EXHIBIT 99.4
THE LEARNING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1999 1998
----------------- --------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 191,863 $ 256,759
Accounts receivable (less allowances for
returns of $101,419 and $83,873, respectively) 188,646 167,001
Inventories 79,901 59,912
Prepaid expenses and other current assets 89,953 56,514
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Total current assets 550,363 540,186
PROPERTY, PLANT AND EQUIPMENT
Machinery and equipment 58,701 57,203
Leasehold improvements 15,761 15,757
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74,462 72,960
Less: accumulated depreciation 48,559 46,296
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Property, plant and equipment, net 25,903 26,664
OTHER NONCURRENT ASSETS
Intangible assets, net 218,557 225,282
Other assets 30,334 28,669
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$ 825,157 $ 820,801
============ ===============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 65,000 $ 65,000
Current portion of long-term liabilities - 148
Accounts payable 42,058 69,046
Accrued liabilities 103,691 97,824
Income taxes payable 101,211 93,805
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Total current liabilities 311,960 325,823
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LONG-TERM LIABILITIES
5-1/2% senior notes 200,955 200,955
Other long-term obligations 6,462 7,837
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Total long-term liabilities 207,417 208,792
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STOCKHOLDERS' EQUITY
Series A preferred stock 8 8
Common stock 876 873
Additional paid-in capital 1,443,478 1,440,620
Deferred compensation (11,933) (12,265)
Retained deficit (1,115,834) (1,138,099)
Other comprehensive loss (10,815) (4,951)
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Total stockholders' equity 305,780 286,186
------------ ---------------
$ 825,157 $ 820,801
============ ===============
The accompanying notes are an integral part of these consolidated
financial statements.
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
Net Sales $ 186,843 $ 179,336
Cost of sales 65,083 63,366
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Gross Profit 121,760 115,970
Advertising and promotion expenses 24,708 21,094
Other selling and administrative expenses 50,080 58,301
Amortization of intangibles 9,856 41,887
Charge for incomplete technology - 40,000
Restructuring and other charges 3,889 15,230
Interest expense 4,272 6,702
Other income, net (6,307) (2,332)
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Income (Loss) Before Income Taxes 35,262 (64,912)
Provision for Income Taxes: 12,997 --
---------- ----------
Net Income (Loss) $ 22,265 $ (64,912)
========== ==========
Net Income (Loss) Per Share -
Basic $ 0.24 $ (0.93)
Diluted $ 0.20 $ (0.93)
Weighted Average Number
of Shares Outstanding -
Basic 91,939,000 69,430,000
Diluted 112,052,000 69,430,000
The accompanying notes are an integral part of these consolidated
financial statements.
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
--------------------------------------------
1999 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 22,265 $ (64,912)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Noncash restructuring and integration -- 4,000
Depreciation 2,282 2,825
Amortization 9,959 41,887
Charge for incomplete technology -- 40,000
Increase (decrease) from changes in net assets and liabilities:
Accounts receivable (21,645) 12,728
Inventories (19,989) (2,101)
Prepaid expenses and other current assets (5,398) (1,060)
Accounts payable, accrued liabilities and income taxes payable (24,322) 9,493
Other, net (6,018) 780
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NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (42,866) 43,640
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of other property, plant and equipment (1,522) (6,141)
Proceeds from sale of investments 7,218 --
Payment for acquisitions, net of cash acquired -- (116,972)
Software development costs (28,000) (6,156)
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NET CASH USED FOR INVESTING ACTIVITIES (22,304) (129,269)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (330) (6,266)
Exercise of stock options including related tax benefit 3,045 14,427
Proceeds from the issuance of special warrants, net -- 134,346
Other, net (584) (2,207)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,131 140,300
----------------- -----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,857) (207)
----------------- -----------------
EFFECT OF BRODERBUND EXCLUDED PERIOD -- 1,348
----------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (64,896) 55,812
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 256,759 188,956
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $191,863 $ 244,768
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(in thousands)
(unaudited)
Three Months Ended
March 31,
------------------------------------------
1999 1998
---------------- ----------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued to acquire Mindscape $ -- $ 30,000
The accompanying notes are an integral part of these consolidated
financial statements.
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of The Learning Company, Inc. ("TLC" or
the "Company") for the three months ended March 31, 1999 and 1998 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 consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
previously filed with the Securities and Exchange Commission (the "SEC") in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
January 4, 1999. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results for the entire year ending
December 31, 1999.
The first quarter reporting period for 1999 ended on April 3, 1999, and the
first quarter reporting period for 1998 ended on April 4, 1998. The periods
from January 3, 1999 to April 3, 1999 and from January 4, 1998 to April 4, 1998
are referred to as the "First Quarter 1999" and the "First Quarter 1998" or the
"Three Months Ended March 31, 1999" and the "Three Months Ended March 31, 1998",
respectively, throughout these financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions regarding items
such as return reserves and allowances, net realizable value of intangible
assets and valuation allowances for deferred tax assets that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates in
these financial statements include: return reserves, inventory reserves,
valuation of deferred tax assets and valuation and useful lives of intangible
assets. Actual results could differ from these estimates.
2. BORROWINGS
On August 7, 1998, the Company amended its revolving line of credit (the "Line")
to provide a maximum availability of $147,500, of which $40,000 was outstanding
at March 31, 1999 and was subsequently repaid. Borrowings under the Line are
due July 1, 2000 and bear interest at variable rates. The Line is subject to
certain financial covenants and is secured by a general security interest in
certain operating subsidiaries of the Company and by a pledge of the stock of
certain of its subsidiaries. Upon consummation of the May 1999 merger with
Mattel, Inc. ("Mattel"), all outstanding borrowings under the Line were repaid
and the agreement was terminated by Mattel.
3. COMPREHENSIVE INCOME (LOSS)
Effective January 4, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income." The Company's comprehensive
income (loss) was as follows:
Three Months Ended March 31,
-----------------------------------------------
1999 1998
------------------- ---------------------
Net income (loss) $22,265 $(64,912)
Other comprehensive loss (5,864) (2,760)
------------------- ---------------------
Total comprehensive income (loss) $16,401 $(67,672)
=================== =====================
Other comprehensive loss represents losses on foreign currency translation and
unrealized gains and losses on investments.
4. INVENTORIES
Inventories are stated at the lower of weighted average cost or net realizable
value and include third-party assembly costs, CD-ROM discs, manuals and an
allocation of fixed overhead.
March 31, December 31,
1999 1998
----------------- ------------------
Components $ 5,797 $ 5,622
Finished goods 74,104 54,290
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$79,901 $59,912
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5. COMPUTATION OF EARNINGS PER SHARE
Dilutive income per share is computed using the weighted average number of
shares of the Company's common stock outstanding during the period, plus the
dilutive effect of common stock equivalents. Common stock equivalents consist of
convertible debentures, preferred stock, stock options and warrants. The
dilutive computations do not include common stock equivalents for the Three
Months Ended March 31, 1998, as their inclusion would be antidilutive. Dilutive
elements would include the 750,000 shares of Series A Convertible Participating
Preferred Stock (which is ultimately convertible into 15,000,000 shares of
common stock) issued on December 5, 1997, special warrants to acquire 8,687,500
exchangeable non-voting shares of Softkey Software Products Inc., the Company's
Canadian subsidiary, and employee stock options totaling 12,483,000 at March 31,
1998.
6. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 by January
1, 2001 and does not expect SFAS No. 133 to have a material impact on its
financial statements.
In December 1998, AcSEC issued SOP 98-9, "Software Revenue Recognition, with
Respect to Certain Arrangements," which required recognition of revenue using
the "residual method" in a multiple element arrangement when fair value does not
exist for one or more of the undelivered elements in the arrangement. Under the
"residual method," the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. The Company does not
expect the adoption of SOP 98-9 will have a material impact on its results of
operations.
7. SUBSEQUENT EVENTS
Mattel Merger
Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998, a
merger was consummated between Mattel and TLC on May 13, 1999. The stock-for-
stock transaction was approved by the stockholders of both companies, after
which TLC was merged with and into Mattel, with Mattel being the surviving
corporation. Under the terms of the merger agreement, each share of TLC Series A
Preferred Stock was converted into 20 shares of TLC common stock just prior to
the consummation of the merger. Each outstanding share of TLC common stock was
then converted into the right to receive 1.2 shares of Mattel common stock. As a
result, approximately 126 million Mattel common shares will be issued in
exchange for all shares of TLC common stock outstanding as of the merger date.
The outstanding share of TLC special voting stock was converted into the right
to receive one share of Mattel Special Voting Preferred Stock. Each outstanding
exchangeable non-voting share of TLC's Canadian subsidiary, Softkey Software
Products Inc., remains outstanding, but becomes exchangeable into the right to
receive 1.2 shares of Mattel common stock.