FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

The Learning Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLC)") else Response.Write("(NYSE: TLC)") end if %>
One Athenaeum Street
Cambridge, MA 02142
(617) 494-1200
http://www.softkey.com

UNION CITY, CA (February 26, 1997)/FOOLWIRE/ --- The Learning Company reported fourth quarter and year-end results on February 6th. For the fourth quarter, revenues were $106 million versus $47.6 million in the prior year's fourth quarter. If one were to look at this on a pro forma combined basis in 1995, the company would have generated $79 million in revenues. This represents a 34% growth rate on a quarter-over-quarter basis with prior year. Gross margin dollars were $78.7 million as compared to $32.2 million actual results of 1995. On a pro forma basis that would have been $57 million. Gross margins as a percentage of sales were 74% and this is up from 68% in the prior year's fourth quarter. Operating margins dollars before amortization of the merger costs were $36.1 million compared to $13 million in the prior year. This results in an operating margin of 34% in Q4 before amortization of merger costs and 27% in the prior year. Earnings per share before merger amortization was $0.60 in the fourth quarter compared to $0.41 per share in the prior year. This is on shares outstanding of 45.7 million for the year and the quarter as compared to 27.3 million in the prior year.

REVENUES FOR THE YEAR. For the year, revenues were $343.3 million versus $167 million in the prior year. On a combined pro forma basis, prior year's revenues would have been $273 million, resulting in a combined revenue growth of 29% in 1996. Gross margins were $252.2 million versus $113 million in the prior year. This represents gross margin as a percentage of sales of 73% in 1996 compared to 68% in 1995. Operating margins were $95.8 million before amortization in 1996 as compared to $43 million in 1995. This results in operating margins of 28% for the year versus 26% in 1995. Earnings per share before amortization were $1.77 in 1996 and $1.50 in 1995 on shares outstanding of 40.8 million in 1996 versus 24.8 million in 1995.

Q4 REVENUES BY CHANNEL. Retail revenues in Q4 were $51.3 million compared to $22.6 million in the prior year on a standalone basis and $49.6 million on a pro forma combined basis. OEM sales were $6.1 million versus $5.6 million in the prior year. School sales were $4.5 million versus zero for Softkey last year, however the combined companies were approximately $4.5 million. Direct response was $16.2 million in Q4 1996 versus $6.6 million in 1995. International sales were $20.5 million in Q4 1996 compared to $10 million in the prior year. Income tax software business in Canada generated $7.3 million in Q4 1996 versus $2.6 million last year in Q4. Overall, this gives them $106 million in sales in the fourth quarter versus $47.6 million on a standalone basis last year and $79 million on a pro forma basis.

1996 REVENUES BY CHANNEL. For the year, retail revenues were $174.8 million compared to $75.7 million in 1995 on a standalone basis and $158.6 million on a combined basis. The OEM business generated $27.8 million in 1996 as compared to $20 million in the prior year. The school business was $21.7 million versus zero in 1995 for the standalone Softkey and $23 million on a combined basis. They acquired MECC in May so they don't have a full year of that school business. Their direct response business was $38.5 million versus $26.2 million in 1995. Their international business was $57.6 million versus $25.6 million in 1995. Their income tax software business was $22.7 million in 1996 versus $19.5 million.

THE RETAIL CHANNEL. Retail revenues for The Learning Company have increased by 10% on a pro forma basis. But, retail has obviously been a challenging channel for them in 1996 due to increased competition from companies such as Disney and Mattel. Increased pricing changes by some of their competitors have also impacted them. In addition, a number of traditional retailers have down-sized or discontinued their operations in US retail. In the quarter, The Learning Company has expanded their relationships with mass merchants such as Wal-Mart and Target by increasing the number of products they sell through those channels. Return reserves and allowances included in the income statement for the fourth quarter were approximately 20% of retail sales or $12.8 million in the quarter. They were 17% of retail sales or $35 million for the year.

THE OEM CHANNEL. Their OEM business experienced 35% growth over the prior year. This was primarily due to the demand created by TLC having to focus on offering its branded products to hardware customers and an increase in royalty-based business during the year.

SCHOOL BUSINESS. On a pro forma basis their school business grew by 15% year-over-year including the MECC portion prior to May, which is consistent with the growth that the school market is generally experiencing.

DIRECT CHANNEL. Their direct response business experienced a 33% growth due to increased electronic registration, introduction of their outbound telesales operation in the Fall of 1996, and an increase in parent-direct purchases of educational products through partnerships with direct marketers through schools.

INTERNATIONAL SALES. Their international business experienced over 100% growth in 1996. This is due to expansion into new markets, the introduction to new localized language titles to these markets which allowed them to launch many of the former MECC and Learning Company titles which previously hadn't been leveraged into these markets. The Learning Company acquired EduSoft in the third quarter of 1996. EduSoft accounted for approximately $2 million of sales in the fourth quarter and $3.7 million for the entire year. Their Canadian income tax business in the fourth quarter benefitted from an increase in the penetration rate of computers in Canada and a much more structured product planning and delivery program.

SALES BY DISTRIBUTION CHANNEL. Distributors for the quarter were 25% of their total retail number, superstores were 14%, mall chains were 5%, office supply were 12%, consumer electronics were 5%, mass merchants were 18%, and clubs were 21%. The most significant change over the third quarter is the fact that mass merchants have gone from 7% to 18% and mall chains have gone from 10% to 5%.

SALES BY PRODUCT CATEGORY. Sales by product category for the quarter were as follows: education was 66% of their business, reference was 11%, lifestyle was 10%, productivity was 13%. Last year, education was only 16% of their business before they acquired Learning Company and MECC. Reference was 22% last year. Lifestyle was 22% last year. Productivity was 40% last year.

SALES BY PRICE POINT. Often they speak about revenue by selling price point. In the fourth quarter of 1996, 18% of their revenues came from less than $20 selling price points, 4% were between $20 and $30, and 78% were over $30. For the year, 20% were less than $20, 5% were between $20 and $30, and 75% were over $30.

INTERNATIONAL REVENUE BREAKDOWN. The UK in the quarter was $3.1 million versus $2.2 million in the prior year's fourth quarter. Northern Europe was $1.1 million versus $912,000 last year in Q4. Germany was $6.7 million versus $4.8 million in Q4 last year. France was $4.6 million in Q4 this year versus $648,000 last year. The Pacific Rim was $2.2 million versus $940,000 in Q4 last year. Holland was new for them in the fourth quarter this year and came in at $1.6 million. Latin America was $1.0 million versus $376,000 in Q4 last year. For the year, the UK was $10 million versus $7.1 million last year. Northern Europe was $5.2 million versus $3.6 million in 1995. Germany was $20.3 million in 1996 versus $9.5 million last year. France was $10.9 million in 1996 versus $648,000 in 1995. The Pacific Rim was $5.7 million versus $3.1 million in 1995. Holland was new and came in at $1.6 million in 1996. Latin America was $2.6 million versus $1.5 million in 1995. And, there was $1.0 million in the Middle East. It is interesting to note that the company has been able to leverage the products and the channels in the overseas market and achieve the growth.

GROSS MARGINS. Their retail boxed product generates a 79% gross margin in the fourth quarter. Their jewel-case product in retail is 72%. Their OEM business gross margin was 75%. Their school business was 85%. Direct response was 73%. International was 61%. Tax software was 87%. This results in a 74% overall margin. For the year, their retail boxed product gross margin was 77%, retail jewel-case was 73%, OEM was 80%, school was 87%, direct response was 73%, international was 57%, and their tax business was 80%, resulting in overall margins for the year of 73%.

OPERATING EXPENSES. Sales and marketing expenses were $19.3 million or 18% of fourth quarter sales. This is down from 23% in the prior year. General and administrative expenses were $7.7 million or 7% of sales, down from 10%. Research and development was $9.5 million or 9% which is up slightly from the prior year's 8%. For the year, sales and marketing expenses were $67.6 million or 20% of sales versus 23% for the prior year. General and administrative expenses were $28.5 million or 8% of sales versus 12% in the prior year. Research and development costs were 10% of sales, up from 7% in the prior year. The Learning Company is able to leverage its research and development spending into all of its distribution channels which includes not only retail, but OEM, direct response, school, and international. If one were to analyze their spending on research and development as a percentage of only retail revenues, they spent 19% in the fourth quarter of 1996 and 21% for the year.

INTEREST EXPENSE. Interest expense for the quarter and for the year was $5.9 million and $24.1 million respectively. Interest expense relates primarily to the interest on the senior convertible notes which is payable in May and November of each year. During the fourth quarter, The Learning Company reduced convertible notes by $8 million and by $18.3 million for the full year. This resulted in a gain of $1.1 million during the quarter and a total of $2.6 million for the year. This is included against interest expense.

AMORTIZATION AND TAX PROVISIONS. The Learning Company is amortizing the goodwill and acquired technology related to its acquisitions of The Learning Company, Compton's, and MECC and its small acquisitions in Europe over a two-year period. The amortization of merger related charges in the fourth quarter of 1996 were $127.9 million and $501 million for the year. Amortization in the fourth quarter relates primarily to the amortization of the purchased goodwill and the acquired technology of $124 million and the effect of the 1996 earn-outs related to their acquisitions in Europe that were made in 1995 and 1996 of $3 million. Included in the annual numbers, is a charge for incomplete technology acquired related to MECC of $56.7 million that was expensed in the second quarter of 1996. The provision for income taxes of $8.8 million in the quarter and $23.6 million for the year were offset by the amortization of the acquisition-related deferred tax credits of similar amounts. At year end, The Learning Company continues to have unrecorded tax assets of approximately $60 million of deductions for net operating loss carryforwards and other tax deductions that are available to offset future taxable income.

SHARES OUTSTANDING AND EPS CALCULATIONS. Shares outstanding on a primary basis were 45,751,000 in the fourth quarter as compared to 27.3 million in the prior year's fourth quarter. There were 40.8 million for the year versus 24.8 million for the prior year. If one were to calculate a fully diluted share count using the Treasury method, you would add approximately 1.5 million shares to the 1996 number. Earnings per share were a reported loss of $2.01 per share in the fourth quarter as compared to a loss of $3.25 per share in the prior year's fourth quarter and was a reported loss of $9.94 per share for the year in 1996 as compared to a loss of $2.65 in the prior year. On an adjusted basis, for the non-cash merger and acquisition related charges and deferred income taxes, the company would have earned $0.60 per share in the fourth quarter as compared to $0.41 per share in the prior year's fourth quarter, and would have earned $1.77 per share for 1996 compared to $1.50 per share in 1995.

CASH. Their cash at year-end was $110 million, up from $104 million at the end of September and up from $77.8 million at the end of last year. For the quarter, their beginning balance was $105 million. They generated $38 million in cash from operations. They had $3 million in proceeds from stock options. They repurchased $7 million of convertible notes. They paid approximately $2 million to settle merger-related costs. They paid $14 million of interest on convertible notes (that's paid twice a year). They paid withholding taxes on stock options that they received the proceeds on throughout the year of $11 million. And, they purchase a couple million dollars worth of fixed assets. For the year, they started out at $77 million. They generated $90 million in cash from operations. They acquired $20 million when they brought in MECC from the merger in May. They received $25 million of proceeds from stock options. They spent $15 million on repurchase of convertible notes. They paid a total of $38 million in cash to settle merger related costs. They paid $28 million in interest on the convertible notes. There were withholding taxes of $11 million. The remainder was purchase of fixed assets, bringing them to $110 million.

ACCOUNTS RECEIVABLE. Accounts receivable at year end were $79.6 million compared to $32.4 million at year end last year, before they bought MECC, The Learning Company, and Compton's. The increase is related primarily to the increase in the size of their business over the prior year. Days sales outstanding at the end of the year was 68 days compared to 61 days at both the end of September and the end of last year. The increase relates to an increase in the volume of their business internationally, which has gone up substantially over the prior year and that business model typically pays in a longer cycle. An increase in their outbound telesales business which is including their direct response business accounted for approximately 2 days in increase. The change in their mix for their US business, moving more to mass merchants accounted for the remainder. They expect as the US retail business and the international businesses continue to expand, they will see further expansion in days sales outstanding. Total accounts receivable reserves at the end of the year were approximately $32 million, consistent with the balance at the end of September. Of this, approximately $15 million relates to acquisition related reserves, which again is consistent with September 30th.

INVENTORY. Inventory at the end of the year was $15.8 million compared to $18.9 million at the end of last year. Inventory at the end of 1996 are pretty flat compared to the prior quarter (Q3), even though their overall business grew in terms of revenues by 18%. Inventory turnover on a quarterly basis increased from 4 times at the end of 1995 to almost 7 times at the end of 1996. They expect that as their business expands, that their inventories will grow in order to efficiently fulfill their customer needs and to service the overseas market effectively. They continue to evaluate methods to reduce the costs of manufacturing their product and in the event that their international business continues to grow, they expect they will be able to achieve higher economies of scale in production of product overseas.

OTHER CURRENT ASSETS. Other current assets at the end of the year were $20.3 million compared to $23.6 million at the end of 1995. This balance relates primarily to prepaid expenses, royalty advances, deferred income taxes, and prepaid direct mail costs.

WORKING CAPITAL. Working capital at the end of the year was $112.3 million compared to $28 million at the end of 1995 and $93.3 million at the end of Q3. The increase of $84.2 million over the prior year represents the continued balance sheet improvement focus that the company has been concentrating on throughout the year and the pay-down of merger related accruals resulting from their acquisitions.

INTANGIBLE ASSETS. Intangible assets on the balance sheet relate to the purchase of MECC, Compton's, The Learning Company, and the businesses they have acquired in Europe. They are amortizing these costs over a two-year period which results in large non-cash charges every quarter. Looking at the activity during the year, the opening balance was $727 million. Additions for the acquisition of MECC and the European acquisitions were $245 million for MECC and miscellaneous adjustments for purchase price items related to 1995 and foreign exchange effects, less the amortization in the year of $438 million. During the fourth quarter, The Learning Company recorded charges related to acquisition for amortization of $124 million and $3 million for the notes related to the European acquisitions.

FIXED ASSETS. Fixed assets at the end of the year were $21.7 million as compared to $19.6 million in the prior year.

DEPRECIATION EXPENSE. Total depreciation expense for the year was $6 million. Current liabilities were $113.6 million at the end of 1996 compared to $124.7 million at the end of 1995 and $108 million at the end of Q3. Included in this balance is $10.6 million of remaining merger-related accruals at December 31, 1996 as compared to the $40 million at December 31, 1995. The December 1995 balance included the investment banking fees for the acquisitions of The Learning Company and MECC for $10 million which as part of the negotiations in 1995 were agreed by the company to be settled in common stock which was done in the second quarter of 1996. The remaining merger reserves at December 31st relate to legal costs, investment banking fees related to the MECC investment bankers, and severance at various companies they have acquired. During the year they actually paid down $38 million of merger-related accruals in cash.

ACCOUNTS PAYABLE. Accounts payable have increased slightly from $66 million at the end of September to $70 million at the end of December which is a reflection of the general growth of the business. In addition, current liabilities include the line of credit draw of $25 million which is the same as the amount at the end of September.

SENIOR CONVERTIBLE NOTES. At the year end, senior convertible notes were $481.65 million compared to $500 million at the end of 1995. The reduction is due to the company's repurchase of $18.3 million of notes during the year, of which $8 million were repurchased in the fourth quarter. $150 million of the senior convertible notes are held by The Tribune Company, who are also one of The Learning Company's largest stockholders and sit on their Board of Directors.

DEFERRED INCOME TAXES. Deferred income taxes at year end are $86.9 million as compared to $57.1 million at the end of 1995. The increase relates primarily to the deferred income tax effects from their acquisition of MECC in May and the balance of this is being amortized over a two-year period which is the same as the related goodwill. The amortization of the acquisition-related income tax is offset by additional reserves reported by the company during the year for future income taxes payable.

STOCKHOLDERS EQUITY. Stockholders equity at the end of the year was $104.9 million compared to $214.5 million at the end of 1995. The decrease results from the loss created by the non-cash charges from the amortization of the purchased account and goodwill and other acquired assets offset by the value of the common stock issued to acquire MECC and EduSoft during the year.

NEW RETAIL INITIATIVES. Their average selling price at retail is close to $40 per unit. This is the most expensive price for educational software in the industry. They elected not to cut any prices in the fourth quarter, even though it was an extremely price-competitive environment. The result of not cutting prices was a loss in PC Data market share. The most dramatic occurred between the months of November and December, a full 2.5% in the PC Data in the educational category. They didn't cut prices in educational software in retail because retail is only half of their business. Most premium-priced educational software titles support programs in the OEM, school, direct marketing, and international businesses. For example, a direct mail offer that is in the mail at $29.95 assumes the same product is selling in retail stores at the same price or higher. So, reducing the price of a product at retail in the middle of the quarter would have an impact on sales in the direct market, the school, and perhaps even the OEM channels. These alternate channels tend to be organized into quarterly schedules. They pretty much know what they are going to be doing in direct mail, offering to schools, or selling to customers well before a quarter starts. So, making unscheduled unilateral price cuts to react to retail channel is not in the best interest of their overall business, particularly when they manage their business to maximize cash flow. Even if it means share loss in retail channel or PC Data, any changes in their prices must be made in light of their impact on all channels in their businesses.

STUDY ON PRICING. This doesn't mean that they are insensitive to trends in the retail channel. On the contrary, it is almost a part of their corporate culture to lead the charge in aggressive pricing. But they have always changed prices in an organized, methodical fashion. First, in this case, they conducted extensive and exhaustive studies price-point by category by subject by age range, they analyzed information from PC Data as well as their own store audits, and they compiled this information on their own as well as their competitors' products. What they know from this is that the pricing of educational software is extremely elastic. For example, if they are selling a product at $39 and they test it to a $29.95 street price, they can achieve lifts between 100-224% in some retail environments and that is a tremendous lift from a price change. The point is that as they do these price changes and get lifts like that in retail, the impact is to enhance the cash contributed per product by as much as 15-20% because at the same time they have been able to decrease their cost of goods sold. Therefore, it will have a very minimal impact on gross margins. So, on certain titles, they will elect to change price points in the quarters ahead. Not across the board, but in cases where they deem the research indicates they will get a win from doing that.

COUPON PROGRAMS. Another strategy they will be implementing, remember they sell products for as high as $79 at retail, they have organized some coupon comp programs to the retailers where they will be selling products for $79 and offering $30-40 off on coupons. The redemption rates on these coupon programs are only 25-30%. Again the lift can be very dramatic. The overall impact is a much higher cash flow with a minimal impact on margins.

FOCUS ON SUCCESSFUL RETAILERS. They are also going to be working a lot closer and more aggressively at channel marketing with the winning retailers -- the ones that are growing their share faster than their competitors, the ones that have significant lifts in their own software businesses. It is very difficult to make a claim that you are going to have significant lift in units in a sluggish retail environment unless you can focus your energies on retailers like mass merchants and clubs and superstores that are showing growth in the educational category. For example, in the last quarter they have increased their placements at Wal-Mart from 12 to over 34 products because they think Wal-Mart is going to be a big winner in the educational software business and they want to be there.

UNDER $20 PRICE POINT PRODUCTS. They are also going to be launching new products with these retailers at new price points. Encouraged by mass merchants to introduce price points below $20 in education, they have a line of titles that will be launching in Q1 right at the under-$20 price point designed for very high volume and impulse purchases.

NEW PRODUCT CATEGORIES. They are also working on a line of products they are developing internally to go right after multi-subject toddler, preschool, and kindergarten categories that have grown very quickly and that they don't have a strong focus in now. By Q2 they will be in that category with 3-4 products that they intend to gain share with.

SUMMARY. It's important to remember that the domestic retail channel is only half of their business. Most of the activities listed above are focused on increasing the efficiency and impact of their domestic retail business. But they are engaging in all of these activities in a methodical fashion -- a pace that will not compromise the integrity of school, OEM, or international channels that have been so successful for them over the last year and allowed them to maintain their margins, generate healthy cash flows, continue to grow, and sustain the viability of their business model during a period of intense change in the retail channel.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.