SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For THE FISCAL YEAR ENDED AUGUST 31, 1996
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO______
Commission file number 0-15811
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BRODERBUND SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
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Delaware 94-2768218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Redwood Boulevard, Novato, California 94948-6121
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (415) 382-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the registrant's Common Stock, $.01 par value,
held by non-affiliates of the registrant, based upon the closing sale price of
the Common Stock on October 31, 1996 as reported on the NASDAQ National Market
system, was $582,097,753.
As of October 31, 1996, there were 20,696,809 shares of the registrant's Common
Stock Outstanding.
Documents Incorporated by Reference
Portions of registrant's definitive proxy statement (the "Proxy Statement") for
its 1997 Annual Meeting of Stockholders to be held January 23, 1997 are
incorporated by reference into Part III hereof.
This report consists of 44 sequentially numbered pages. The Exhibit Index is
located at pages 38 and 39. Page 1 of 44 Pages
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BRODERBUND SOFTWARE, INC.
FORM 10-K, AUGUST 31, 1996
Table of Contents
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Page
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PART I
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Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 14
Item 3. Legal Proceedings....................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders..................................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 16
Item 6. Selected Financial Data................................................................. 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 18
Item 8. Financial Statements and Supplementary Data............................................. 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 38
Item 11. Executive Compensation.................................................................. 38
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 38
Item 13. Certain Relationships and Related Transactions.......................................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 38
Signatures.............................................................................. 41
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS: This Form 10-K of
Broderbund Software, Inc. ("Broderbund " or the "Company") contains
forward-looking statements that are subject to risks and uncertainties.
Statements indicating that the Company "believes," "expects," "anticipates" or
"estimates" are forward looking as are all other statements regarding future
financial results, market conditions, product offerings or other events that
have not yet occurred. There are many important factors that could cause actual
results or events to differ materially and/or adversely from those anticipated
by the forward looking statements contained in this Form 10-K or in the
Company's 1996 Annual Report to Stockholders. Such factors include but are not
limited to, the rate of growth of the consumer software market, market
acceptance of the Company's products or those of its competitors, the timing of
new product introductions, expenses relating to the development and promotion of
new product introductions, changes in pricing policies by the Company or its
competitors, projected and actual changes in platforms and technologies, timely
and successful adaptation to such platforms or technologies, the accuracy of
forecasts of consumer demand, product returns, market seasonality, the timing of
orders from major customers and order cancellations, and changes or disruptions
in the consumer software distribution channels as well as those factors listed
under Factors Affecting Future Operating Results in the Company's 1996 Annual
Report to Stockholders and elsewhere herein. Actual events or the actual future
results of the Company may differ materially from any forward looking statement
due to such risks and uncertainties. Other factors, uncertainties and
assumptions not specifically identified or disclosed by the Company were also
involved in the derivation of these forward-looking statements and the failure
of such other assumptions to be realized may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
these forward-looking statements to reflect actual results or changes in factors
or assumptions affecting such forward looking statements.
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PART I
Item 1. BUSINESS
Overview
Broderbund Software, Inc. ("Broderbund" or the "Company") develops,
publishes and markets a broad line of interactive personal productivity,
entertainment and education software for use in the home, school and small
business markets. Since the founding of the Company in 1980, Broderbund has
developed innovative products which take advantage of advances in personal
computer ("PC") technology and which have won over 400 awards and sold over 35
million units. The Company is committed to creating imaginative software to
provide value for consumers of all ages.
Broderbund's strategy is to identify and develop families of products that
will achieve sustained consumer appeal and brand name recognition primarily
across three major consumer software categories: personal productivity,
entertainment and education. The Company's best known products are The Print
Shop(R) family of personal productivity products, the Carmen Sandiego(R) family
of educational products, the Family Tree Maker(TM) line of genealogy products,
and the entertainment product Myst(R), which is the best selling PC game of all
time. Recognizing that new and emerging technologies have historically played,
and will continue to play, an increasingly significant role in the multimedia
environment and consumer preferences, the Company seeks to adapt to and
incorporate such technologies into its product offerings. In this respect, the
Company believes that the emergence of the internet represents an important
trend and opportunity in the consumer software market, and as part of its
internet strategy it is developing on-line capabilities to its existing
products, expanding its web-site presence and infrastructure and investing in a
number of small internet related companies in order to keep abreast of
developments in this rapidly-evolving area, and to position itself as a leading
participant in this emerging platform.
The Company sells its products through distributors, computer superstores,
electronics stores, mass merchandisers, discount warehouse stores, office
stores, software specialty retail chains and educational dealers. The Company's
North American retail sales force serves over 20,000 domestic retail outlets. In
addition, Broderbund also sells its products directly to schools and to
consumers. International sales are primarily derived from a subsidiary in the
United Kingdom and from licensing arrangements with foreign distributors. The
Company also leverages its distribution strength by acting as the exclusive
distributor for other publishers through its affiliated label program.
The consumer software industry is characterized by rapid change, intense
competition and consolidation. The Company has engaged in acquisitions,
investments and joint ventures of technologies, content products and businesses
when it believes that they are consistent with and beneficial to its overall
strategy. In 1995 Broderbund acquired Banner Blue, and its Family Tree Maker
product line, one of Broderbund's top three best selling families of products in
1996. In August 1996, the Company acquired T/Maker Company, a leading publisher
of clip art software, including the popular ClickArt(R) product line. During
fiscal 1996, Broderbund also made a minority equity investment in Live Picture,
Inc., which publishes photo editing software for businesses and consumers. In
addition, the Company has initiated investments in certain start-up internet
related companies.
Living Books(R) is an equal partnership between Broderbund and Random
House. This joint venture publishes a series of award-winning, interactive
animated children's storybooks on CD-ROM. Broderbund has an affiliated label
arrangement with Living Books to distribute its products through Broderbund's
computer software distribution channels. Living Books has now released a total
of 14
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children's titles, including Just Grandma and Me, The Berenstain Bears In the
Dark, Dr. Seuss's ABC and the recently released Green Eggs and Ham.
The Company was incorporated in California in September 1981 and was
reincorporated in Delaware in February 1987. The Company's executive offices are
located at 500 Redwood Boulevard, Novato, California 94948-6121. Its telephone
number is (415) 382-4400. The Company's internet web site is located at
http://www.broderbund.com.
Industry Background
The consumer software market is generally divided into five primary
categories: entertainment, education, personal productivity, finance and
reference. The Company primarily develops and publishes products for the first
three of these categories.
Improvements in multimedia technology have fundamentally changed the
consumers' experience by providing highly interactive entertainment and
educational environments increasingly rich in content with realistic sounds and
music, text, advanced graphics and animations, photographs and even film or
video clips. Accordingly, although consumer demand has grown for multimedia
products as a result of these improvements, so have consumer expectations for
more sophisticated, easy to use, content rich products. Periodically, the
software industry undergoes profound changes with the introduction of new
hardware platforms and new technologies, such as, most recently, Win95 and the
internet. In addition to these developments, competition has continued to
increase and intensify among new and existing multimedia content providers.
The growth in the installed base of multimedia PCs over the last few years
has resulted in the creation of a mass market for consumer software products
with advanced multimedia functionality and engaging content. The creation of
this mass market has been characterized by the rise in importance of mass
merchant software sales as a distribution channel, increasing price pressure as
well as increasing competition for limited consumer retail shelf space. This
competitive environment has resulted in the increased importance of creating
significant brand name recognition, establishing strong retail relationships in
the distribution channel, and offering a diverse product line for increased
likelihood of retail success and sell-through.
Products
Broderbund's product strategy is to create, identify and develop families
of software products with brand name recognition in order to achieve sustained
consumer appeal. During fiscal 1996, the Company released 42 new titles in both
the published and affiliated label areas, as compared to 36 new titles in fiscal
1995. The Company offers products primarily in three major consumer software
categories: personal productivity, entertainment and education. Personal
productivity products consist of software that provide tools for the consumer to
enhance productivity, whether via printed output or on-screen visualization.
Entertainment products are designed for the consumer's leisure time enjoyment.
Broderbund designs its education products to be both educational and engaging,
so that the products appeal both to the primary user (i.e., the child) and to
the buyer (i.e., the parent). The top three best selling products during fiscal
1996 were The Print Shop Ensemble, Myst and Family Tree Maker.
The Company's product strategy for each of its categories is based on the
following:
Branded Product Franchises. Broderbund seeks to develop products with
significant and broad brand name recognition that may be expanded into families
of related sequel or complementary products in
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order to achieve sustained consumer appeal. Successful products serving as
examples of the Company's strategy include: The Print Shop, Carmen Sandiego, Kid
Pix(R), Myst, the Active Mind Series(TM), Family Tree Maker and Living Books
families of products. The Company believes that developing product families
helps to achieve longer life cycles for the Company's products.
Advanced Technology. The Company seeks to create technologically
sophisticated multimedia products based on the latest personal computer
platforms, including the internet. Broderbund incorporates conventional
programming disciplines with advanced tools like those used to develop animated
or cinematic films. The Company has also developed proprietary internal
programming tools, including a powerful product development system that allows
for simultaneous development of programs on multiple platforms. The advanced
technology utilized increases the appeal of Broderbund's products to
sophisticated consumers as well as new users.
Creativity. Broderbund seeks to foster creativity in the development of its
products. The Company's goal is to lead the market in manifesting creativity in
our products and in pioneering new types of interactive experiences. Throughout
its sixteen years of developing products, Broderbund has a history of
establishing products with enduring consumer appeal by conceiving imaginative
and innovative ideas to develop new niches in the consumer market.
Quality. The Company seeks to provide a high level of quality in its
products. The Company strives to develop products that exceed customer
expectations and provide long-term lasting value and enjoyment. The SPA has
consistently recognized the quality of Broderbund products. Broderbund has been
awarded more SPA "Excellence in Software" Awards than any other company.
Ease-of-Use. The Company seeks to create products that allow the consumer
to become quickly proficient in the use of the product. Because Broderbund's
products are easy to use, they are often given as gifts or recommended as
purchases for the first-time buyer.
Third Party Validation. The Company seeks to develop products that appeal
both to the primary user and to third parties, particularly parents and
teachers, who have significant influence over the product buying decision.
Broderbund believes the educational and creative content in its products makes
them popular with parents and teachers without diminishing the enjoyment of the
primary users.
The Company's products in each category are described below:
Productivity Products. The Company's productivity products are designed to
provide consumers and small businesses with high quality, easy to use software
products that relate to popular lifestyle, adult education and productivity
interests and needs. The productivity category includes The Print Shop family of
products, the Family Tree Maker line, 3D Home Architect(R) Edition 2,
Williams-Sonoma Guide to Good Cooking(TM), PC Globe(R) Maps N Facts(R), Org
Plus(R) and the ClickArt family of products. Products in The Print Shop family,
first introduced in May 1984, have sold over ten million units. The Print Shop
programs enable consumers to easily create personalized greeting cards, signs,
banners, calendars, post cards, letterhead, envelopes, business cards and other
personal documents and are supplemented by the additions of several graphics
libraries. Family Tree Maker is a leading genealogy program which is supported
by the Banner Blue division's Family Archives(TM) CD-ROM collections of family
historical data to make searching for one's ancestors easier. 3D Home Architect
is a best-selling, comprehensive solution to easy home design, complete with
realistic 3D views. Williams-Sonoma Guide to Good Cooking, released in September
1996, is a computerized cookbook designed to streamline and organize the cooking
process. Org Plus is an organizational charting tool used by many businesses. In
August 1996, the Company acquired T/Maker Company which publishes Click Art, a
popular line of clip art software.
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The Company's productivity products range in price in stores from
approximately $20 to $90. During fiscal 1996, productivity products accounted
for approximately 45% of the Company's net revenues.
Entertainment Products. In September 1993, the Company released Myst, which
subsequently became the single best-selling title in PC history, and although it
continues to remain popular, sales declined significantly, especially in the
second half of fiscal 1996. Other entertainment titles released in fiscal 1996
included In the 1st Degree(R) and Learn the Art of Magic(TM). Part of
Broderbund's strategy is to increase its focus and commitment to the development
of entertainment titles and to expand its entertainment line with several new
strategy, adventure and action products using both internal and external
development resources. The Company has signed development agreements for several
new entertainment products that are expected to be released in calendar 1997.
However, because the entertainment market tends to be a "hit" driven business,
where only a relatively limited number of popular "hit" titles achieve
widespread consumer acceptance, the risks associated with the successful
development of costly entertainment products and their market acceptance
increase. As a result, there can be no assurance that the Company will publish
an adequate number of successful titles. In addition, the Company anticipates
that a significant number of the entertainment products will be licensed from,
or developed by, the Company in collaboration with independent software
developers. Accordingly the risks associated with reliance upon outside
developers will increase, including the risks of delays in product introduction,
increases in royalties paid to outside developers, and uncertainties surrounding
the Company's ability to attract and retain successful developers and their
content.
The Company's entertainment products range in price in stores from
approximately $20 to $50. During fiscal 1996, entertainment products accounted
for approximately 20% of the Company's net revenues.
Education Products. Broderbund's education strategy is to provide a broad
and diverse selection of high-quality educational products for the home and
school which are educationally strong, easy to use and engaging for a wide range
of age groups. The core of the education category is comprised of the Carmen
Sandiego family of products, the Active Mind Series, the ImagiMaker Series(TM),
the StoryQuest(TM) Series, and the new Advantage Libraries.
The Carmen Sandiego family of products is a very popular series of
interactive games designed to motivate the player to learn more about geography
and history and which have sold over five million units since the first product
was released in April 1985. The central character is Carmen Sandiego, who, due
to the popularity of the game and marketing efforts of the Company, has become a
household name. Since September 1991, Public Broadcasting Service Television
("PBS") has shown a weekday children's quiz show based on the Carmen Sandiego
theme. In addition, in February 1994, the Fox TV network began airing a new
cartoon series created by DIC Animation City, Inc. based on the Carmen Sandiego
software program called "Where on Earth is Carmen Sandiego?". Although the
Company does not receive significant revenues from the television programs, the
Company believes the programs have increased the exposure of the Carmen Sandiego
series and enhanced the recognition of the brand name.
The Active Mind Series includes seven products designed to develop
curriculum-oriented skills in reading, writing, math, communication, thinking
and reasoning, including the recently released Logical Journey of the
Zoombinis(TM), Reading Galaxy(TM), and Write, Camera, Action!(TM). The
ImagiMaker Series includes Kid Pix Studio, Kid Pix, and The Amazing Writing
Machine(R), a series of creative products that allow children to do projects
ranging from multimedia painting, arts and crafts, and slide shows to creative
writing. The first products in the Company's new StoryQuests Series, the
adventure stories Darby the
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Dragon and Gregory and the Hot Air Balloon, were released in fiscal 1996 and are
designed to entertain and teach children from the ages of 4 to 8.
In fiscal 1996, the Company, as part of its strategy to provide greater
value to its customers and to capture greater market share in the education
category, released four product "suites", which are collections of its CD-ROM
titles in one retail package, called Advantage Libraries. The Advantage
Libraries are designed to provide parents with complete education solutions at
an exceptional value.
The Company's education products range in price in stores from
approximately $20 to $70. During fiscal 1996, education products accounted for
approximately 20% of the Company's net revenues.
Affiliated Label Products. Affiliated label products are designed,
developed and published by third party software publishers and distributed by
Broderbund through its sales forces. In fiscal 1996, affiliated label products
accounted for approximately 15% of the Company's net revenues. The Company's
current affiliated label partners are: Against All Odds Productions, Cyan, Inc.,
Headbone Interactive Inc., Inroads Interactive, Inc., Live Picture, Inc.,
ParaGraph International, Progressive Networks, Starwave Corporation, Sunset New
Media, The Logic Factory, Inc., Tsunami Media, Inc. and Living Books.
Under affiliated label agreements, Broderbund performs a low-margin
distribution function and in certain cases, a manufacturing function, which
causes affiliated label revenues to yield substantially lower gross margins than
sales of Broderbund's published products. As a result, changes in the mix
between published sales and affiliated label sales can affect the Company's
gross margin. Affiliated label publishers in general are small publishers, often
with limited financial resources. The Company's affiliated label agreement
requires the affiliate label publisher to assume the financial risk of product
returns. There can be no assurance that there will not be significant returns of
affiliated label products, or that the affiliated label publisher will be able
to fulfill its financial obligation created thereby, in which case the Company,
in order to preserve it relationships with its customers, would have to assume
the obligation for affiliated label product returns.
Living Books. Since January 1, 1994, Broderbund and Random House, Inc. have
been equal partners in a joint venture called Living Books to publish the Living
Books line of products. Both Broderbund and Random House are distributing Living
Books through their respective distribution channels under affiliated label
agreements. The Living Books line of products is a series of CD-ROM based
interactive storybooks for children which allow children to learn, listen and
explore. Living Books feature well-known children's authors and classic
children's stories, including Just Grandma and Me, The Berenstain Bears In the
Dark, Dr. Seuss's ABC and the recently released, Green Eggs and Ham. The
Company's 50% share of the joint venture's profits and losses are recognized in
nonoperating income in the financial statements. In fiscal 1996, the market for
children's interactive storybooks on CD-ROM became intensely competitive, with
significant new entrants into the market, resulting in lower average selling
prices. In some cases, the new entrants had access to proprietary intellectual
property content, as well as the financial resources to market products heavily
and to leverage brand names through other media, such as feature films and
television. As a result, the Living Books joint venture recognized a loss in the
Company's fourth quarter in 1996, and there can be no assurances that the joint
venture will return to profitability in fiscal 1997.
Product Development
The Company's product development process includes design, prototyping,
programming, computer graphic design, animation, sound and video recordings and
quality assurance. Although the Company has focused on internally developed
technology, it acquires a portion of its products, content and
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technologies from third parties. The Company's development agreements with third
parties generally provide the Company with publishing, marketing and
distribution rights to a personal computer software product for payment of
royalties based on sales of the product. Many of these agreements also call for
development fees to be paid as advances on such royalties over the term of the
product's development. The specific royalty rates, development fees, payment
terms, geographic scope, duration and other terms of the Company's license
agreements vary, based on the nature of the product and the amount of
development contribution from the licensor.
The Company's product development department is divided into studios based
on product categories. Each of the Company's studios consists of software
engineers, graphic artists, animators, and sound and video technicians to
develop products and convert existing programs to various hardware formats. The
product development department also has a systems group which works on creating
more effective development systems. For example, the Company has designed a
proprietary development system that lets the Company develop programs for
several platforms at once. This advanced system is designed to enable the
internal development staff to accelerate production of new software products and
to reduce the time to convert a product to a different hardware platform. In
addition, the Company has also developed a proprietary graphics digitizing
system that enables Broderbund to deliver richer, more realistic images and
animations.
Most elements of the development process are provided by a combination of
third-party and in-house resources with the exception of quality assurance,
which is completed solely at Broderbund facilities. Broderbund believes that the
use of both in-house and third-party designers, artists and programmers expands
its ability to introduce creative and innovative products. Third-party
designers, content providers (such as musical composers) and some outside
programming groups often receive royalties on the sales of products with which
they were involved, in addition to fees, while most graphic artists and some
outside programming groups operate on a fee-only basis. The Company is
continuing to devote research and development resources to each of its product
categories.
The continued success of the Company depends on the timely introduction of
successful new products, including new titles and adaptations to new platforms,
to replace declining revenues from older products. Consumer preferences for
software products are difficult to predict, and few consumer software products
achieve sustained market acceptance. During fiscal 1996, a substantial
percentage of Broderbund's net revenues has been derived from each of The Print
Shop family, Myst and Family Tree Maker line. There can be no assurance that
current sales levels of these products can be maintained. In fact, the
substantial year-over-year decline in Myst revenues during the second half of
fiscal 1996 was not fully replaced, and there can be no assurance that the
shortfall from the continuing decline in Myst revenues will be replaced in a
timely manner or that Myst II's introduction will occur in fiscal 1997 or that
it will achieve widespread market acceptance. In general, entertainment products
have relatively short product lives, and sales of older entertainment products
may decline precipitously. If for any reason revenues from new products or
upgrades should fail to replace declining revenues from existing products, the
Company's business, operating results and the trading price of Broderbund's
common stock would be significantly adversely affected.
The process of developing software products such as those offered by the
Company is extremely complex and is becoming more complex and expensive over
time. In recent periods, the costs of internal development of new products, and
advances to fund product development by third parties, have increased
significantly. As a result, the financial risks borne by the Company associated
with new product development have increased. In addition, Broderbund's expense
levels are based on its expectations regarding future sales, and accordingly,
operating results would be disproportionately adversely affected by a decrease
in sales or failure to meet the Company's sales expectations due to delays in
new product
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introductions, or lower than expected demand. As a result of the inherent
seasonality of the Company's business, a delay in a new product introduction in
the first or second quarter of a fiscal year may have a particularly exaggerated
effect on results of operations in that year. In the past, Broderbund has
experienced delays in the introduction of new products, and anticipates that it
will experience similar delays from time to time in the future. If the Company
does not accurately anticipate and successfully adapt its products to emerging
platforms, environments and technologies, or new products are not introduced
when planned or do not achieve anticipated revenues, the Company's operating
results could be materially adversely affected. In addition, the Company
believes that electronic or internet products and services will become an
increasingly important platform and distribution media, the Company's failure to
timely and successfully adapt to and utilize such technologies could materially
and adversely affect its competitive position and its fiscal results.
Marketing and Distribution
Broderbund sells its products through distributors, software specialty
retail chains, computer superstores, mass merchandisers, discount warehouse
stores, educational dealers and directly to end users. Broderbund commonly
participates in and provides financial assistance for its retailers' promotional
efforts, such as in-store displays or catalog advertisements. The Company also
provides its retailers with demonstration disks and other collateral marketing
materials. Broderbund's two largest distributors in fiscal 1996 each accounted
for approximately 11% of the Company's net revenues in the fiscal year as
compared to 13% and 22% in fiscal 1995. The Company expects to continue to
increase its direct sales to retailers in fiscal 1997.
Sales to a limited number of distributors and retailers have constituted
and are anticipated to constitute a substantial amount of the Company's net
revenues. Generally, arrangements with these distributors and retailers may be
terminated by either party at any time. The loss of, or significant reduction in
sales volume attributable to any of the Company's principal resellers or
accounts sold through such resellers could materially adversely affect the
Company's results of operations. In addition, certain distributors and retailers
have experienced business difficulties and there can be no assurance such
difficulties for these or additional distributors and retailers will not
continue which could have an adverse effect on the operating results and
financial condition of the Company.
The distribution channels through which consumer software products are sold
are characterized by rapid change, including consolidations and business
difficulties of certain distributors and retailers and the emergence of new
retailers such as warehouse clubs, mass merchants and computer superstores. In
addition, there is an increasing number of companies competing for access to
these channels. As a result of this activity, the Company has experienced an
increase in product returns and credit risks and has adjusted its reserves for
product returns and doubtful accounts accordingly.
In addition, retailers of the Company's products typically have a limited
amount of shelf space and promotional resources, and there is intense
competition for high quality and adequate levels of shelf space and promotional
support from retailers. To the extent that the number of software products and
consumer platforms increases, this competition for shelf space may also
increase. As large computer and software manufacturers, entertainment companies,
media companies and print publishers enter or increase their focus on the
consumer software market, the competition for shelf space will become more
intense. There can be no assurance that distributors and retailers will continue
to purchase the Company's products or provide the Company's products with
adequate levels of shelf space and promotional support.
At the time of product shipment the Company establishes reserves that are
an estimate of future returns of products. The Company's estimates of future
returns takes into account the anticipated growth
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in revenue, the current level of distributor and retailer inventories of its
products in relation to the seasonally adjusted rate of sell-through for each
product, the impact of planned product releases on sales of previously released
products, the proportion of sales attributable to new outlets of existing
retailers and new channels, the effects of shifts in consumer preferences, and
other factors. Broderbund monitors the volume of its sales to distributors and
retailers to attempt to avoid over-stocking of its products by such customers.
The Company maintains a stock balancing policy that allows distributors and
retailers to return products according to negotiated terms or pursuant to any
promotional terms that may be in effect and the Company accepts returns of
defective, shelf-worn and damaged products at any time in accordance with
negotiated terms. Product returns that differ from the Company's reserves could
affect the Company's operating results. Broderbund believes that the rate of
product returns will increase as mass merchants become an increasing percentage
of the Company's sales. Additionally, the Company believes that higher than
normal returns may be experienced whenever significant shifts occur within the
distribution channel and whenever significant shifts occur with respect to
consumer preferences for new technologies.
Broderbund also promotes its products directly to consumers. Marketing
activities include direct mailings of catalogs, brochures, in-store
demonstrations and presentations to computer user groups, advertising in
computer publications and the circulation of newsletters to specific audiences.
As the Company increases its product offering in the entertainment category, it
is likely that the Company will pursue a strategy to significantly increase the
amount that it spends on consumer advertising, thus adversely affecting the
Company's profit margin if there is no corresponding significant increase in
revenues generated by those products. The entertainment sector in particular is
characterized by significant marketing, promotional and advertising
expenditures, and there can be no assurance that a strategy to increase
marketing and promotional activities will be successful, or that the revenues
generated by the affected products will offset the increased marketing and
promotional expenditures. Further, the Company expects to increase significantly
its direct-to-consumers marketing, via direct mailings to customers, among other
things. Such marketing efforts can be extremely costly, and there can be no
assurance that these activities will be cost-effective. The Company maintains a
substantial mailing list currently comprising over 3 million users of the
Company's products.
The Company's 38-person national sales staff covers the United States and
Canada and operates out of ten offices located in California (2), Illinois (2),
Maryland, Massachusetts, Ohio, Pennsylvania, Texas and Ontario, Canada. The
Company has established a subsidiary in the United Kingdom to market and
distribute localized versions of the Company's products to the major European
markets. In addition, the Company has distribution arrangements in Australia,
Southeast Asia and Japan. The Company's international distributor agreements
generally grant the exclusive right to distribute the Company's products in
specific geographic territories. In some cases, the distributor purchases
finished goods from the Company for resale. In other cases, the distributor
develops a foreign language version and pays the Company a royalty on sales of
such products. In fiscal 1996, international sales accounted for approximately
11% of the Company's net revenues.
The Company has a separate 8-person education sales and marketing group to
focus on sales to schools. The Company believes that sales to this market are an
important element in its overall success because schools often introduce
children to Broderbund's products.
Competition
The consumer software industry is intensely and increasingly competitive.
The Company expects that existing consumer software companies can be expected to
broaden their product lines or increase their focus to compete more directly
with its products. Moreover, large corporations with substantial bases of
intellectual property content in the motion picture and media industries and/or
substantial financial
10
<PAGE>
resources without the need for immediate profit or return, have increasingly
entered or announced their intention to enter the market for consumer software.
Certain of the Company's existing and future competitors have greater financial,
technical, marketing, sales and customer support resources than Broderbund.
There can be no assurance that the Company will compete successfully in the
future.
Only a small percentage of products introduced in the consumer software
market achieve any degree of sustained market acceptance. Broderbund believes
that the principal competitive factors in the consumer software industry include
product features and quality, reliability and ease-of-use, brand name
recognition, strength in distribution channels, quality of support services and
price. The Company believes that its products compete most favorably with
respect to product features and quality, reliability and ease-of-use, brand name
recognition and strength in distribution channels and, to a lesser extent, with
quality of support services and price. Broderbund also believes that the
increased technical sophistication required in new consumer software products
has caused the availability of significant financial resources to become a more
important competitive factor. Broderbund believes that the competitive
environment has increased pressure to reduce the prices of its products which
would reduce profit margins. In response to such competitive pressures, the
Company has reduced the price of some of its products, including its best
selling series, The Print Shop, and there can be no assurance that product
prices will not continue to decline or that the Company will not respond to such
declines with additional product price reductions. Prolonged price competition
would have a material adverse effect on the Company's operating results.
International Sales and Expansion
Over the last year and one-half Broderbund has taken several steps to
enhance its presence in international markets, including the Company's
establishment of a wholly-owned subsidiary in the United Kingdom in February
1995 and an increase in the number of international and localized products
developed by the Company. As a result, international revenues amounted to
approximately 11% of net revenue for fiscal 1996. Although the Company did
experience significant growth in its international operations and sales in
fiscal 1996, and expects that such operations will continue to grow, there can
be no assurance that international sales of products will continue to grow at
the rate experienced during fiscal 1996, or that other difficulties, including
the timely and successful launch of foreign products, will not be encountered in
the future. In addition, international sales are subject to inherent risks,
including unexpected regulatory requirements, tariffs and other barriers,
difficulties managing foreign operations, currency fluctuations and difficulty
in collection of accounts receivable.
Proprietary Rights
Generally, the Company does not have signed license agreements with the end
users of its products and does not copy-protect its software; rather, it relies
on the copyright laws to prevent unauthorized distribution of its software. The
Company also relies on a combination of trade secret, patent and trademark laws
and nondisclosure agreements to protect its proprietary rights. Existing
copyright laws afford only limited protection. It may be possible for
unauthorized third parties to copy the Company's products or to reverse engineer
or otherwise obtain and use information it regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which software piracy of its products
exists, software piracy can be expected to be a persistent problem. The Company
is a member of the SPA and supports the SPA's anti-piracy efforts to police the
unauthorized use of software. In addition, there can be no assurance that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to its technologies. Further, the laws of
certain countries in which the Company's products are or may be distributed do
not protect products and intellectual property rights to the same extent as the
laws of the United States.
11
<PAGE>
Internet Opportunities and Strategies
The Company believes that the proliferation of on-line networks and the
internet has created new opportunities for the consumer software industry,
including opportunities for the Company to strengthen customer relationships,
direct distribution, broaden its reach to new customers, add value to existing
products and to develop new products and markets. Broderbund has initiated steps
to take advantage of these opportunities, including the expansion of its on-line
web site presence, infrastructure and capabilities, incorporating on-line
functionality into existing products, such as The Print Shop, Carmen Sandiego,
Family Tree Maker and 3D Home Architect products, and started development of,
and investment in, new internet centric businesses and products, including
multi-user entertainment products. The Company expects to incur significant
costs in connection with its internet infrastructure, including costs associated
with the acquisition of hardware and software necessary to allow for on-line
commerce and multi-user games. Although the Company expects that these platforms
and technologies will be an integral element of its overall business, there can
be no assurance that the Company's internet strategy will be successful, or that
the costs and investments will provide adequate, or any, returns.
Product Concentration
During fiscal 1996, approximately 45%, 20% and 20% of the Company's net
revenues were derived from sales of productivity, entertainment and education
products, respectively. These products are expected to continue to account for a
material percentage of net revenues in fiscal 1997 and thereafter. There can be
no assurance that sales levels of any of these families of products will
increase or be sustained, especially in the light of increased competition in
the market place. The failure of new products in these families to achieve
market acceptance, or an overall decline in sales of any one or more of the
products in these families, could have a material adverse effect on the
Company's financial condition and operating results.
Acquisitions, Investments and Joint Ventures
The Company believes that its future success and growth will depend in part
on its ability to identify, acquire and integrate technologies, content products
and/or businesses. The Company continues to actively explore additional
product-driven and technology-driven acquisition, investment, and joint venture
opportunities consistent with Broderbund's overall product and publishing
strategies. In the past these opportunities have included acquisitions of
external technologies, content products and businesses, investments in shared
technologies and various start-up internet businesses, and joint ventures, such
as Living Books. There can be no assurance that the Company will be successful
in identifying suitable opportunities, or if identified, there can be no
assurance that the Company will be successful in completing, or integrating, the
acquired properties, investments or joint ventures.
Fluctuations in Results and Stock Price
The Company has experienced, and expects to continue to experience,
significant fluctuations in operating results due to a variety of factors,
including but not limited to, the rate of growth of the consumer software
market, fluctuations in consumer demand, market acceptance of the Company's
products or those of its competitors, the timing of new product introductions,
expenses relating to the development and promotion of new product introductions,
changes in pricing policies by the Company or its competitors, projected and
actual changes in platforms and technologies, timely and successfully adaptation
to such platforms or technologies, the accuracy of forecasts of consumer demand,
product returns, market seasonality, the timing of orders from major customers
and order cancellations, the ability to timely manufacture and ship products in
response to fluctuating demand, and changes or disruptions in the
12
<PAGE>
consumer software distribution channels. As a result of these and other factors,
the Company's results in any given period are inherently difficult to predict.
In the event that the Company should experience a shortfall in sales in a
given fiscal quarter, the Company does not expect that it would be able to
reduce its operating expenses quickly enough to prevent a decline in profit
margins. As a result, a shortfall in sales in any given period may have an
exaggerated effect on the Company's earnings for that period. Because the
Company's stock trades at a relatively high price-earnings multiple, due in part
to analysts' expectations of continued earnings growth, even a relatively small
shortfall in earnings or a change in analysts' expectations may cause an
immediate and substantial decline in the Company's stock price. Moreover, the
Company's stock is subject to the volatility generally associated with
technology stocks and may also be affected by broader market trends or the
results reported by other market participants. There can be no assurance that
the Company's stock price will remain at or near its current level. Investors in
the Company's common stock must be willing to bear the risk of such fluctuations
in earnings and stock price.
Seasonality
Although the Company's business has generally been highly seasonal, with
net revenues and operating income generally highest in the first fiscal quarter
during the calendar year-end holiday selling season, lower in the second fiscal
quarter, and lowest in the seasonally slow third and fourth fiscal quarters.
During fiscal 1997, the Company anticipates that its results may differ from
that seasonal pattern with results more heavily weighted to the second half of
the fiscal year when several new entertainment products are scheduled to be
released. The Company also believes that the market conditions which resulted in
the year-over-year decline in revenues and profitability experienced in the last
two quarters of fiscal 1996 will continue for at least the next two fiscal
quarters. Without growth in net revenues in any particular quarter, the
Company's increasing operating expenses would cause net income to decline when
compared to the same period in the previous year.
Employees
As of August 31, 1996, the Company had 638 employees, including 241 in
product development, 222 in sales, marketing and customer service, 103 in
manufacturing and shipping and 72 in administration and finance. The Company's
future success depends in large part on the continued service of its key
technical and senior management personnel and on its ability to continue to
attract, motivate and retain highly qualified employees. Competition for such
employees is intense, and the loss of the services of key personnel could have a
material adverse effect upon the Company's current operations and on new product
development efforts. None of the Company's employees is represented by a labor
union or is subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and believes that its employee relations are good.
Broderbund Foundation
In 1988, the Company created the Broderbund Foundation (the "Foundation"),
a non-profit corporation. Douglas Carlston and William McDonagh serve on the
three-member Board of Directors of the Foundation. Each year, the Company
donates to the Foundation a percentage of its adjusted pretax profits as
determined by the Company's Board of Directors. For the preceding three years
Broderbund has donated approximately 2% of its adjusted pretax profits. The
Foundation makes grants to qualified non-profit organizations at the discretion
of the Foundation's Board of Directors.
13
<PAGE>
Production
The Company prepares master software diskettes and CD-ROM discs, user
manuals and packaging, and prints labels. The Company primarily uses outside
sources to procure and duplicate CD-ROM discs. Diskette duplication is performed
by the Company at its own facilities. Printing of the user manuals, packaging
and manufacture of related materials are performed to the Company's
specifications by outside sources, and the completed packages are assembled by
the Company. To date the Company has not experienced any material difficulties
or delays in the manufacture and assembly of its products, and has experienced
very low returns due to product defects, however there can be no assurance that
such difficulties will not occur in the future.
Backlog
The Company typically ships product within one to two days after receipt of
an order, which is customary in the computer software business. Accordingly,
backlog as of any particular date is not representative of actual sales for any
succeeding period.
Item 2. PROPERTIES
Broderbund leases approximately 111,000 square feet of office space in
Marin County, California, approximately 134,000 square feet of manufacturing and
warehouse space in Sonoma County, California, approximately 15,000 square feet
of office space in Alameda County, California, approximately 10,000 square feet
of office space in Santa Clara County, California and 1,500 square feet of
office space in Provo, Utah. The Company also leases approximately 12,000 square
feet, a portion of which has been sublet to third parties, in Tempe, Arizona.
Broderbund leases approximately 4,000 square feet of office space for its
European subsidiary in the United Kingdom, and leases office space for sales
representatives in the United States and Canada. The Company expects that its
office, manufacturing and warehouse space will be sufficient for its needs
through fiscal 1997.
Item 3. LEGAL PROCEEDINGS
The Company is subject to various pending claims. Management, after review
and consultation with counsel, considers that any liability from the disposition
of such lawsuits in the aggregate would not have a material adverse effect upon
the consolidated financial position or results of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended August 31, 1996.
14
<PAGE>
Executive Officers of the Registrant
The executive officers of the Company, who are appointed by and serve at
the discretion of the Company's Board of Directors, are as follows:
Name Age Position with Company
---- --- ---------------------
Joseph P. Durrett 51 Chief Executive Officer and Director
William M. McDonagh 40 President, Chief Operating Officer and Director
Jan L. Gullett 42 Senior Vice President, Marketing and Sales
Harry R. Wilker 50 Senior Vice President, Broderbund Studios
Thomas L. Marcus 43 Vice President, Business Development,
General Counsel and Secretary
Michael J. Shannahan 48 Vice President, Finance and Chief Financial
Officer
Rodney D. Haden 46 Vice President, Sales
There are no family relationships among directors or executive officers of
the Company.
Mr. Durrett joined the Company in October 1996 as Chief Executive Officer.
Prior to joining the Company, Mr. Durrett served as president and chief
operating officer of ADVO, Inc., a direct marketing company, and has held senior
management positions at Kraft General Foods and brand management positions at
Procter and Gamble. Mr. Durrett received a B.A. from Duke University and an
M.B.A. from Wharton School, University of Pennsylvania.
Mr. McDonagh joined the Company in October 1982 as Controller. In April
1987, he was promoted to Vice President of Finance. In February 1992, Mr.
McDonagh was appointed Senior Vice President and Chief Financial Officer. Since
April 1994, he has served as President and Chief Operating Officer. Mr.
McDonagh, a certified public accountant, received a B.A. from the University of
Notre Dame and an M.B.A. from Golden Gate University.
Mr. Gullett joined the Company in February 1995 as Senior Vice President,
Marketing and Sales. Prior to joining the Company, Mr. Gullett spent eighteen
years in the consumer products industry with Pepsico, Sara Lee Corp. and Procter
and Gamble. Mr. Gullett received a B.S. from Miami University and an M.B.A. from
Harvard University.
Mr. Wilker joined the Company in March 1987 as Manager, Technical Services
and served as an Executive Publisher between August 1987 and May 1990. In July
1990 he was appointed Vice President, Product Development for the productivity
group and in July 1992, he was appointed Vice President of Publishing. Mr.
Wilker was promoted to Senior Vice President, Broderbund Studios in June 1994.
Mr. Wilker received a B.S. from George Washington University and an M.A. in
political science from the State University of New York at Buffalo.
15
<PAGE>
Mr. Marcus joined the Company in October 1986 as General Counsel. Since
1987, he has served as Vice President, General Counsel and Secretary of the
Company. In June 1994, Mr. Marcus was also appointed Vice President, Business
Development. He had previously served as Vice President of Business Development
from November 1989 to June 1991. Mr. Marcus received an A.B. from Yale
University and a J.D. from University of California at Berkeley, Boalt Hall.
Mr. Shannahan joined the Company in February 1995 as Vice President,
Finance and Chief Financial Officer. Prior to joining the Company, Mr. Shannahan
was an audit partner with KPMG Peat Marwick LLP in the information,
communication and entertainment practice. Mr. Shannahan received a B.S. from
Rockhurst College in Kansas City, Missouri. Mr. Shannahan is a certified public
accountant.
Mr. Haden joined the Company in July 1985 as Director of Sales. Since April
1987, he has served as Vice President, Sales. Mr. Haden oversees sales in the
United States and Canada. Mr. Haden received a B.A. from The American University
in Washington, D.C.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Trading
The Company's common stock is traded on the NASDAQ National Market System
under the symbol BROD. The following table sets forth, for the periods
indicated, the high and low closing prices for the Company's common stock as
reported by NASDAQ:
Fiscal 1996 High Low
First Quarter $76.88 $53.50
Second Quarter 64.75 43.13
Third Quarter 48.75 37.00
Fourth Quarter 44.00 28.50
Fiscal 1995 High Low
First Quarter $35.75 $25.38
Second Quarter 55.38 33.25
Third Quarter 59.75 44.38
Fourth Quarter 76.75 43.13
The Company has not paid cash dividends and has no present plans to do so.
There were 447 stockholders of record on August 31, 1996, excluding stockholders
whose stock is held in nominee or street name by brokers.
16
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended August 31, 1996 1995 1994 1993 1992
(In thousands, except per share data)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Net revenues $ 186,207 $ 171,594 $ 111,774 $ 95,583 $ 75,085
Cost of revenues 58,544 61,092 40,589 39,119 32,838
----------------------------------------------------------
Gross margin 127,663 110,502 71,185 56,464 42,247
----------------------------------------------------------
Operating expenses:
Sales and marketing 34,381 25,143 18,621 15,051 11,102
Research and development 29,244 22,784 16,016 13,671 10,624
General and administrative 11,256 11,085 7,500 7,112 6,375
Charge for acquired in-process
technology 8,369 -- -- -- --
----------------------------------------------------------
Total operating expenses 83,250 59,012 42,137 35,834 28,101
----------------------------------------------------------
Income from operations 44,413 51,490 29,048 20,630 14,146
Interest and dividend income, net 6,499 6,364 1,791 1,295 1,318
Equity in earnings of joint venture 217 3,886 -- -- --
Terminated merger fees, net 15,464 -- (11,000) -- --
----------------------------------------------------------
Income before income taxes 66,593 61,740 19,839 21,925 15,464
Provision for income taxes 29,816 25,553 8,778 8,297 5,805
----------------------------------------------------------
Net income $ 36,777 $ 36,187 $ 11,061 $ 13,628 $ 9,659
==========================================================
Net income per share $ 1.71 $ 1.72 $ 0.55 $ 0.68 $ 0.49
==========================================================
Shares used in computing per share
data 21,509 21,037 20,145 20,006 19,582
==========================================================
Balance Sheet Data
at August 31
Cash and short-term investments $ 150,893 $ 126,547 $ 75,000 $ 54,316 $ 31,409
Working capital 142,493 119,894 73,005 54,770 37,462
Total assets 200,432 161,551 97,651 77,229 56,226
Stockholders' equity 165,548 128,882 80,179 62,010 44,170
</TABLE>
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
NET REVENUES
(In thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Net revenues $186,207 9% $171,594 54% $111,774
- --------------------------------------------------------------------------------
The Company derives revenue from products which are published by Broderbund
(published products) and products from other software publishers which are
distributed by Broderbund (affiliated label products). The Company sells its
products in North America primarily through distributors as well as directly to
retailers and consumers. The Company's international sales, representing 11% of
revenues in fiscal 1996 and less than 10% of revenues in fiscal 1995 and 1994,
are derived from a subsidiary in the United Kingdom and licensing arrangements
with foreign distributors.
The Company's top three selling products during fiscal 1996 were The Print
Shop Ensemble, Myst, and Family Tree Maker. Although each is a leading product
in its segment, each product is encountering increased competition. During
fiscal 1996, the Company released 42 new titles in both the published and
affiliated label areas, as compared to 36 new titles in fiscal 1995 and 37 new
titles in fiscal 1994.
Revenue growth rates from the Company's major product families fluctuate
from year to year, depending on the timing of new product releases or
acquisition of new products or product lines, comparable growth in the prior
year, and changes in consumer demand. The productivity product line showed the
highest growth rate, approximately 30% year over year in fiscal 1996 compared to
48% in fiscal 1995. Growth in this product line was primarily due to the
addition of Family Tree Maker products from the acquisition of Banner Blue
Software in April 1995. The education line of products grew approximately 13% in
fiscal 1996 as compared to 4% in fiscal 1995 due mainly to the introduction of
the Advantage Library suites of products. The entertainment category was down
15% in fiscal 1996 after increasing over 150% in fiscal 1995. This was primarily
due to the significant decline in Myst sales in fiscal 1996 compared to the
significant increase experienced in fiscal 1995. Net revenues from the
affiliated label products declined 9% in fiscal 1996, following an increase of
61% in fiscal 1995 primarily due to a decline in Living Books sales as
competition increased in the children's interactive storybook category. While
net revenues reached a record high, the net revenue growth rate slowed when
compared to prior year growth, particularly in the second half of the fiscal
year, reflecting the increasingly competitive and challenging consumer software
market, and in particular, the decreases in the rate of sales of Myst and Living
Books products.
The growth in net revenues during fiscal 1995 resulted primarily from new
product releases among both published and affiliated label products.
Particularly strong products in fiscal 1995 included Myst and The Print Shop
Ensemble II, as well as the Living Books series. Also contributing to the growth
in fiscal 1995 was the continued expansion of software into the mass-merchant
retail channel, expanding the number of locations where the Company's software
could be purchased.
COST OF REVENUES
(In thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Cost of revenues $58,544 (4%) $61,092 51% $40,589
Percentage of net revenues 31% 36% 36%
- --------------------------------------------------------------------------------
18
<PAGE>
Cost of revenues includes cost of goods sold, royalties paid to developers
and accrued technical support costs, which relate primarily to telephone support
provided to consumers after they purchase the software. The Company does not
capitalize software development costs as the impact on the financial statements
would be immaterial. Affiliated label products carry significantly higher cost
of revenues than published products.
Cost of revenues declined as a percentage of net revenues in fiscal 1996
after remaining constant in fiscal 1995 and 1994. The decrease was primarily due
to changes in the mix between sales of published products and sales from
affiliated label companies and to a decrease in royalties paid to outside
developers. Lower margin affiliated label revenues represented 15% of revenues
in fiscal 1996 as compared to 18% in fiscal 1995 and 17% in fiscal 1994.
OPERATING EXPENSES
<TABLE>
<CAPTION>
(In thousands) 1996 Change 1995 Change 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and marketing $34,381 37% $25,143 35% $18,621
Percentage of net revenues 18% 15% 17%
---------------------------------------------------
Research and development $29,244 28% $22,784 42% $16,016
Percentage of net revenues 16% 13% 14%
---------------------------------------------------
General and administrative $11,256 2% $11,085 48% $ 7,500
Percentage of net revenues 6% 6% 7%
---------------------------------------------------
Charge for acquired in-process
technology $ 8,369 100% -- -- --
Percentage of net revenues 4% -- --
- ------------------------------------------------------------------------------------
</TABLE>
Sales and marketing expenses increased in fiscal 1996 from fiscal 1995
primarily due to an increased emphasis on advertising and promotions and other
sales and marketing programs, as well as a higher level of staffing to support
the additional programs. Sales and marketing expenses also included the costs
from the Banner Blue division for all of fiscal 1996, whereas in the prior year,
expenses were only included subsequent to the completion of the acquisition in
April 1995. Sales and marketing expenses increased in fiscal 1995, as compared
to fiscal 1994, primarily due to promotional efforts and additional staffing
levels associated with new product releases, special marketing programs for
certain products and costs associated with direct sales to customers.
Research and development expenses increased in fiscal 1996 as compared to
fiscal 1995 primarily as a result of the increased number of new title releases,
expansion of the Company's development staff as part of its continued focus on
new product development and the publishing of more technologically sophisticated
multimedia products. The increase in research and development expenses in fiscal
1995 as compared to fiscal 1994 was due primarily to the investment in staffing
and technology to convert the Company's product line to Windows 95. Also,
subsequent to April 1995, research and development expenses include the costs of
the Banner Blue division.
General and administrative costs for fiscal 1996 remained constant as a
percentage of net revenues when compared to fiscal 1995 as an effort was made to
maintain expense levels consistent with the prior year. General and
administrative expenses increased in fiscal 1995 as compared to fiscal 1994, as
a result of increased employee-related expenses associated with staffing
requirements needed to support higher
19
<PAGE>
revenue levels, the creation of the Company's wholly owned subsidiary in the
United Kingdom, and the acquisition of Banner Blue Software.
In August 1996, the Company charged to operations in-process technology of
$8.4 million in connection with the acquisition of T/Maker Company.
NONOPERATING INCOME AND EXPENSES
<TABLE>
<CAPTION>
(In thousands) 1996 Change 1995 Change 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest and dividend income, net $ 6,499 2% $ 6,364 255% $ 1,791
Percentage of net revenues 3% 4% 2%
-----------------------------------------------------------
Equity in earnings of joint venture $ 217 (94)% $ 3,886 100% --
Percentage of net revenues 0% 2% --
-----------------------------------------------------------
Terminated merger fees, net $ 15,464 100% -- -- $(11,000)
Percentage of net revenues 8% -- (10)%
- -------------------------------------------------------------------------------------------------
</TABLE>
Investment income increased in fiscal 1996 as compared to fiscal 1995 and
1994 due to higher average invested cash balances. In fiscal 1995, the Company
had a gain of $1.6 million from the sale of a common stock investment that was
previously recorded as a non-current asset at no net value.
In fiscal 1996, the contribution from the Company's 50% equity interest in
Living Books, a joint venture between Broderbund and Random House, decreased
from fiscal 1995 due primarily to the decline in net revenues of Living Books
products, as well as an increase in operating expenses reflecting higher
marketing and development costs.
In December 1995, Broderbund and The Learning Company terminated an
agreement to merge and Broderbund recognized a gain from the break-up fee paid
by The Learning Company. In May 1994, Broderbund and Electronic Arts terminated
an agreement to merge. Broderbund recognized a charge in conjunction with the
terminated merger.
PROVISION FOR INCOME TAXES
(In thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Provision for income taxes $29,816 17% $ 25,553 191% $8,778
Effective income tax rate 44.8% 41.4% 44.2%
- --------------------------------------------------------------------------------
The Company's effective income tax rate, as a percentage of pre-tax income,
increased in fiscal 1996 as the charge for acquired in-process technology
resulting from the acquisition of T/Maker Company did not provide any tax
benefit. The Company's effective income tax rate decreased in fiscal 1995 as
compared to the prior year because in fiscal 1994 the Company recognized a lower
tax benefit on the terminated merger costs, raising the overall effective rate.
A more complete analysis of the differences between the federal statutory and
the Company's effective income tax rates is presented in Note 7 to the
consolidated financial statements.
20
<PAGE>
NET INCOME AND NET INCOME PER SHARE
(In thousands,
except per share data) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Net income $36,777 2% $36,187 227% $11,061
Percentage of net revenues 20% 21% 10%
---------------------------------------------------
Net income per share $ 1.71 $ 1.72 $ .55
- --------------------------------------------------------------------------------
Exclusive of the one-time charge from the acquisition of T/Maker Company
and of a one-time gain relating to a terminated merger, net income for fiscal
1996 would have been $35.9 million or $1.67 per share. Net income for fiscal
1995 grew 93% over fiscal 1994, which would have been $18.8 million or $.93 per
share, exclusive of the one-time charge for terminated merger costs in fiscal
1994.
LIQUIDITY AND CAPITAL RESOURCES
(In thousands) 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------
Cash and short-term
investments $150,893 19% $126,547 69% $ 75,000
-----------------------------------------------------
Working capital $142,493 19% $119,894 64% $ 73,005
-----------------------------------------------------
Net cash provided by
operating activities $ 50,516 24% $ 40,622 163% $ 15,457
-----------------------------------------------------
The Company's strong financial position improved in fiscal 1996. Cash and
short-term investments increased $24.3 million to $150.9 million at August 31,
1996. Cash and short-term investments were provided by operating activities and
the receipt of a terminated merger break-up fee, partially offset by the use of
cash to purchase T/Maker Company, acquire a minority interest in Live Picture,
Inc. and repurchase shares of the Company's common stock. Accounts receivable,
net of allowances of $27.6 million, decreased $1.9 million to $6.0 million.
At this time, the Company is not committed to incur any significant capital
expenditures in fiscal 1997.
In addition to cash and short-term investments, the Company has $5.0
million available under an unsecured line of credit agreement with no borrowings
outstanding. The line of credit bears interest at the bank's prime rate and is
subject to renewal by the bank in January 1997.
The Company uses its working capital to finance ongoing operations and to
fund the expansion and development of its product lines. In addition, the
Company evaluates from time to time other acquisitions of products or companies
that complement the Company's business.
Management believes the existing cash and short-term investments and cash
generated from operations will be sufficient to meet the Company's expected
liquidity and capital needs for the coming year.
21
<PAGE>
FACTORS AFFECTING FUTURE OPERATING RESULTS
Broderbund operates in a rapidly changing environment that is subject to
many risks and uncertainties. Some of the important risks and uncertainties
which may cause the Company's operating results to differ materially and/or
adversely are discussed below and in the Company's Form 10-K for the 1996 fiscal
year.
Fluctuations in Operating Results
The Company has experienced, and expects to continue to experience,
significant fluctuations in operating results due to a variety of factors,
including but not limited to, the rate of growth of the consumer software
market, market acceptance of the Company's products or those of its competitors,
the timing of new product introductions, expenses relating to the development
and promotion of new product introductions, changes in pricing policies by the
Company or its competitors, projected and actual changes in platforms and
technologies, timely and successful adaptation to such platforms or
technologies, the accuracy of forecasts of consumer demand, product returns,
market seasonality, the timing of orders from major customers and order
cancellations, and changes or disruptions in the consumer software distribution
channels.
Although the Company's business has generally been highly seasonal, with
net revenues and operating income generally highest in the first fiscal quarter
during the calendar year-end holiday selling season, lower in the second fiscal
quarter, and lowest in the seasonally slow third and fourth fiscal quarters,
during fiscal 1997, the Company anticipates that its results may differ from
that seasonal pattern with results more heavily weighted to the second half of
the fiscal year when several new entertainment products are scheduled to be
released. The Company also believes that the market conditions which resulted in
the year-over-year decline in revenues and profitability experienced in the last
two quarters of fiscal 1996 will continue for at least the next two fiscal
quarters. Without growth in net revenues in the next two quarters, the Company's
increasing operating expenses would cause net income to decline when compared to
the same period in the previous year.
Any significant shortfall in net revenues and earnings from the levels
expected by securities analysts and stockholders could result in a substantial
decline in the trading price of the Company's common stock. There can be no
assurance that the Company's stock price will remain at or near its current
level. Moreover, the Company's stock is subject to the volatility generally
associated with technology stocks and may also be affected by broader market
trends or the results reported by other market participants.
Industry and Competition
Recent data indicates a slowdown in growth of end-user demand for consumer
software and hardware during 1996 and there can be no assurance that such demand
will not continue to slow or to decline. In addition, the intense competition in
the consumer software business continues to accelerate as an increasing number
of companies, many of which have financial, managerial and technical resources
greater than those of the Company, offer products that compete directly with one
or more of the Company's products. As a result, an increasingly large number of
products are competing for limited shelf space. In response to increasing
product and price competition, the Company has reduced the price of some of its
products, including its best-selling series, The Print Shop, which places
negative pressures on net revenues and gross margins. There can be no assurance
that product prices will not continue to decline as competition increases, and
if such conditions persist, the Company's net revenues and profitability could
be materially and adversely affected. Further, there can be no assurance that
sales of the Company's existing products will continue to sustain market
acceptance and to generate significant levels of revenue in subsequent quarters
or that a shortfall in revenue from any product could be replaced in a timely
manner. In addition, sales of products on older platforms and in certain product
lines have declined, and there can be no assurance that sales of these products
will not decline further or experience lower than expected sales levels. Because
a significant portion of the Company's expense levels are fixed and based on its
22
<PAGE>
expectations regarding future revenues, operating results would be
disproportionately adversely affected by a decrease in sales or failure to meet
the Company's sales expectations. In addition, competition for creative talent,
including independent developers, has also intensified, and the attraction and
retention of key personnel has become increasingly difficult.
Products and Platforms
The Company's future success will depend in large part on its ability to
develop and release new products on a timely basis and to achieve widespread
market acceptance for such products. There can be no assurance that expected new
product introductions will not experience material delays, that new products
introduced by the company will achieve any significant degree of market
acceptance, or that such acceptance will be sustained for any length of time. In
addition, because the Company expects that the cost of developing and
introducing new products will continue to increase, the financial risks
associated with new product development will increase as will the risks
associated with material delays in the introduction of such new products. The
substantial year-over-year decline in Myst revenues during the second half of
fiscal 1996 was not fully replaced, and there can be no assurance that the
shortfall from the continuing decline in Myst revenues will be replaced in a
timely manner or that Myst II's introduction will occur in fiscal 1997 or that
it will achieve widespread market acceptance. In addition, the Company believes
that electronic or internet products and services will become an increasingly
important platform and distribution media, the Company's failure to timely and
successfully adapt to and utilize such technologies could materially and
adversely affect its competitive position and its fiscal results.
Distribution
The distribution channels through which consumer software products are sold
have been characterized by intense competition and continuing uncertainties and
there can be no assurance that distributors and retailers will continue to
purchase the Company's products or provide the Company's products with adequate
levels of shelf space and promotional support. In addition, certain distributors
and retailers have experienced business difficulties and there can be no
assurance such difficulties for these or additional distributors and retailers
will not continue which could have an adverse effect on the operating results
and financial condition of the Company. The Company also permits distributors
and retailers to return products under certain circumstances, and the Company
believes that the rate of product returns will increase as competition in the
distribution channel increases and as mass merchants, office and warehouse
stores become an increasing percentage of the Company's sales. The Company
establishes allowances based on estimated future returns of product after
considering various factors, and accordingly, if the level of actual returns
exceed management's estimates, it could have a material adverse impact on the
Company's operating results. Further, there is increasing pressure from
distributors and retailers to obtain marketing and promotional funds and
discounts in connection with access to shelf space, in-store promotion and sale
of products which has an adverse impact on the Company's net revenues and
profitability, and there can be no assurance that these pressures will not
continue or increase.
23
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Broderbund Software, Inc.
We have audited the accompanying consolidated balance sheets of Broderbund
Software, Inc. as of August 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended August 31, 1996. Our audits also included the
financial statement schedule of Broderbund Software, Inc. listed in Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Broderbund Software, Inc. at August 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended August 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
San Francisco, California
October 8, 1996
24
<PAGE>
<TABLE>
<CAPTION>
Broderbund Software, Inc.
Consolidated Balance Sheets
August 31,
1996 1995
-------------------------------
(In thousands,
except share data)
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments $150,893 $126,547
Accounts receivable, net of allowances of
$27,611 in 1996 and $23,692 in 1995 5,956 7,880
Income tax prepayments -- 487
Inventories 3,140 2,562
Deferred income taxes 15,057 13,880
Other current assets 869 1,186
--------------------------------
Total current assets 175,915 152,542
Equipment and improvements, net 7,014 5,570
Deferred income taxes -- 928
Purchased technology and advances, net 13,090 761
Investments in affiliates 4,053 1,386
Other assets 360 364
--------------------------------
Total assets $200,432 $161,551
=================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,442 $ 6,094
Accrued compensation 8,794 11,062
Accrued income taxes 8,966 --
Other accrued liabilities 11,220 15,513
--------------------------------
Total current liabilities 33,422 32,669
--------------------------------
Deferred income taxes 1,462 --
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares -
20,670,060 in 1996 and 20,618,967 in 1995 31,383 31,140
Retained earnings 134,165 97,742
--------------------------------
Total stockholders' equity 165,548 128,882
--------------------------------
Total liabilities and stockholders' equity $200,432 $161,551
=================================
</TABLE>
See accompanying notes.
25
<PAGE>
Broderbund Software, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended August 31,
-------------------------------------
1996 1995 1994
-------------------------------------
(In thousands,
except per share data)
<S> <C> <C> <C>
Net revenues $ 186,207 $ 171,594 $ 111,774
Cost of revenues 58,544 61,092 40,589
-------------------------------------
Gross margin 127,663 110,502 71,185
-------------------------------------
Operating expenses:
Sales and marketing 34,381 25,143 18,621
Research and development 29,244 22,784 16,016
General and administrative 11,256 11,085 7,500
Charge for acquired in-process technology 8,369 -- --
-------------------------------------
Total operating expenses 83,250 59,012 42,137
-------------------------------------
Income from operations 44,413 51,490 29,048
Interest and dividend income, net 6,499 6,364 1,791
Equity in earnings of joint venture 217 3,886 --
Terminated merger fees, net 15,464 -- (11,000)
-------------------------------------
Income before income taxes 66,593 61,740 19,839
Provision for income taxes 29,816 25,553 8,778
-------------------------------------
Net income $ 36,777 $ 36,187 $ 11,061
=====================================
Net income per share $ 1.71 $ 1.72 $ 0.55
=====================================
Shares used in computing per share data 21,509 21,037 20,145
=====================================
See accompanying notes.
</TABLE>
26
<PAGE>
Broderbund Software, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Total
--------------------- Retained Stockholders'
Shares Amount Earnings Equity
-------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balances at August 31, 1993 18,998 $13,213 $ 48,797 $ 62,010
Exercise of stock options 626 3,202 - 3,202
Tax benefits relating to stock options - 3,906 - 3,906
Net income - - 11,061 11,061
----------------------------------------------------------
Balances at August 31, 1994 19,624 20,321 59,858 80,179
Exercise of stock options 388 4,069 - 4,069
Tax benefits relating to stock options - 6,213 - 6,213
Adjustment for effect of pooling-of-interests
on prior periods 607 537 1,688 2,225
Foreign currency translation adjustment - - (20) (20)
Unrealized gain on short-term investments - - 29 29
Net income - - 36,187 36,187
----------------------------------------------------------
Balances at August 31, 1995 20,619 31,140 97,742 128,882
Exercise of stock options 151 2,128 - 2,128
Tax benefits relating to stock options - 1,548 - 1,548
Repurchase of common stock (100) (3,433) - (3,433)
Foreign currency translation adjustment - - (78) (78)
Unrealized loss on short-term investments - - (276) (276)
Net Income - - 36,777 36,777
==========================================================
Balances at August 31, 1996 20,670 $31,383 $134,165 $165,548
==========================================================
See accompanying notes
</TABLE>
27
<PAGE>
Broderbund Software, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended August 31,
1996 1995 1994
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 36,777 $ 36,187 $ 11,061
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of joint venture (217) (3,886) --
Depreciation and amortization 2,804 2,258 3,028
Deferred income taxes (120) (5,394) (4,325)
Charge for acquired in-process technology 8,369 -- --
Write-off of purchased technology -- 1,678 --
Changes in current assets and liabilities:
Accounts receivable 1,924 (5,582) 2,958
Inventories (578) (201) 850
Other current assets 317 (429) (79)
Income taxes 9,453 669 (2,394)
Accounts payable (1,652) 438 1,419
Accrued compensation (2,268) 5,709 1,087
Other accrued liabilities (4,293) 9,175 1,852
-------------------------------------
Net cash provided by operating activities 50,516 40,622 15,457
-------------------------------------
Investing activities
Net additions to equipment and improvements (3,963) (3,383) (1,041)
Dividends received from joint venture 1,000 2,500 --
Short-term investments (17,702) 33,842 (21,844)
Purchased technology and advances (21,020) -- --
Investments in affiliates (3,450) -- --
Adjustment for effect of pooling-of-interests on prior
periods -- 2,225 --
Other 1,374 (708) (840)
-------------------------------------
Net cash provided (used) for investing activities (43,761) 34,476 (23,725)
-------------------------------------
Financing activities
Exercise of stock options 2,128 4,069 3,202
Tax benefit from exercise of stock options 1,548 6,213 3,906
Repurchase of common stock (3,433) -- --
-------------------------------------
Net cash provided by financing activities 243 10,282 7,108
-------------------------------------
Translation adjustment (78) (20) --
-------------------------------------
Increase (decrease) in cash 6,920 85,360 (1,160)
Cash and equivalents, beginning of year 102,079 16,719 17,879
-------------------------------------
Cash and equivalents, end of year 108,999 102,079 16,719
Short-term investments 41,894 24,468 58,281
-------------------------------------
Cash and short-term investments, end of year $ 150,893 $ 126,547 $ 75,000
=====================================
Supplemental disclosure of cash flow information
Income tax payments, net $ 18,857 $ 24,168 $ 11,591
=====================================
Interest payments $ 81 $ 39 $ 30
=====================================
</TABLE>
See accompanying notes.
28
<PAGE>
Broderbund Software, Inc.
Notes to Consolidated Financial Statements
August 31, 1996, 1995, and 1994
1. Accounting Policies
Operations
The Company currently operates in one business segment, the development and
publishing of consumer software for personal computers.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company has export sales from the United States and has
operations in the United Kingdom. All significant intercompany accounts and
transactions have been eliminated.
Investments in Affiliates
The Company and Random House, Inc. (collectively, the "Partners") formed a joint
venture to publish story-based multimedia software for children. The joint
venture, Living Books, combines resources of these two publishers and is 50%
owned by each. The Company's contribution to the joint venture consisted of the
existing Living Books product line and the technology and people to produce more
Living Books. Random House, Inc. contributed cash and access to its library of
children's books and authors. The joint venture is responsible for all research
and development, manufacturing and marketing costs associated with the Living
Books products. The Partners are each distributing Living Books products through
their respective distribution channels under an affiliated label arrangement.
The Company had revenues of $18,041,000, $22,393,000 and $14,667,000 during
fiscal 1996, 1995, and 1994, respectively, from distribution of Living Books
products.
The Company reports its share in earnings and losses of Living Books under the
equity method of accounting. The Company's share is based on the partnership's
most recent quarter end results, which are reported on a calendar year basis.
The Company's equity in the earnings of the joint venture for the years ended
June 30, 1996 and 1995 amounted to $217,000 and $3,886,000, respectively, and
for the six months ended June 30, 1994 was not material. The Company received
distributions from the joint venture during fiscal 1996 and 1995 of $1,000,000
and $2,500,000, respectively, which reduced the Company's investment in the
joint venture.
The Partners have jointly and severally guaranteed payment of royalties
aggregating $656,000 at August 31,1996 and certain future royalty obligations on
behalf of Living Books. Additionally, the Partners have guaranteed the payment
of Living Books' facilities lease which has a remaining term of three years and
an aggregate commitment of $997,000 at August 31, 1996.
The Company has a minority interests in Live Picture, Inc. which develops and
markets high end imaging software products and Classified Projects, Inc. a
development stage enterprise developing on-line applications. These investments
are recorded at cost.
29
<PAGE>
1. Accounting Policies (continued)
Cash and Short-Term Investments
Cash and cash equivalents consist of cash in banks and investments in highly
liquid short-term instruments with original maturities of 90 days or less.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS No. 115") as of September 1, 1994. Under SFAS No. 115,
investments in equity and debt securities are classified in three categories and
accounted for based upon the classification. The Company has accounted for
investments in debt securities as "available-for sale" pursuant to SFAS No. 115
and has recorded such investments at fair value with unrealized gains and losses
reported as a component of stockholders equity.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash, short-term investments and accounts
receivable. The Company's investment portfolio consists of investment grade
securities. Accounts receivable are principally from distributors and retailers
of the Company's products. The Company performs ongoing credit evaluations of
its customers' financial condition and maintains allowances for potential credit
losses.
Inventories
Inventories, which consist primarily of software media, manuals and related
packaging materials, are recorded at standard cost, which approximates the lower
of cost, determined on the first-in, first-out basis, or market. Provisions are
made in each period for the effect of inventory obsolescence.
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation and amortization
are provided using the straight-line method over estimated useful lives ranging
from three to seven years.
Purchased Technology and Advances
Purchased technology, net of amortization, at August 31, 1996 and 1995 of
$11,570,000 and $761,000, respectively, includes costs of obtaining product
technology which are amortized using the straight line method over periods not
exceeding three years. Management evaluates the future realization of purchased
technology quarterly and writes down any amounts that management deems unlikely
to be recovered through future products sales. Amortization expense for fiscal
1996, 1995, and 1994 was $646,000, $110,000, and $600,000 respectively. As a
result of weakness in sales of PC Globe products during the 1994 calendar
year-end holiday selling season, the Company wrote off the remaining balance of
$1,678,000 resulting from the 1992 acquisition in the first quarter of fiscal
1995.
Advances at August 31, 1996 of $1,520,000 represent prepayments of royalties
made to independent software developers under development agreements. These
advances are charged to cost of revenues at the contractual royalty rate based
on actual net product sales. Management evaluates the future realization of the
advances quarterly and charges to research and development expense any amounts
that management deems unlikely to be recovered through future products sales.
Software Development Costs
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
attained. No such costs were capitalized in fiscal 1996, 1995, or 1994 because
the impact on the financial statements would not be material.
30
<PAGE>
1. Accounting Policies (continued)
Net Revenues
Revenue from product sales is recognized upon shipment of product, net of
allowances for returns, in accordance with the provisions of the American
Institute of Certified Public Accountants' Statement of Position 91-1, "Software
Revenue Recognition." Net revenues from sales to two major distributors were
$21,086,000 and $20,808,000 in fiscal 1996. Net revenues from sales to the same
two distributors were $21,914,000 and $37,259,000 in fiscal 1995. Net revenue
from sales to one of these distributors were $23,668,000 in fiscal 1994.
Royalties
Royalties are accrued based on net revenues, pursuant to contractual agreements
with developers of software products published by the Company. Royalty costs,
which are included in cost of revenues, were $11,999,000, $13,424,000 and
$6,864,000 in fiscal 1996, 1995 and 1994, respectively.
Advertising Costs
The Company charges advertising costs to sales and marketing expense as
incurred. Advertising costs were $6,383,000, $3,025,000 and $2,534,000 in fiscal
1996, 1995 and 1994, respectively.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is its local
currency. Assets and liabilities of this operation are translated into U.S.
dollars using current exchange rates, and revenues and expenses are translated
in U.S. dollars using average exchange rates. The effects of foreign currency
translation adjustments are deferred and included as a component of
stockholder's equity.
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Such amounts were not material in fiscal 1996, 1995 or
1994.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company will adopt SFAS No. 121 effective September
1, 1996. Based on current circumstances, management does not believe the effect
of adoption will be material to the consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation", which establishes a fair value based method of accounting for
stock based compensation plans. SFAS No. 123 is effective for years beginning
after December 15, 1995. The Company intends to continue to account for employee
stock options under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" but will be required to make pro forma disclosures of
net income and earnings per share as if the fair value based method had been
applied.
31
<PAGE>
1. Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include allowances for doubtful accounts, product returns and price
protection, and estimates regarding the recoverability of prepaid royalty
advances and inventories. Actual results could differ from those estimates.
Net Income Per Share
Net income per share data is based on the weighted average number of common
shares and dilutive common stock equivalents outstanding for the period. There
are no significant differences between primary and fully diluted earnings per
share.
Reclassifications
Certain amounts reported in prior years have been reclassified to conform to the
fiscal 1996 presentation.
2. Business Combinations
T/Maker Company
On August 6, 1996, the Company completed its acquisition of T/Maker Company
("T/Maker"), a leading developer of clip art software. The acquisition has been
accounted for under the purchase method, and had an aggregate purchase price of
approximately $19,900,000, including acquisition costs. Approximately $8,000,000
of the excess of the purchase price over the fair value of the net tangible
assets acquired was allocated to in-process research and development and
approximately $11,500,000 to purchased technology. The amount allocated to
in-process research and development was charged to operations at the time of
acquisition. The purchased technology is being amortized over three years from
the date of acquisition. The operating results of T/Maker, which are not
material in relation to those of the Company, have been included in the
consolidated financial statements for the period subsequent to the date of
acquisition.
Banner Blue Software, Inc.
On April 28, 1995, the Company acquired Banner Blue Software Incorporated
("Banner Blue"), a leading developer of genealogy software, in a transaction
accounted for under the pooling-of-interests method. The Company issued 607,000
shares of common stock in exchange for all the outstanding stock of Banner Blue.
The operating results for Banner Blue were not material to the combined results
of the two companies for all periods prior to the acquisition and therefore
results for those periods have not been restated. The operating results of
Banner Blue have been included in the consolidated financial statements for all
periods subsequent to the date of acquisition.
3. Fair Value of Financial Instruments
The carrying amount approximates fair value for each class of financial
instruments which include cash and equivalents, accounts receivable, accounts
payable and accrued liabilities because of the short maturity of these
instruments. The carrying values of short-term investments are based upon quoted
market prices.
32
<PAGE>
3. Fair Value of Financial Instruments (continued)
Cash and short-term investments, at fair value, consist of the following:
August 31,
1996 1995
-------------------------
(In thousands)
Cash and equivalents:
Cash and money market funds $ 1,149 $ 2,310
Municipal securities 53,812 29,919
Commercial paper 1,500 --
Money market preferreds 49,200 69,850
Corporate notes 3,338 --
-------- --------
108,999 102,079
-------- --------
Short-term investments:
Money market preferreds 2,675 7,300
Municipal securities 22,831 16,577
U.S. government agencies 15,884 --
Corporate equity fund 504 591
-------- --------
41,894 24,468
-------- --------
Cash and short-term investments $150,893 $126,547
======== ========
Cash and short-term investments had an aggregate cost of $151,140,000 and
$126,518,000 at August 31, 1996 and 1995, respectively. At August 31, 1996 cash
and short-term investments included gross unrealized gains of $139,000 and gross
unrealized losses of $386,000. At August 31, 1995 cash and short-term
investments included gross unrealized gains of $157,000 and losses of $128,000.
At August 31, 1996 short-term investments of $11,775,000 were contractually due
within one year with the balance due after one year but before two years.
4. Equipment and Improvements
Equipment and improvements consist of the following:
August 31,
1996 1995
------------------------
(In thousands)
Computer equipment $ 10,169 $ 6,934
Furniture 6,134 4,947
Leasehold improvements 1,947 1,648
------------------------
18,250 13,529
Accumulated depreciation and amortization (11,236) (7,959)
------------------------
$ 7,014 $ 5,570
========================
5. Other Accrued Liabilities
Other accrued liabilities consist of the following:
August 31,
1996 1995
------------------------
(In thousands)
Accrued marketing and sales costs $ 3,288 $ 6,226
Accrued royalties 4,101 4,625
Other accrued expenses 3,831 4,662
------------------------
$11,220 $15,513
========================
33
<PAGE>
6. Bank Line of Credit
The Company has available a $5,000,000 unsecured bank line of credit. Interest
on borrowings is computed at the bank's prime rate (9% at August 31, 1996). The
line of credit agreement requires that the Company maintain minimum current and
net worth ratios. The agreement is subject to renewal by the bank on January 31,
1997. There were no outstanding borrowings under the line of credit at August
31, 1996 or 1995.
7. Income Taxes
The Company's pretax income from foreign operations for fiscal 1996 and 1995 was
$1,648,000 and $88,000, respectively.
Significant components of the provision for income taxes are as follows:
Year ended August 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
(In thousands)
Current:
Federal $ 22,392 $ 23,920 $ 10,201
State 7,002 6,789 2,806
Foreign 542 238 96
--------------------------------------------
Total current 29,936 30,947 13,103
Deferred:
Federal (93) (4,299) (3,517)
State (27) (1,095) (808)
--------------------------------------------
Total deferred (120) (5,394) (4,325)
--------------------------------------------
$ 29,816 $ 25,553 $ 8,778
============================================
The principal reasons that the aggregate income tax provisions differ from taxes
computed at the applicable federal statutory rate are reflected below:
<TABLE>
<CAPTION>
Year ended August 31,
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income tax provision at federal statutory rate $23,308 $21,609 $ 6,944
State income taxes, net of federal tax benefit 4,533 3,701 1,299
Charge for acquired in-process technology 2,803 - -
Other (828) 243 535
-----------------------------------------------
$29,816 $25,553 $ 8,778
===============================================
</TABLE>
34
<PAGE>
7. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
August 31,
1996 1995
-----------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently deductible $ 14,900 $ 13,192
Other, net 2,723 1,786
-----------------------------------
17,623 14,978
-----------------------------------
Deferred tax liabilities:
Purchased technology and advances 3,855 -
Other, net 173 170
===================================
4,028 170
===================================
===================================
Net deferred tax assets $ 13,595 $ 14,808
===================================
</TABLE>
Income tax benefits which accrue to the Company from the exercise of
nonqualified stock options and disqualifying dispositions of incentive stock
options have been recorded as increases to common stock.
The Company does not provide for U.S. taxes on undistributed earnings of its
foreign subsidiary. If these earnings were distributed to the parent company,
foreign tax credits available under current law would substantially eliminate
the resulting Federal tax liability.
8. Stockholders' Equity
Preferred Stock
The Company's Certificate of Incorporation authorizes 1,000,000 shares of
preferred stock, none of which is issued or outstanding at August 31, 1996 and
1995. The Board of Directors has the authority to issue the preferred stock in
one or more series and to fix the rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders.
Employee Stock Purchase Plan
In April 1996, the Company established an Employee Stock Purchase Plan whereby
eligible employees may authorize payroll deductions of up to 10% of their
compensation to purchase shares at 85% of the lower of the fair market value of
the Common Stock on the first or the last day of each six-month purchase period.
At August 31, 1996, the Company had 250,000 shares of its Common Stock reserved
for future issuance under the Plan.
Stock Option Plans
Under the Company's Employee and Consultant Stock Option Plans, incentive and
nonqualified stock options may be granted to employees, directors and
consultants to purchase a maximum of 4,750,000 common shares. All options are
granted at an amount equal to or greater than the fair market value of the
common stock at the date of grant. In connection with the acquisition of Banner
Blue Software, the Company assumed the outstanding options of Banner Blue
Software and converted such options into options under the Plans based upon the
merger exchange ratio. Options vest in annual 20% increments from the date of
grant, according to the vesting schedule at the date of grant. The options
generally expire ten years from the date of grant.
35
<PAGE>
8. Stockholders' Equity (continued)
Stock Option Plan (continued)
Changes in options outstanding during the three years ending August 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
----------------------------------------
<S> <C> <C>
Options outstanding at August 31, 1993 2,186,000 $ 1.00 - $ 21.88
Granted 464,000 $ 16.66 - $ 28.32
Exercised (626,000) $ 1.00 - $ 21.88
Forfeited (232,000) $ 2.50 - $ 28.32
---------------
Options outstanding at August 31, 1994 1,792,000 $ 1.00 - $ 28.32
Granted 660,000 $ 32.25 - $ 72.00
Assumed in the acquisition
of Banner Blue Software 42,000 $ 3.97 - $ 27.54
Exercised (388,000) $ 1.50 - $ 28.32
Forfeited (150,000) $ 10.62 - $ 32.25
---------------
Options outstanding at August 31, 1995 1,956,000 $ 1.00 - $ 72.00
Granted 1,042,000 $ 33.13 - $ 76.73
Exercised (151,000) $ 1.00 - $ 32.25
Forfeited (138,000) $ 10.63 - $ 72.00
===============
Options outstanding at August 31, 1996 2,709,000 $ 1.00 - $ 76.73
===============
Outstanding options exercisable at August 31, 1996 745,000
===============
Options available for grant at August 31, 1996 1,081,000
===============
</TABLE>
At August 31, 1996, a total of 3,790,000 shares of common stock have been
reserved for issuance upon exercise of outstanding stock options and options
available for issuance under the Company's plans.
9. Profit Sharing and Retirement Plan
The Company has a 401(k) Profit Sharing Plan covering substantially all
employees. The Company contributes $.25 for every $1.00 contributed by Plan
participants subject to certain limitations on individual contributions. The
Company also funds annually its profit sharing expense which is at the
discretion of the Board of Directors. The Company's cost of the Plan was
$2,141,000, $2,306,000 and $1,328,000 in fiscal 1996, 1995 and 1994
respectively.
10. Lease Commitments
The Company leases office and warehouse space under operating leases. Rent
expense under operating leases was $3,628,000, $2,808,000, and $2,803,000 in
fiscal 1996, 1995 and 1994, respectively. Future minimum lease payments under
operating leases are as follows:
Year ended August 31,
----------------------
(In thousands)
1997 $ 3,810
1998 3,685
1999 3,742
2000 3,739
2001 3,852
2002 and thereafter 2,062
----------------------
$ 20,890
======================
36
<PAGE>
11. Terminated Merger Costs
In December 1995, the Company and The Learning Company terminated an agreement
to merge. The Company recognized pre-tax income of $15,464,000 which consisted
of an $18,000,000 payment received to terminate the merger and $2,536,000 of
associated expenses.
In May 1994, the Company and Electronic Arts terminated an agreement to merge.
The Company recognized a pre-tax charge of $11,000,000 which consisted of a
$10,000,000 payment to Electronic Arts to terminate the merger and $1,000,000 of
associated costs.
12. Operations by Geographic Area
Prior to fiscal 1996, revenues from foreign sources were less than 10% of
consolidated net revenues. Information about the Company's operations in the
United States and foreign areas is presented below:
Year ended August 31,
(In thousands)
Net revenue
North America
Customers in the United States $166,426
Customers in Canada 5,664
Customers in Asia/Pacific 3,312
Other exports 157
Intercompany revenues 2,055
-------------
177,614
Europe 10,648
Consolidating eliminations (2,055)
-------------
$ 186,207
===============
Income from Operations
North America $ 42,823
Europe 1,590
-------------
$ 44,413
===============
August 31,
(In thousands)
Identifiable Assets
North America $195,347
Europe 5,085
$200,432
===============
37
<PAGE>
13. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------
November 30 February May August Fiscal
28/29 31 31 Year
------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Fiscal year 1996:
Net revenues $ 70,961 $ 48,044 $ 34,993 $ 32,209 $ 186,207
Gross margin 46,041 33,009 24,706 23,907 127,663
Net income (loss) 15,936 18,839 6,180 (4,178) 36,777
Net income (loss)
per share 0.73 0.87 0.29 (0.20) 1.71
Fiscal year 1995:
Net revenues $ 53,089 $ 45,208 $ 36,114 $ 37,183 $ 171,594
Gross margin 29,561 30,702 24,037 26,202 110,502
Net income 11,593 10,367 7,035 7,192 36,187
Net income
per share 0.57 0.50 0.33 0.33 1.72
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
Item 10 to Item 13 inclusive.
These items have been omitted in accordance with instructions to Form
10-K Annual Report. The registrant will file with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Report, a definitive proxy statement pursuant to Regulation 14A with
respect to the 1997 Annual Meeting of Stockholders.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
The following documents are filed as a part of this Report:
<TABLE>
<CAPTION>
Page 1. Index to Financial Statements.
<S> <C>
Report of Independent Auditors 24
Consolidated Balance Sheets - August 31, 1996 and 1995 25
Consolidated Statements of Income - Years Ended August 31, 1996, 1995 and 1994 26
Consolidated Statements of Stockholders' Equity - Years Ended August 31, 1996,
1995 and 1994 27
Consolidated Statements of Cash Flows - Years Ended August 31, 1996, 1995 and 1994 28
Notes to Consolidated Financial Statements 29
</TABLE>
38
<PAGE>
2. Financial Statement Schedules. The following financial statement schedule
of Broderbund Software, Inc. for the fiscal years ended August 31, 1996,
1995 and 1994 is filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of Broderbund
Software, Inc.
Schedule Page
Schedule II - Valuation and Qualifying Accounts 42
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
3.1 (1) Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1 (1) Second Amended and Restated 1986 Employee and Consultant Stock Option
Plan, as amended.
4.2 (2) Form of Incentive Stock Option Agreement.
4.3 (2) Form of Non-qualified Stock Option Agreement.
4.4 (5) Broderbund Software, Inc. 1996 Employee Stock Purchase Plan.
4.5 (5) Broderbund Software, Inc. 1996 Employee Stock Purchase Plan
Subscription Agreement.
4.6 (5) Broderbund Software, Inc. 1996 Employee Stock Purchase Plan Notice
of Withdrawal.
4.7 (5) 1996 Employee and Consultant Stock Option Plan of Broderbund Software,
Inc.
10.1 (3) Broderbund Software, Inc. 401(k) Profit Sharing Plan, as amended.
10.3 (4) Trade Finance Credit Agreement made by and between registrant and Union
Bank, as amended.
10.5 (4) Form of Indemnification Agreement.
10.10(3) Living Books Partnership Agreement dated September 9, 1993 between
registrant, Random House, Inc., Random House New Media Inc. and
Broderbund Living Books, Inc.
11.1 Computation of net income per share (see page 43).
21.1 List of subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 44).
24.1 Power of Attorney (included on page 41).
---------------------
(1) Incorporated by reference to the exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended August 31, 1994.
(2) Incorporated by reference to the exhibit filed with the registrant's
Registration Statement on Form S-8 (File No. 33-45928), effective February
24, 1992.
(3) Incorporated by reference to the exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended August 31, 1993.
(4) Incorporated by reference to the exhibit filed with the registrant's
Registration Statement on Form S-1 (File No. 33-43232), effective November
25, 1991.
(5) Incorporated by reference to exhibits filed with the registrant's
Registration Statement on Form S-8 (File No. 333-13803), effective October,
9, 1996.
39
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the fourth quarter of the period covered by this Report.
(c) Exhibits
See item 14 (a) 3 above.
(d) Financial Statement Schedules
See item 14 (a) 2 above.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Novato,
State of California, on this 29th day of November, 1996.
BRODERBUND SOFTWARE, INC.
By: /s/ Joseph P. Durrett
-------------------------------------------
Joseph P. Durrett, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Thomas L. Marcus and William M.
McDonagh and each of them acting individually, as such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution, for such
person, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this report on Form 10-K, and to file with same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his or her substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------------------------- -------------------------------------------- --------------------
/s/ Joseph P. Durrett Chief Executive Officer (Principal Executive November 29, 1996
- --------------------------- Officer) and Director
Joseph P. Durrett
/s/ William M. McDonagh President, Chief Operating Officer and November 29, 1996
- --------------------------- Director
William M. McDonagh
/s/ Michael J. Shannahan Vice President and Chief Financial Officer November 29, 1996
- --------------------------- (Principal Financial and Accounting Officer)
Michael J. Shannahan
/s/ Douglas G. Carlston Chairman, Board of Directors November 29, 1996
- ---------------------------
Douglas G. Carlston
/s/ Edmund R. Auer Director November 29, 1996
- ---------------------------
Edmund R. Auer
/s/ Gary L. Buckmiller Director November 29, 1996
- ---------------------------
Gary L. Buckmiller
/s/ Scott D. Cook . Director November 29, 1996
- ---------------------------
Scott D. Cook
/s/ William P. Egan. . Director November 29, 1996
- ---------------------------
William P. Egan
/s/ David E. Liddle, PhD Director November 29, 1996
- ---------------------------
David E. Liddle, PhD
/s/ Lawrence H. Wilkinson Director November 29, 1996
- ---------------------------
Lawrence H. Wilkinson
</TABLE>
41
<PAGE>
Schedule II
BRODERBUND SOFTWARE, INC.
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Balance at Deductions, Balance
Beginning Additions- Returns and at End
Description of Year Provisions Write-offs Other (1) of Year
- ----------- ------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for returns:
Year ended August 31, 1996 $19,130 $24,970 $24,541 $ 1,809 $21,368
Year ended August 31, 1995 10,336 25,744 17,875 925 19,130
Year ended August 31, 1994 6,436 15,116 11,216 10,336
Allowance doubtful accounts:
Year ended August 31, 1996 $ 4,563 $ 1,111 $ 281 $ 850 $ 6,243
Year ended August 31, 1995 3,029 1,900 481 115 4,563
Year ended August 31, 1994 2,540 2,903 2,414 3,029
</TABLE>
(1) Represents balance assumed from T/Maker Company acquisition in fiscal 1996
and the Banner Blue Software acquisition in fiscal 1995.
42
<PAGE>
43
Exhibit 11.1
BRODERBUND SOFTWARE, INC.
Computation of Net Income Per Share
<TABLE>
<CAPTION>
Year ended August 31,
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Primary:
Weighted average common shares outstanding
for the period 20,682 20,027 19,293
Common equivalent shares assuming conversion
of stock options 827 1,010 852
-----------------------------------------------
Shares used in per share calculation 21,509 21,037 20,145
===============================================
Net income used in per share calculation $36,777 $36,187 $11,061
===============================================
Net income per share $1.71 $1.72 $0.55
===============================================
</TABLE>
43
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-92326 and No. 333-7921) pertaining to the Broderbund/Banner
Blue Stock Plan and (Form S-8 No. 333-13803) pertaining to the 1996 Employee and
Consultant Stock Option Plan and the 1996 Employee Stock Purchase Plan of
Broderbund Software, Inc. of our report dated October 8, 1996, with respect to
the consolidated financial statements and schedule of Broderbund Software, Inc.
included in the Annual Report (Form 10-K) for the year ended August 31, 1996.
Ernst & Young LLP
San Francisco, California
November 27, 1996
44
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-1-1995
<PERIOD-END> AUG-31-1996
<CASH> 150,893
<SECURITIES> 0
<RECEIVABLES> 33,567
<ALLOWANCES> (27,611)
<INVENTORY> 3,140
<CURRENT-ASSETS> 175,915
<PP&E> 18,250
<DEPRECIATION> (11,236)
<TOTAL-ASSETS> 200,432
<CURRENT-LIABILITIES> 33,422
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 200,432
<SALES> 0
<TOTAL-REVENUES> 186,207
<CGS> 58,544
<TOTAL-COSTS> 83,250
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 66,593
<INCOME-TAX> 29,816
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,777
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 1.71
</TABLE>
