson plc, $1,096 for rent, utilities,
depreciation, telephone and other costs in connection with the sharing of the
Novato, California facility. In addition, Mindscape US provided Headland with
certain general and administrative services in 1997, including accounting, human
resources, legal, information systems and other services. The allocated costs
for these services totaled $2,046 and are excluded from the accompanying
combined financial statements. Management believes that the methodologies used
to allocate these charges are reasonable.
EMPLOYEE BENEFIT PLANS
Pearson plc has a 401(k) plan covering substantially all of the
Mindscape US employees. Mindscape US contributes 25 percent for every dollar
contributed by Plan participants subject to certain limitations on individual
contributions. Beginning in 1997, the amount Mindscape US contributes each year
will increase from 25 percent to 50 percent for every dollar contributed if
Mindscape US reaches certain specified corporate earnings targets and upon the
discretion of Mindscape US management. Mindscape US's costs of the Plan was $372
in 1997.
Pearson plc has a defined contribution plan covering substantially all
Mindscape UK employees. Employees contribute either 2.5 percent or 5 percent of
base salary and Pearson plc provides a 200 percent matching of the amounts
contributed. There is no charge to Mindscape UK under this plan. Amounts
contributed by Pearson plc were not significant during 1997.
Mindscape UK has a defined contribution plan covering several employees
not covered by the Pearson plc plan. Mindscape UK contributed 5 percent of base
salary for all non-director employees and 10 percent of base salary for all
directors. Mindscape UK's cost of this plan was $35 in 1997.
Mindscape Australia has defined contribution plans covering all
employees. Employer contributions are required at the statutory rate of 6
percent of base salary. Mindscape Australia's cost of the Plan was $13 in 1997.
14
<PAGE> 16
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
NOTE 5 - RESTRUCTURING COSTS:
During 1997, the Group recorded charges of $11,898, in connection with
the termination of 57 research and development employees, the abandonment of
certain development efforts and the partial closure of certain research and
development operations. These costs included accruals for abandoned research and
development projects, severance, office lease termination and other items. As of
December 31, 1997, $3,899 of the charge has not yet been utilized and relates
primarily to long-term real property lease commitments.
NOTE 6 - BALANCE SHEET COMPONENTS:
DECEMBER 31,
1997
------------
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $ 60,878
Less: Allowance for returns and price protection (21,786)
Less: Allowance for doubtful accounts (6,021)
--------
$ 33,071
========
INVENTORIES:
Raw materials $ 3,437
Finished goods 5,954
--------
$ 9,391
========
PROPERTY AND EQUIPMENT, NET:
Machinery and equipment $ 15,054
Leasehold improvements 803
Furniture and fixtures 1,348
--------
17,205
Less: Accumulated depreciation (13,726)
--------
$ 3,479
========
15
<PAGE> 17
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
INTANGIBLE ASSETS, NET:
Goodwill $ 387,718
Less: Accumulated amortization (385,638)
---------
$ 2,080
=========
ACCRUED EXPENSES:
Compensation, benefits and other accruals $ 11,613
Restructuring costs 3,899
---------
$ 15,512
=========
NOTE 7 - INCOME TAXES:
Through December 31, 1997, the Group companies operated as reporting
units of Pearson plc and were included in the consolidated tax returns of
Pearson plc and its subsidiaries. For purposes of preparing these combined
financial statements in accordance with generally accepted accounting
principles, the provisions for income taxes has been computed using the separate
return method as if the Group represented separate taxable entities for all
periods presented.
Certain net operating losses generated by the Group have been utilized
by Pearson plc and its subsidiaries. Accordingly, Pearson plc has allocated the
income tax benefit received to the Group companies and has historically
reflected these amounts as capital contributions.
No provision for federal, foreign and state taxes has been recorded as
the Group has incurred net operating losses through December 31, 1997. At
December 31, 1997, the Group has federal and state net operating loss
carryforwards of approximately $105,000 and $16,000, respectively, which will
expire in varying amounts through 2012. Such carryforwards may be limited in
certain circumstances including, but not limited to, cumulative stock ownership
changes of more than 50 percent over a three-year period.
Pretax loss was subject to tax in the following jurisdictions:
16
<PAGE> 18
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
YEAR ENDED
DECEMBER 31,
1997
------------
United States $ 274
Foreign (7,084)
-------
$(6,810)
=======
Deferred tax assets may be recognized for temporary differences that
will result in deductible amounts in future periods, net operating loss
carryforwards and other future tax benefits. A valuation allowance is recognized
if, on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. At December 31,
1997, the deferred tax asset valuation allowance is established at 100% of the
deferred tax asset of the Group's U.S. entities, which has a history of
operating losses. Included in other current assets are deferred tax assets and
related valuation allowances as follows:
YEAR ENDED
DECEMBER 31,
1997
------------
Net operating loss carryforwards $ 32,000
Allowance for doubtful accounts 1,000
Allowance for sales returns and price protection 5,500
Accruals 3,000
Other 500
--------
Gross deferred tax assets 42,000
Valuation allowance (42,000)
--------
$ -
========
17
<PAGE> 19
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
NOTE 8 - SHAREHOLDER'S EQUITY:
The holder of Preferred Stock is entitled to one vote per share on all
matters to be voted upon by the shareholders and entitled to receive ratably
dividends declared, if any, out of funds legally available. In the event of a
liquidation, dissolution or winding up of the Group, the holder of Preferred
Stock is entitled to receive $1.64 per share prior, and in preference, to the
holders of Common Stock and is entitled to share ratably in any proceeds
remaining after the Common Stockholder receives its amount paid in for such
shares.
The holder of Common Stock is entitled to one vote per share on all
matters to be voted upon by the shareholders and entitled to receive ratably
dividends declared, if any, out of funds legally available. In the event of a
liquidation, dissolution or winding up of the Group, the holder of Common Stock
is entitled to share ratably in all assets remaining after the payment of
liabilities then outstanding and the distribution of amounts to the Preferred
Stockholder.
18
<PAGE> 20
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
SHARES
SHARES ISSUED AND
AUTHORIZED OUTSTANDING PAR VALUE AMOUNT
---------- ----------- --------- -------
Preferred Stock:
Mindscape UK 5,500,000 5,500,000 $ 1.64 $ 9,020
--------- --------- -------
Common Stock:
Mindscape US 2,000 1,000 $ 1.00 $ 1
Mindscape UK 8,208,282 8,208,282 $ 1.62 13,297
Mindscape France 20,000 20,000 $17.40 348
--------- --------- -------
8,230,282 8,229,282 $13,646
========= ========= =======
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Group leases office space and equipment under noncancelable
operating leases, which expire from January 1998 through September 2011. The
accompanying combined financial statements reflect rent expense on a
straight-line basis over the terms of the respective lease agreements. Total
rent expense under noncancelable operating leases was $2,398 for the year ended
December 31, 1997. Future minimum payments under noncancelable operating leases
at December 31, 1997, are as follows:
19
<PAGE> 21
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
YEAR ENDING
DECEMBER 31,
- ------------
1998 $ 2,609
1999 2,042
2000 2,097
2001 2,109
2002 2,090
Thereafter 7,352
=======
$18,299
-------
ROYALTY COMMITMENTS
The Group enters into noncancelable development and royalty agreements
with various independent software developers. Commitments are tied to specific
performance milestones and future minimum payments under noncancelable
development and royalty agreements totaled $14,123 at December 31, 1997.
LEGAL PROCEEDINGS
Various claims arising in the ordinary course of business, seeking
monetary damages and other relief, are pending. The amount of liability, if any,
from such claims can not be determined with certainty; however, in the opinion
of management, the ultimate liability for such claims will not have a material
adverse effect on the Group's financial position, results of operations or cash
flows. See NOTE 11 -- Subsequent Event (Unaudited).
NOTE 10 - INDUSTRY SEGMENT AND FOREIGN OPERATIONS:
The Group operates in one primary industry segment. Financial
information by geographic area is as follows:
20
<PAGE> 22
MINDSCAPE GROUP
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF PEARSON PLC)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
(CONTINUED)
YEAR ENDED
DECEMBER 31,
1997
------------
Net revenues:
United States $115,107
Europe 19,866
Other 3,547
--------
Combined net revenues $138,520
========
Income (loss) from operations:
United States $ (2,900)
Europe (4,437)
Other 1,058
--------
Combined loss from operations $ (6,279)
========
DECEMBER 31,
1997
------------
Identifiable assets:
United States $45,782
Europe 11,621
Other 2,368
-------
Combined identifiable assets $59,771
=======
Combined loss from operations excludes other income and expenses. Foreign
operations generally operate as autonomous units and there are no general
corporate allocations other than interest income and expense.
NOTE 11 - SUBSEQUENT EVENT (Unaudited):
In March 1998, as a result of developments with respect to certain legal
claims arising in the ordinary course of business, the Group recognized a loss
provision totaling $2.8 million.
21
