SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
OR
_____ 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
BRODERBUND SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2768218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Redwood Blvd.
Novato, CA 94948-6121
(Address of principal executive offices)
Telephone Number (415) 382-4400
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___
As of May 31, 1997 there were 20,694,023 shares of the Registrant's Common Stock
Outstanding.
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BRODERBUND SOFTWARE, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at May 31, 1997
and August 31, 1996 ......................................... 3
Condensed Consolidated Statements of Operations Three and Nine
Months Ended May 31, 1997 and 1996 .......................... 4
Condensed Consolidated Statements of Cash Flows Nine Months
Ended May 31, 1997 and 1996 ................................. 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................. 15
Signature ................................................................. 16
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
May 31, 1997 August 31, 1996
------------ ---------------
ASSETS (Unaudited)
Current assets:
Cash and short-term investments $127,120 $150,893
Accounts receivable, net 15,553 5,956
Inventories 4,443 3,140
Deferred income taxes 19,554 15,057
Other current assets 1,100 869
-------- --------
Total current assets 167,770 175,915
Equipment and improvements, net 7,598 7,014
Purchased technology and advances, net 17,166 13,090
Investments in affiliates 6,133 4,053
Other assets 1,219 360
-------- --------
$199,886 $200,432
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,523 $ 4,442
Accrued compensation 6,369 8,794
Accrued income taxes 9,404 8,966
Other accrued expenses 9,889 11,220
-------- --------
Total current liabilities 32,185 33,422
Deferred income taxes 1,889 1,462
-------- --------
Total liabilities 34,074 34,884
Stockholders' equity:
Common stock 26,115 31,383
Retained earnings 139,697 134,165
-------- --------
Total stockholders' equity 165,812 165,548
-------- --------
$199,886 $200,432
======== ========
See accompanying notes.
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BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, May 31,
------- -------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 39,294 $ 34,993 $ 145,101 $ 153,998
Cost of revenues 12,868 10,287 50,303 50,243
--------- --------- --------- ---------
Gross margin 26,426 24,706 94,798 103,755
Operating expenses:
Sales and marketing 12,615 6,760 37,988 26,840
Research and development 10,578 6,758 27,818 21,771
General and administrative 3,224 2,961 9,740 8,721
Charge for acquired in-process
technology and amortization 1,427 -- 12,991 --
--------- --------- --------- ---------
Total operating expenses 27,844 16,479 88,537 57,332
--------- --------- --------- ---------
Income (loss) from operations (1,418) 8,227 6,261 46,423
Interest and dividend income, net 1,435 1,907 4,507 4,915
Equity in earnings (loss) of joint venture -- -- (603) 1,291
Terminated merger fee, net -- -- -- 15,464
--------- --------- --------- ---------
Income before income taxes 17 10,134 10,165 68,093
Provision for income taxes 6 3,953 4,721 27,137
--------- --------- --------- ---------
Net income $ 11 $ 6,181 $ 5,444 $ 40,956
========= ========= ========= =========
Net income per share $ 0.00 $ 0.29 $ 0.26 $ 1.90
========= ========= ========= =========
Shares used in computing
net income per share 21,048 21,435 21,083 21,583
========= ========= ========= =========
</TABLE>
See accompanying notes.
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BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
May 31,
-------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,444 $ 40,956
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (earnings) loss of joint venture 603 (1,291)
Depreciation and amortization 2,388 2,033
Deferred income taxes (2,562) (2,986)
Charge for acquired in-process technology and amortization 12,991 --
Changes in operating assets and liabilities (11,253) 12,014
--------- ---------
Net cash provided by operating activities 7,611 50,726
Cash flows from investing activities:
Additions to equipment and improvements (2,878) (2,645)
Investments in affiliates (2,683) --
Purchase of Living Books, net of cash (7,594) --
Advance royalties (4,727) (3,075)
Other (655) (80)
--------- ---------
Net cash (used in) investing activities (18,537) (5,800)
Cash flows from financing activities:
Repurchase of common stock (14,574) --
Employee stock purchase plan 891 --
Exercise of stock options 841 1,658
Tax benefit of stock option exercises 254 1,444
--------- ---------
Net cash provided by (used in) financing activities (12,588) 3,102
--------- ---------
Translation adjustment (259) (79)
--------- ---------
Increase (decrease) in cash and short-term investments (23,773) 47,949
Cash and short-term investments, beginning of period 150,893 126,547
--------- ---------
Cash and short-term investments, end of period $ 127,120 $ 174,496
========= =========
</TABLE>
See accompanying notes
5
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BRODERBUND SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements for Broderbund Software, Inc.
(the "Company") for the three and nine months ended May 31, 1997 and 1996 are
unaudited and reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
(Form 10-K) for the year ended August 31, 1996. The results of operations for
the three months and nine months ended May 31, 1997 are not necessarily
indicative of the results for the entire fiscal year ending August 31, 1997.
Note 2. Recently Issued Accounting Principles
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation"
which will be effective for the Company's fiscal year ending August 31, 1997.
SFAS No. 123 permits a company to choose either a new fair value based method or
the current Accounting Principles Board Opinion No. 25 intrinsic value based
method of accounting for its stock-based compensation arrangements. The Company
has elected to continue to follow current practice but SFAS No. 123 requires pro
forma disclosures of net income and earnings per share computed as if the fair
value based method had been applied.
In February 1997, the FASB issued Statement No. 128 (SFAS No. 128), "Earnings
per Share" which will be effective for the Company's fiscal year ending August
31, 1998. SFAS No. 128 requires a change in the method currently used to compute
earnings per share and that all prior periods be restated. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share but the impact on the calculation of fully diluted
earnings per share is not expected to be material.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report (Form 10-K) for the fiscal year ended August 31, 1996.
This Quarterly Report on Form 10-Q, and in particular Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains forward
looking statements regarding future events or the future performance of the
Company that involve certain risks and uncertainties including, but not limited
to, those discussed in "Factors Affecting Future Operating Results" below at
pages 11 to 14, as well as in the Company's 1996 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission ("S.E.C."). Actual events or
the actual future results of the Company may differ materially from any forward
looking statements due to such risks and uncertainties. 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.
This analysis is provided pursuant to applicable S.E.C. regulations and is not
intended to serve as a basis for projections of future events.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income data as
a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, May 31,
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 33% 29% 35% 33%
---- ---- ---- ----
Gross margin 67% 71% 65% 67%
Operating expenses:
Sales and marketing 32% 19% 26% 17%
Research and development 27% 19% 19% 14%
General and administrative 8% 9% 7% 6%
Charge for acquired in-process
technology and amortization 4% -- 9% --
---- ---- ---- ----
Total operating expenses 71% 47% 61% 37%
---- ---- ---- ----
Income (loss) from operations (4%) 24% 4% 30%
Interest and dividend income, net 4% 5% 3% 3%
Equity in earnings of joint venture -- -- -- 1%
Terminated merger fee, net -- -- -- 10%
---- ---- ---- ----
Income before income taxes -- 29% 7% 44%
Provision for income taxes -- 11% 3% 17%
---- ---- ---- ----
Net income -- 18% 4% 27%
==== ==== ==== ====
</TABLE>
7
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NET REVENUES
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 through distributors and retailers, as well as
directly to consumers. The Company's international sales are derived from a
foreign subsidiary and licensing and distribution arrangements with foreign
distributors.
Net revenues for the third quarter of fiscal 1997 were $39.3 million, an
increase of 12% from the $35.0 million recorded in the third quarter of fiscal
1996. The increase for the third quarter of fiscal 1997 was due to the release
of The Last Express(TM), 3D Home Interiors(TM) and 3D Home Architect(R) Deluxe,
as well as strong showings for other products, including various Click Art(R)
Image Paks(TM), Learning Advantage Libraries(TM) and various Family Tree Maker's
(TM) Family Archive CD Collection products. The increase was also impacted by
sales of T/Maker products which were not included in the same period last year,
since the acquisition of T/Maker was concluded in the fourth quarter of fiscal
1996. These revenue increases were offset, in part, by an increase in product
returns experienced in the quarter. For the first nine months of fiscal 1997 and
1996, net revenues were $145.1 million and $154.0 million, respectively, a
decrease of 6%. This decrease was largely a result of the Company's aggressive
sales and marketing strategy of decreasing prices and increasing marketing and
promotions to increase unit volume and market share, as further discussed below
and in prior filings.
Net revenues in the personal productivity category for the third quarter of
fiscal 1997 were up 18% over the same period last year. The increase in the
productivity revenues during this third quarter compared to the third quarter of
the prior year was primarily due to the release of 3D Home Architect Deluxe and
new Click Art Image Paks. For the first nine months of fiscal year 1997, the
productivity category posted a 15% increase in net revenues over the first nine
months of fiscal year 1996. The personal productivity category comprised 54% and
52% of the Company's total net revenue for the third quarter and first nine
months of fiscal 1997, respectively.
Net revenues in the entertainment category increased 37% for the third quarter
and decreased 34% for the first nine months of fiscal 1997 compared to fiscal
1996, respectively. The increase for the third quarter of fiscal 1997 was
primarily due to the release of The Last Express. The decrease for the first
nine months of fiscal 1997 was primarily attributable to a decrease in revenues
from Myst(R) due to reductions in pricing, which was partially offset by the
release of The Last Express this quarter. The entertainment category comprised
17% and 15% of the Company's total net revenues for the third quarter and first
nine months of fiscal 1997, respectively.
Net revenues in the education category decreased 21% for the third quarter and
11% for the first nine months of fiscal 1997 as compared to fiscal 1996 after
adjusting prior year revenues to include Living Books revenues in this category
rather than as affiliated label revenue. The decreases in this category were
primarily a result of decreases experienced in the unit volume of Carmen
Sandiego(R) and Early Learning product lines for the third quarter of fiscal
1997 as compared to fiscal 1996 and due to decreases in prices for the first
nine months of fiscal 1997 as compared to fiscal 1996. The education category
comprised 27% and 30% of the Company's total net revenues for the third quarter
and first nine months of fiscal 1997, respectively.
Net revenues from sales of affiliated label products declined 309% and 33% for
the third quarter and first nine months of fiscal 1997 compared to fiscal 1996,
respectively, after excluding the effects of Living Books affiliated label
revenue from prior periods. The decrease in the third quarter of fiscal 1997 was
attributable to the fact that without Living Books, affiliated label sales were
minimal for the third quarter of fiscal 1997. This category comprised 2% and 4%
of the Company's total net revenues for the third quarter and first nine months
of fiscal 1997, respectively.
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During the third quarter of fiscal 1997, the Company released a total of eight
new titles, nine upgrades to existing products and two international versions.
In the same period of the prior year, the Company released a total of two new
titles, three upgrades to existing products and one international version.
COST OF REVENUES
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 shortly after they purchase software. The Company does not
capitalize software development costs as the impact on the financial statements
would be immaterial. In the third quarter of fiscal 1997, the Company's gross
margin was 67% compared to 71% in the third quarter of fiscal 1996. For the
first nine months of fiscal 1997 and 1996, gross margin was 65% and 67%,
respectively. The decrease in gross margins for such periods was primarily due
to the impact of lower prices on revenues; however this decrease was partially
offset by an increase in the mix of published products, which carry a higher
gross margin, versus affiliated label products. The Company currently expects
the gross margin to decline to the low to mid 60% range as the revenue from
published entertainment titles, which have a higher royalty rate, become a
higher percentage of overall revenue.
SALES AND MARKETING
Sales and marketing expenses increased 85% to $12.6 million in the third quarter
of fiscal 1997 from $6.8 million in the third quarter of fiscal 1996. Similarly
for the first nine months of fiscal 1997, sales and marketing expenses increased
42% to $38.0 million from $26.8 million in the comparable period last year. The
increase was primarily due to the Company's increased emphasis on advertising
and promotions related to new product releases as well as significant increases
in marketing costs with the Company's channel partners. In addition, market
development funds granted increased substantially. The Company also incurred
additional expenses in order to monitor its channel partners' compliance with
these programs and to track inventory levels at individual retail outlets.
Further, the inclusion of sales and marketing expenses of Living Books due to
the acquisition of Random House's 50% interest in the Living Books joint venture
in the second quarter of fiscal 1997 contributed to the increase in the third
quarter of fiscal 1997 compared to the same quarter of fiscal 1996. The intense
competition for high quality and adequate levels of retail shelf space continues
to increase as the number of software products increases. As a result, the
Company believes that it may sustain, or incur further increases in, sales and
marketing expenses in the future, particularly in the entertainment category
where it is common for significant marketing costs to be incurred in advance of
product release, in an effort to more clearly distinguish its products from its
competitors' products and to obtain adequate shelf space.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 56% to $10.6 million in the third
quarter of fiscal 1997 from $6.8 million in the third quarter of fiscal 1996.
Similarly for the first nine months of 1997, research and development expenses
increased 28% to $27.8 million from $21.8 million for the same period in the
prior year. The increase was primarily due to higher employee-related expenses
from increased headcount as the number of new products under development has
increased in fiscal 1997, as well as expanded localization efforts to adapt
products for foreign markets, which were partially offset by lower bonus and
profit sharing provisions due to the decline in profitability. The increase in
the third quarter of fiscal 1997 was partially attributable to the inclusion of
research and development resulting from the acquisition of Random House's 50%
interest in the Living Books joint venture in the second quarter of fiscal 1997.
The Company continues to invest in the development of CD-ROM based multimedia
products with expanded sound, graphics, animation video and/or information
content. The development of products with more content increases research and
development costs and in future periods, the development of products for
emerging platforms, such as DVD, and new technologies, such as 3-D, may cause
development expenses to increase even further. To partially offset this increase
in content costs, the Company has implemented, and continues to develop,
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proprietary development systems to reduce the number of programming hours
required to bring a product to market on multiple platforms.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 7% to $3.2 million in the third
quarter of fiscal 1997 from $3.0 million in the third quarter of fiscal 1996.
General and administrative expenses increased 12% to $9.7 million in the first
nine months of fiscal 1997 from $8.7 million in the same period in the prior
year. The increases were primarily due to the Company's increased staffing and
the related employee expenses.
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY AND AMORTIZATION
The Company is amortizing, over a three year period, the value of the technology
purchased in the Company's acquisition of Random House's 50% interest in the
Living Books joint venture in January 1997, T/Maker Company in August 1996 and
Banner Blue Software, Inc. in April 1995.
The $1.4 million recorded in the third quarter of fiscal 1997 represents
amortization of the technologies acquired. For the first nine months of fiscal
1997, the Company recorded a charge of $9.5 million for acquired in-process
technology and incurred amortization of purchased technology of $3.5 million.
NONOPERATING INCOME
Included in nonoperating income is interest and dividend income and other
nonrecurring items. Interest and dividend income was $1.4 million and $1.9
million in the third quarter of 1997 and 1996, respectively. The decrease was
primarily due to lower cash balances in the current quarter.
Nonoperating income decreased 82% for the first nine months of fiscal 1997 when
compared to the same period for fiscal 1996. Interest and dividend income was
$4.5 million and $4.9 million in the first nine months of 1997 and 1996,
respectively. This decrease was primarily the result of lower cash balances. In
fiscal 1996, the Company recorded a pretax gain of $15.5 million, net of
expenses related to a terminated merger. In addition, prior to the acquisition
of Random House's 50% interest in Living Books in the second quarter of fiscal
1997, the equity in earnings of the Living Books joint venture was included as
nonoperating income.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate decreased to 35.3% from 39.0% for the
third quarter of fiscal year 1997 and 1996, respectively. The Company's
effective income tax rate increased to 46.4% from 39.9% for the first nine
months of fiscal year 1997 and 1996, respectively. Excluding the impact of the
in-process technology write-off for the first nine months of fiscal 1997, the
effective income tax rate would have been 38.5%. The decrease in the effective
income tax rate for the third quarter and first nine months of fiscal 1997,
excluding the in-process technology write-off, was primarily due to an increase
of tax-exempt interest income as a percentage of income before income taxes.
NET INCOME
Net income was $11.2 thousand or $0.00 per share in the third quarter of fiscal
1997 compared with net income of $6.2 million or $0.29 per share for the same
period in 1996.
For the first nine months of fiscal 1997, net income was $5.4 million or $0.26
per share compared with $41.0 million or $1.90 per share for fiscal 1996.
Excluding the one-time charge resulting from
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the Living Books acquisition, net income for the nine month period totaled $12.1
million or $0.57 per share. Excluding the one-time gain, net income for the nine
months ended May 31, 1996 was $31.7 million or $1.47 per share.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's primary source of liquidity has been cash generated from
operations. The Company's working capital decreased $6.9 million during the
first nine months of fiscal 1997 to $135.6 million from $142.5 million at August
31, 1996. Cash and short-term investments decreased $23.8 million to $127.1
million at May 31, 1997 from $150.9 million at the end of the prior fiscal year.
The decrease in cash and short-term investments was due to the purchase of
Random House's share of the Living Books joint venture for approximately $7.6
million, net of the cash balance, during the second quarter and the purchase of
500,000 shares of the Company's common stock in the open market during the
second and third quarters for approximately $14.6 million.
During the third quarter of fiscal 1997, the Company announced the signing of a
letter of intent to acquire Parsons Technology from Intuit Inc. The acquisition
is expected to be completed in the fourth quarter of this fiscal year. This
transaction will be accounted for as a purchase. The Company expects that at
least 50% of the purchase price will be allocated to in-process technology and
charged to expense at the time of closing.
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, acquisitions of products or companies that
complement the Company's business.
Management believes the existing cash and short-term investments balances and
cash generated from operations will be sufficient to meet the Company's
liquidity and capital needs for the coming year.
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 Annual Report and Form 10-K for the 1996
fiscal year, both of which are on file with the S.E.C.
FLUCTUATIONS IN PERFORMANCE AND 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.
The Company's business has generally been highly seasonal, with net revenues and
operating income normally 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. The Company
also believes that the market conditions which resulted in the year-over-year
decline in revenues and profitability experienced in the first nine months of
fiscal 1997 may continue in future periods. The Company has adjusted its sales
and marketing strategy in an effort to increase prices on several products, and
increase net revenues while maintaining the increases in unit volume and market
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share achieved during the first half of the current fiscal year when prices on
such products were lowered. However, there can be no assurance that the Company
will be successful in implementing the strategy, or that, if successfully
implemented, such strategy will be effective or will generate or sustain revenue
growth, unit volume or market share in the future. In addition to seasonal and
product pricing factors, the Company anticipates that its quarterly results for
the fourth quarter will be affected by the timing and the number of new product
releases or upgraded versions of existing products, as well as marketing and
promotional expenditures in connection with the product releases and the timing
of product announcements or introductions by the Company's competitors. Products
are generally shipped as orders are received, therefore quarterly sales and
operating results depend on the volume and timing of orders received during the
quarter, which are difficult to predict. A significant portion of the Company's
operating expenses are relatively fixed and planned expenditures are based on
sales forecasts. Thus, if net revenue levels are below expectations due to
either the timing of orders received or delays in product releases, operating
results are likely to be materially adversely affected. Due to the foregoing
factors, the Company believes that quarter to quarter comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
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. For example, during fiscal 1996,
the price per share of the Company's common stock ranged from $28.50 to $76.88
and in the first nine months of fiscal 1997 ranged from $18.38 to $35.13.
INDUSTRY AND COMPETITION
Recent data indicates a slowdown in the growth of end user demand for consumer
software for calendar year 1996 and the first five months of calendar year 1997
when compared to the same periods in prior years. There can be no assurance that
such demand will not continue to slow or decline. If such results persist, the
Company's future growth in net revenues could be adversely affected. 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, technical and intellectual property 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. As discussed above and in prior filings, the
Company decreased prices on a number of its products in order to increase market
share, including its best-selling series, The Print Shop, as well as Myst, which
placed negative pressure on net revenues and gross margins. Although the Company
is attempting to increase prices on certain products, there can be no assurance
that its attempts will be successful or 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. Retailers of
the Company's products typically have a limited amount of shelf space and
promotional resources for which there is intense competition. For example, there
are 19 products available from Living Books and it has become increasingly
difficult to maintain shelf space in the retail channel for all of these
products. There can be no assurance that retailers will continue to purchase all
of these products or provide these products with adequate levels of shelf space
and
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promotional support. In addition, competition for creative talent, including
independent developers, has also intensified, and the attraction and retention
of key personnel have 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
Company's increased focus and commitment towards the development and
introduction of entertainment titles increases the risk associated with the
development and marketing of products and their market acceptance since the
entertainment sector is more hit-driven, and with titles generally having a
relatively shorter life-cycle. Further, the substantial year-over-year decline
in Myst revenues during the second half of fiscal 1996 and first nine months of
fiscal 1997 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. The Myst sequel product, Riven(TM): The Sequel to Myst(R), is
currently on schedule for commercial release in the first quarter of fiscal
1998, but there can be no assurance that it will achieve widespread market
acceptance or that its remaining development effort will not be delayed. 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 and media 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. 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. In addition, the Company also permits distributors and
retailers to return products under certain circumstances and in recent periods,
the Company has experienced an increase in the rate of returns as the
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 believes that the rate of product returns may continue at this rate, and
there can be no assurance that return rates will not increase further. The
Company establishes allowances based on estimated future returns of product
after considering various factors, and accordingly, if the level of actual
returns exceeds management's estimates, it could have a material adverse impact
on the Company's operating results. Further, 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 manufactures its products based
upon estimated future sales, and accordingly, if the level of actual orders of
products falls short of management's estimates, inventory levels could be
excessive which could lead to inventory write-offs and have an adverse impact on
the Company's operating results.
13
<PAGE>
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 31,
1997.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRODERBUND SOFTWARE, INC.
(Registrant)
Dated: July 15, 1997
By: /s/ Michael J. Shannahan
------------------------
Michael J. Shannahan
Vice President and
Chief Financial Officer
(Principal Financial Officer)
16
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