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Exhibit 99.3
SOFTKEY INTERNATIONAL INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(in thousands)
(unaudited)
MECC
Including
Pro Forma Combined
SoftKey Adjustments Pro Forma
------- ----------- ---------
ASSETS
Current Assets:
Cash and
cash equivalents $ 77,479 $ 21,837 $ 99,316
Accounts receivable, net 45,069 5,923 50,992
Inventories 16,683 1,749 18,432
Other current assets 19,943 888 20,831
-------- -------- ----------
159,174 30,397 189,571
Property and equipment, net 19,657 3,206 22,863
Goodwill and other assets, net 642,009 225,612(a) 867,621
-------- -------- ----------
820,840 259,215 1,080,055
======== ======== ==========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable and
accrued liabilities $ 51,303 $ 2,837 $ 54,140
Merger related accruals 30,180 14,800(a) 44,980
Current portion of long-
term obligations 1,002 -- 1,002
Revolving line of credit 25,000 -- 25,000
Other current liabilities 265 636 901
-------- -------- ----------
107,750 18,273 126,023
Long-term obligations 500,000 500,000
Deferred Income taxes 58,684 160 58,844
Other long-term obligations 2,351 301 2,652
-------- -------- ----------
561,035 461 561,496
Stockholders' equity 152,055 240,481(a) 392,536
-------- -------- ----------
$820,840 $259,215 $1,080,055
======== ======== ==========
The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
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SOFTKEY INTERNATIONAL INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
SoftKey The Learning Company Compton's tewi Pro Forma
(pre-acquisition) (pre-acquisition) (pre-acquisition) Adjustments
---------- ---------------- --------------- --------------- -----------
REVENUES $ 167,042 $60,698 $23,204 $ 3,720 $ --
----------- ------ ------- ------- ----------
COSTS AND EXPENSES:
Costs of production 53,070 13,217 12,874 5,161 --
Sales, marketing
and support 38,370 16,545 11,392 1,439 --
General and
administrative 20,813 8,324 9,559 709 --
Amortization and
merger related charges 103,172 -- 2,039 -- 321,830(b)
Research and
development 12,487 11,738 1,244 -- --
----------- ------ ------- ------- ----------
227,912 49,824 37,108 7,309 321,830
----------- ------ ------- ------- ----------
OPERATING
INCOME(LOSS) (60,870) 10,874 (13,904) (3,589) (321,830)
OTHER INCOME
(EXPENSE), net 705 686 (856) (54) (23,319)(c)
----------- ------ ------- ------- ----------
INCOME (LOSS)
BEFORE TAXES (60,165) 11,560 (14,760) (3,643) (345,149)
----------- ------ ------- ------- ----------
PROVISION (BENEFIT)
FOR INCOME TAXES 5,795 4,162 (5,134) -- (35,037)
----------- ------ ------- ------- ----------
NET INCOME (LOSS) $ (65,960) $7,398 $(9,626) $(3,643) $ (310,112)
=========== ====== ======= ======= ==========
NET INCOME (LOSS)
PER SHARE-
FULLY DILUTED $ (2.65)
===========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING-FULLY
DILUTED 24,855,000 4,632,000(d)
=========== ==========
SoftKey, The Learning MECC Pro Forma Combined
Company, Compton's Adjustments Pro Forma
and tewi Combined
------------------ ------ ----------- ---------
REVENUES $ 254,664 $33,815 $ -- $ 288,479
----------- ------- ---------- -----------
COSTS AND EXPENSES:
Costs of production 84,322 6,769 -- 91,091
Sales, marketing
and support 67,746 11,588 -- 79,334
General and
administrative 39,405 2,937 -- 42,342
Amortization and
merger related charges 427,041 302 112,196(b) 539,539
Research and
development 25,469 6,442 -- 31,911
----------- ------- ---------- -----------
643,983 28,038 112,196 784,217
----------- ------- ---------- -----------
OPERATING
INCOME(LOSS) (389,319) 5,777 (112,196) (495,738)
OTHER INCOME
(EXPENSE), net (22,838) 969 -- (21,869)
----------- ------- ---------- -----------
INCOME (LOSS)
BEFORE TAXES (412,157) 6,746 (112,196) (517,607)
----------- ------- ---------- -----------
PROVISION (BENEFIT)
FOR INCOME TAXES (30,214) 1,978 -- (28,236)
----------- ------- ---------- -----------
NET INCOME (LOSS) $ (381,943) $ 4,768 $ (112,196) $ (489,371)
=========== ======= ========== ===========
NET INCOME (LOSS)
PER SHARE-
FULLY DILUTED $ (12.95) $ (12.66)
=========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING-FULLY
DILUTED 29,487,000 9,174,000(d) 38,661,000
=========== ========== ===========
The accompanying notes are an integral part of
these pro forma combined condensed consolidated
financial statements.
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SOFTKEY INTERNATIONAL INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1996
(in thousands, except share and per share data)
(unaudited)
MECC
Including
Pro Forma Combined
SOFTKEY Adjustments Pro Forma
----------- ----------- -----------
REVENUES $ 71,133 $ 6,051 $ 77,184
----------- ---------- -----------
COSTS AND EXPENSES:
Costs of production 20,455 1,632 22,087
Sales, marketing
and support 15,380 3,014 18,394
General and
administrative 6,862 708 7,570
Amortization and
merger related
charges 90,512 28,503(b) 119,015
Research and
development 7,897 1,867 9,764
----------- ---------- -----------
141,106 35,724 176,830
----------- ---------- -----------
OPERATING
INCOME (LOSS) (69,973) (29,673) (99,646)
OTHER INCOME
(EXPENSE), net (6,348) 268 (6,080)
----------- ---------- -----------
INCOME (LOSS)
BEFORE TAXES (76,321) (29,405) (105,726)
----------- ---------- -----------
PROVISION (BENEFIT) FOR
INCOME TAXES -- (421) (421)
----------- ------- -----------
NET INCOME (LOSS) $ (76,321) $ (28,984) $ (105,305)
=========== ========== ===========
NET INCOME (LOSS)
PER SHARE-FULLY
DILUTED $ (2.32) $ (2.50)
=========== ============
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING-FULLY
DILUTED 32,874,000 9,174,000(d) 42,048,000
=========== ========== ===========
The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
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SOFTKEY INTERNATIONAL INC.
NOTES TO PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(unaudited)
A. PRO FORMA BASIS OF PRESENTATION AND ADJUSTMENTS
On May 17, 1996, pursuant to the previously announced Agreement and
Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and
among SoftKey International Inc. ("SoftKey"), SchoolCo Inc., a wholly owned
subsidiary of SoftKey ("SchoolCo"), and Minnesota Educational Computing
Corporation (MECC) ("MECC"), a publisher and distributor of high quality
educational software for children, SchoolCo was merged with and into MECC (the
"Merger"), with MECC surviving the Merger as a wholly owned subsidiary of
SoftKey. Pursuant to the Merger Agreement, at the effective time of the Merger
(the "Effective Time"), each share of common stock, par value $.01 per share,
of MECC ("MECC Common Shares") outstanding immediately prior to the Effective
Time, was converted into the right to receive 1.14286 shares of common stock,
par value $.01 per share, of SoftKey ("SoftKey Common Stock"). The total
estimated purchase price, including other consideration and costs, is
approximately $260,000 (based on the market value of SoftKey Common Stock at
the time the parties reached agreement regarding the framework of a plan to
implement SoftKey's strategic plan with respect to the integration of the
operations of MECC and other acquired businesses of SoftKey into those of
SoftKey). The transaction will be accounted for as a purchase.
On December 28, 1995, SoftKey purchased Compton's NewMedia, Inc. and
Compton's Learning Company (collectively, "Compton's"), developers and
publishers of educational multimedia titles and each a wholly owned subsidiary
of Tribune Company, in exchange for a total of 5,052,697 shares of SoftKey
Common Stock (which included 587,036 shares issued to settle $14,000 of
intercompany debt to Tribune Company) and executed a promissory, which note
was, in accordance with its terms, settled as of April 5, 1996 by the issuance
of approximately 158,099 shares of Softkey Common Stock, note to Tribune
Company for $3,000 for cancellation of intercompany indebtedness, which note
was, in accordance with its terms, settled as of April 5, 1996 by the issuance
of approximately 158,099 shares of SoftKey Common Stock. Total purchase
price was $104,394, including transaction costs, deferred income taxes related
to identifiable intangible assets acquired, settlement of certain intercompany
debt to Tribune Company and assumption of net liabilities of Compton's. The
transaction was accounted for as a purchase.
On December 22, 1995, SoftKey acquired approximately a 95% interest in The
Learning Company ("TLC"), a leading developer of educational software products
for use at home and school, as the first step in a two-step, all cash
transaction resulting in SoftKey owning, effective as of December 27, 1995, the
entire equity interest of TLC. Under the terms of the merger agreement between
SoftKey and TLC, SoftKey purchased all of the outstanding shares of TLC for
total consideration of $684,066, including estimated transaction and other
related costs, value of stock options acquired and deferred income taxes related
to identifiable intangible assets acquired. These shares represent all of TLC
shares outstanding, including vested stock options, as of December 27, 1995.
Approximately 1.1 million
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unvested stock options of TLC were converted into options to purchase 3,123,000
shares of SoftKey Common Stock, based on the merger consideration of $67.50
per share, and were vested on January 26, 1996.
In addition, on December 28, 1995, SoftKey announced that Tribune
Company had made a strategic $150,000 investment in SoftKey in connection with
SoftKey's acquisition of TLC. Tribune Company's investment is in the form of
$150,000 principal amount of 5 1/2% Senior Convertible/Exchangeable Notes Due
2000. The notes are either convertible into SoftKey Common Stock at a
conversion price of $53 per share or exchangeable for shares of a newly
designated series of preferred stock of SoftKey which is itself convertible
into SoftKey Common Stock.
On July 21, 1995, SoftKey acquired tewi Verlag GmbH, a distributor of
CD-ROM software and computer-related books, located in Munich, Germany ("tewi").
The purchase price was settled by a combination of cash and issuance of common
stock. SoftKey issued 99,045 shares of SoftKey Common Stock valued at $3,640 and
may issue additional shares of SoftKey Common Stock to a former shareholder of
tewi pursuant to an earn-out agreement. SoftKey paid cash consideration of
$12,688 for tewi. The additional shares issuable under the earn-out agreement
have been treated as contingent consideration and will be recorded as goodwill
if and when certain future conditions are met.
The pro forma combined condensed consolidated balance sheet includes
the financial statements of SoftKey and MECC at March 31, 1996, as if the
acquisition had occurred on March 31, 1996.
The pro forma combined condensed consolidated statement of operations
for the year ended December 31, 1995 sets forth the results of operations for
the year ended December 31, 1995, as if the acquisition of MECC, Compton's,
tewi and TLC by SoftKey had occurred at the beginning of such period. The
pro forma combined condensed consolidated statement of operations for the
quarter ended March 31, 1996 sets forth results of operations for the quarter
ended March 31, 1996 as if the acquisition of MECC had occurred at the
beginning of such period.
The pro forma combined condensed consolidated financial statements are
intended for information purposes and are not necessarily indicative of the
future consolidated financial position or future results of operations of the
combined entity. These combined condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in SoftKey's Current Reports on Form 8-K/A dated October 4, 1995 and
January 25, 1996, SoftKey's Annual Report on Form 10-K for the year ended
January 6, 1996 and SoftKey's Quarterly Report on Form 10-Q for the quarter
ended April 6, 1996, MECC's financial statements for the year ended March 31,
1995 and for the nine month period ended December 31, 1995, TLC's Annual Report
on Form 10-K for the year ended June 30, 1995, as amended by Form 10-K/A dated
November 7, 1995, and TLC's Quarterly Report on Form 10-Q for the three month
period ended September 30, 1995.
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B. PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(a) The pro forma combined condensed consolidated balance sheet reflects the
purchase of MECC, as if the transaction had occurred as of March 31, 1996. The
pro forma adjustment to reflect the excess purchase price over the estimated
fair value of net assets of $224,392 for MECC is reflected in goodwill and
other assets. The ultimate allocation of the purchase price for each of the
acquisitions to the net assets acquired, goodwill, other intangible assets and
a charge for incomplete technology is subject to final determination of
their respective fair values. Approximately $14,800 has been included in the
purchase price related to estimated transaction related costs, including
investment banking and legal fees, related out-of-pocket expenses and
restructuring costs.
(b) The pro forma combined condensed consolidated statement of operations
for the year ended December 31, 1995 has been prepared assuming the acquisitions
of MECC, Compton's, TLC and tewi were consummated at the beginning of the fiscal
year ended December 31, 1995. The pro forma combined condensed consolidated
statement of operations for the quarter ended March 31, 1996 has been prepared
assuming the acquisition of MECC was consummated at the beginning of such
quarter. Pro forma adjustments for each of the acquisitions reflect the
amortization of the identifiable intangible assets acquired and goodwill related
to TLC, Compton's and tewi over the estimated useful life of two years on a
straight-line basis. Pro forma adjustments also include amortization of the
excess purchase price over the estimated fair value of the net assets acquired
of MECC over the estimated useful life of two years on a straight-line basis.
Pro forma adjustments include amortization and merger related charges of $28,049
for the quarter ended March 31, 1996. Any allocation of the purchase price to
the fair value of incomplete technology related to MECC could result in a
material charge to operations and a corresponding reduction in the amounts to be
amortized. There were no intercorporate transactions that required elimination.
SoftKey has performed an evaluation of the estimated period of benefit
and the estimated useful life of goodwill and other identifiable intangible
assets acquired in and resulting from the acquisition of MECC, tewi, TLC and
Compton's based upon the following factors. The consumer software industry has
recently undergone significant change evidenced by increased competition,
changes in technology platforms, the increase of on-line and Internet usage,
reductions in product life cycles and a rapidly changing demand preference of
its customer base. These factors limit SoftKey's ability to predict the degree
of success of future performance beyond a short period of time. SoftKey also
intends to implement or is in the process of a corporate restructuring of the
businesses acquired that will result in closure of certain facilities,
reduction in personnel and consolidation of practices. There is no guarantee
that the Company will be successful in this restructuring. These uncertainties
and factors are reflected in the period of time that SoftKey can reasonably
estimate for the estimated useful life of goodwill and other identifiable
intangible assets. Accordingly, SoftKey has determined that estimated useful
life of goodwill to be two years and certain other intangible assets to be in
the range of two to seven years.
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(c) The adjustment for $27,500 represents the related interest cost
associated with the issuance of the October Notes and the Tribune Notes
described below.
On October 23, 1995 SoftKey issued $350,000 5 1/2% Senior Convertible Notes
Due 2000 (the "October Notes"). The pro forma combined consolidated statements
of operations include the interest expense associated with the October Notes as
if the issuance occurred at the beginning of the period indicated. Interest
income associated with the proceeds from the October Notes which would
substantially offset the interest expense is not included in the pro forma
statements of operations. Transaction related costs of $11,625 for investment
banker fees, accounting and legal fees, and other various transaction costs
have been deferred and are being amortized over the term of the October Notes.
On December 28, 1995, Tribune Company made a $150,000 strategic
investment in SoftKey in the form of $150,000 principal amount of 5 1/2% Senior
Convertible/Exchangeable Notes Due 2000 (the "Tribune Notes"). The pro forma
combined condensed consolidated statements of operations include the interest
expense associated with the Tribune Notes as if the issuance occurred at the
beginning of the period indicated. Transaction related costs of $1,000 for
accounting and legal fees, and other various transaction costs have been
deferred and are being amortized over the term of the Tribune Notes.
(d) The pro forma combined condensed consolidated statement of operations
for the year ended December 31, 1995 includes an adjustment to add back the
common stock equivalents in the fully diluted earnings per share computation as
the combined entity is in a loss position, and therefore the inclusion of common
stock equivalents would be antidilutive.
In connection with acquisition of Compton's, SoftKey repaid $14,000 of
intercompany debt to Tribune Company by issuing 587,036 additional shares of
SoftKey Common Stock and executed a promissory note to Tribune Company for
$3,000 related to cancellation of intercompany debt, which note was, in
accordance with its terms, settled as of April 5, 1996 by the issuance of
approximately 158,099 shares of SoftKey Common Stock to Tribune Company.
The pro forma share adjustments include, among other things, the issuance
of 4,465,661 shares of SoftKey Common Stock for the acquisition of Compton's,
and approximately 9,174,000 shares for the acquisition of MECC.