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, 1997
_____ 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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BR0DERBUND 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, 1997 as reported on the NASDAQ National Market
system, was $603,552,495.
As of October 31, 1997, there were 20,812,155 shares of the registrant's Common
Stock Outstanding.
Documents Incorporated by Reference
Portions of registrant's definitive proxy statement (the "Proxy Statement") for
its 1998 Annual Meeting of Stockholders to be held January 22, 1998 are
incorporated by reference into Part III hereof.
This report consists of 50 sequentially numbered pages.
The Exhibit Index is located at pages 44 and 45. Page 1 of 50 Pages
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BR0DERBUND SOFTWARE, INC.
FORM 10-K, AUGUST 31, 1997
Table of Contents
Page
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PART I
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.........................26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................43
PART III
Item 10. Directors and Executive Officers of the Registrant..................43
Item 11. Executive Compensation..............................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management......43
Item 13. Certain Relationships and Related Transactions......................43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................................44
Signatures...................................................................47
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 and Annual Report.
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 and to the marketing and
distribution of existing products, 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, changes or disruptions
in the consumer software distribution channels and successful acquisition and
integration of new businesses, as well as those factors listed under Factors
Affecting Future Operating Results elsewhere in this Annual Report to
Stockholders. 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 40
million units. The Company is committed to creating imaginative software to
provide value for consumers of all ages.
Broderbund's product 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. In addition,
Broderbund also sells its products directly to schools and to consumers through
direct mail, telemarketing and via the Internet. In August 1997, the Company
acquired Parsons Technology, a consumer productivity software company based in
Iowa that distributes its products primarily direct-to-consumer. The Company
believes that the direct-to-consumer channel will play an increasingly important
role in the distribution of its products. 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. As described above, in August 1997 Broderbund acquired Parsons
Technology. Also in fiscal 1997, the Company acquired from Random House, Inc.
the remaining 50% interest in the Living Books(R) joint venture created by the
Company and Random House, Inc. in 1993, which publishes a series of
award-winning, interactive animated children's storybooks on CD-ROM. In fiscal
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 invested in certain start-up Internet related companies.
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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 world-wide 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.
Declining retail software prices and improvements in multimedia technology
and performance have fundamentally changed the consumers' experience by
providing affordable, highly interactive entertainment, educational and creative
environments increasingly rich in content with realistic sounds and music, text,
advanced graphics and animations, photographs and even film or video clips.
Accordingly, both consumer demand and consumer expectations compel the
publication of increasingly sophisticated, easy to use, content rich multimedia
products. The world-wide software industry also periodically undergoes profound
changes with the introduction of new hardware platforms and new technologies,
including most recently significant changes with the introduction and increased
importance of the Internet. In addition to these developments, competition has
continued to increase and intensify among new and existing multimedia content
providers and publishers.
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,
and offering a diverse product line for the increased likelihood of retail
success and sell-through. It has also resulted in the increased importance of
direct-to-consumer channels which augment the Company's efforts in the retail
environment.
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 1997, the Company released 46 new titles in both
the published and affiliated label areas, as compared to 42 new titles in fiscal
1996. 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
create and communicate, whether via printed output, on-screen visualization,
e-mail or Internet environments. 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 or teacher).
The top selling products during fiscal 1997 were from The Print Shop family,
from the Family Tree Maker line and Myst.
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 order to achieve sustained
consumer appeal. Successful products serving as examples of the
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Company's strategy include: The Print Shop, Carmen Sandiego, Kid Pix(R), Myst,
Family Tree Maker and Living Books(R) 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 advanced technology utilized increases the appeal and
realism 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
its products and in pioneering new types of interactive experiences. 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 in the
consumer software category.
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, education and productivity interests
and needs. The productivity category includes The Print Shop family of products,
the Family Tree Maker line, 3D Home Series, Williams-Sonoma Guide to Good
Cooking(TM), Org Plus(R) and the ClickArt family of products. Products in The
Print Shop family, first introduced in May 1984, have sold over 12 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 product line extensions such as The Print Shop(R)
Presswriter(TM), The Print Shop(R) Signature Greetings(TM) and The Print Shop(R)
Live Mail(TM). Family Tree Maker is a leading genealogy program which is
extended by the Family Archives(TM) CD-ROM collections of family historical data
to make searching for one's ancestors easier. 3D Home Architect(R) and 3D Home
Interiors(R) are best-selling, comprehensive solutions to easy home design,
complete with realistic 3D views. Williams-Sonoma Guide to Good Cooking is a
computerized cookbook designed to streamline and organize the cooking process.
Click Art is 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 $70. During fiscal 1997, productivity products accounted
for approximately 56% 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 Company also seeks to leverage well known brands, whether
owned by the Company (e.g., Carmen Sandiego) or licensed from third parties
(e.g., Rugrats(TM) and Dr. Seuss) to achieve recognition and consumer appeal.
The core of the education category is comprised of the Carmen Sandiego family of
products and the Living Books family of products.
The Carmen Sandiego family of products is a very popular series of
interactive games designed to motivate the player to learn more about the
subject matter and which have sold over six 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 the Emmy award winning, weekday children's quiz
show now called "Where in Time 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 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 Dr. Seuss's Green Eggs and Ham, Dr. Seuss's The Cat in the
Hat, Just Grandma and Me(TM), The Berenstain Bears In the Dark and Arthur's
Reading Race. In fiscal 1997, the market for children's interactive storybooks
on CD-ROM continued to be intensely competitive, resulting in lower average
selling prices. In some cases, competitors of the Company 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.
The Active Mind Series includes seven products designed to develop
curriculum-oriented skills in reading, writing, math, communication, thinking
and reasoning, including recently released Success Starter(TM) products.
The Company's education products range in price in stores from
approximately $20 to $40. During fiscal 1997, education products accounted for
approximately 27% of the Company's net revenues.
Entertainment Products. In September 1993, the Company released Myst, which
subsequently became the single best-selling entertainment title in PC software
history, and although it continues to remain popular, revenue has declined
significantly, even though unit volume is strong. Other entertainment titles
released in fiscal 1997 included Koala Lumpur Journey to the Edge(TM), The Last
Express(TM) and Warlords(TM) III: Reign of Heroes(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 games using both internal and external
development resources. 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
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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 1997, entertainment products accounted
for approximately 13% 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 distribution channels. In fiscal 1997, affiliated label
products accounted for approximately 4% of the Company's net revenues. The
Company's current affiliated label partners include Encyclopedia Britannica,
Inc., Talonsoft Inc., Progressive Network, Inc., Sunset Books, Tsunami and
Inroads Interactive, Inc.
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 are often smaller publishers, with
limited financial resources. The Company's affiliated label agreements require
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 its relationships with its customers, would have to assume
the obligation for affiliated label product returns.
Living Books. As of January 1, 1997, the Company acquired from Random House
the remaining 50% interest in the Living Books joint venture. However, since its
inception on January 1, 1994 and prior to the acquisition date, Broderbund and
Random House, Inc. were equal partners in a joint venture called Living Books to
publish the Living Books line of products. Prior to the Company's acquisition,
the Company's 50% share of the joint venture's profits and losses were
recognized in nonoperating income in the financial statements.
Product Development
The Company's strategy to successfully achieve new product flow while
managing its research and development expenses has been to combine its internal
software development capabilities together with publishing relationships
established with various independent software developers and content providers.
The Company's product development process includes design, prototyping,
programming, computer graphic design, animation, sound and video recordings and
quality assurance. The Company relies on a combination of internally developed
technology, as well as content and 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 and marketing activities are coordinated
in integrated business units based on the target customer. Each of the Company's
business units consists of software
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engineers, graphic artists, animators, and sound and video technicians to
develop products and convert existing programs to various hardware formats, as
well as marketing and public relations staff to market the resulting products.
Most elements of the development process are provided by a combination of
third-party and in-house resources. 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 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 1997, a substantial
percentage of Broderbund's net revenues has been derived from 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
decline in Myst revenues during fiscal 1997 as compared to prior fiscal years
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), has been released in the
first quarter of fiscal 1998 but there can be no assurance that it will achieve
widespread market acceptance, or that revenues generated from Riven: The Sequel
to Myst will replace the revenue shortfall from the decline in Myst revenues. 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 introductions, or lower than expected customer acceptance or market
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
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consumers through mail, telemarketing and the Internet. Broderbund commonly
participates in and provides financial assistance for its retailers' promotional
efforts, such as in-store displays or newspaper advertisements. The Company also
provides its retailers with demonstration disks and other collateral marketing
materials. Broderbund's two largest distributors in fiscal 1997 accounted for
approximately 12% and 5% of the Company's net revenues in the fiscal year as
compared to 11% each for the top two distributors in fiscal 1996. The Company
expects to continue to increase its direct sales to retailers in fiscal 1998.
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 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. The Company from
time to time lowers the wholesale price of selected products to stimulate
sell-through to consumers. At such times, the Company has historically granted
"price protection" to its distributors and retailers. The Company issues a
credit for the difference in wholesale pricing multiplied by the number of units
of the product that the retailer or distributor has in inventory on the date of
the price change. The Company includes a reserve for expected future price
protection credits as part of its reserve for returns. 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.
Additionally, the Company believes that higher
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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 well as promotional and marketing efforts conducted via the Internet. As the
Company increases its product offering in the entertainment category, the
Company has significantly increased 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. Also, particularly in the entertainment
sector, the Company has spent and expects to continue spending significant
amounts on marketing, promotional and advertising well in advance of a product's
commercial release. Therefore, substantial marketing expenses have and will
continue to increase the Company's operating costs well before any revenues are
derived from the product. Further, the Company expects to increase significantly
its direct-to-consumer marketing, via direct mailings to customers and outbound
calls, 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 eight
million users of the Company's products.
As part of its efforts to increase the exposure of the Company's evergreen
products to the consumer, the Company purchased Parsons Technology from Intuit
Inc. in August of 1997. Parsons Technology specializes in developing and
marketing productivity software and in selling such software directly to the
consumer through mail, telemarketing and the Internet. In addition, the Company
has increased its direct-to-consumer Internet marketing and promotional programs
including product-dedicated web sites to generate pre-product launch awareness,
on-line promotions, news group seedings and electronic commerce capabilities.
The Company's national retail sales staff covers the United States and
Canada and operates in California, Illinois, Maryland, Massachusetts, Ohio,
Pennsylvania, Texas and Ontario, Canada. The Company's subsidiary in the United
Kingdom markets and distributes 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 in Asia 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 1997, international sales
accounted for approximately 11% of the Company's net revenues.
The Company has a separate education division 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.
During fiscal year 1997 the Company experienced intense product-specific
competition in multiple product categories, including the Company's largest
revenue-generating product, The Print Shop product. The Company expects that
existing consumer software companies can be expected to broaden their product
lines and to
10
<PAGE>
increase their focus to compete more directly with its products. Moreover, large
corporations with substantial bases of intellectual property content in the
motion picture, toy and media industries and/or substantial financial resources
without the need for immediate profit or return, have increasingly entered or
announced their intention to enter the market for consumer software and/or their
activities on the Internet. 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. The Company believes
that the principal competitive factors in the consumer software industry include
brand name recognition, strength in distribution channels, product features and
quality, reliability and ease-of-use, 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. The Company 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 the Company 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 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 1997. There can be no assurance that international sales
of products will continue at the rate experienced during fiscal 1997, 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
supports industry anti-piracy efforts to police the unauthorized use of software
and obtains limited assistance from U.S. Customs and various foreign customs and
police authorities. 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
11
<PAGE>
distributed do not protect products and intellectual property rights to the same
extent as the laws of the United States.
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 marketing, promotion and 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, including electronic commerce capablilites,
incorporating on-line functionality into existing products, such as The Print
Shop, Carmen Sandiego, Family Tree Maker, 3D Home Architect products and
Warlords III: Reign of Heroes, and continued development of, and investment in,
new Internet centric businesses and products, including multi-user entertainment
products (Warlords III: Reign of Heroes and the Red Orb Zone, on-line gaming
website). The Company has incurred, and expects to incur significant additional
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 strategies will be successful, or
that the costs and investments will provide adequate, or any, returns.
Product Concentration
During fiscal 1997, approximately 56%, 13% and 27% of the Company's net
revenues were derived from sales of productivity, entertainment and education
products, respectively. Within the productivity category, the Print Shop product
line was approximately 23% of the Company's total net revenue. Within the
entertainment category, Myst was approximately 10% of the Company's total net
revenue. Within the education category, the Living Books product line was
approximately 8% of the Company's total net revenue. These were the leading
products from their respective categories and, with the exception of Myst, are
expected to continue to account for a material percentage of net revenues in
fiscal 1998 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 as evidenced by the purchase of Parsons Technology in fiscal
1997. The Company continues to actively explore additional product-driven,
distribution-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. 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.
12
<PAGE>
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, market acceptance of the Company's products or
those of its competitors, the timing of new product introductions, the rate of
growth of the consumer software market, fluctuations in consumer demand,
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, the ability to timely manufacture and ship products in
response to fluctuating demand, and changes or disruptions in the consumer
software distribution channels and the successful acquisition and integration of
new business, products or technologies. 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, or, as happened in the fourth quarter of fiscal year 1997, to prevent a
loss. 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
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. The
Company believes that the market conditions which resulted in the year-over-year
decline in profitability experienced in fiscal 1997 could continue. 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.
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.
13
<PAGE>
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.
Employees
As of August 31, 1997, the Company had 1,129 employees, including 366 in
product development, 380 in sales, marketing and customer service, 200 in
manufacturing and shipping and 183 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.
Item 2. PROPERTIES
The Company owns 15 acres of land and related buildings in Hiawatha, Iowa.
The buildings total 150,000 square feet.
The Company leases approximately 108,000 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 11,000 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 59,000 square
feet in Cedar Rapids, Iowa which it subleases. Broderbund leases approximately
4,100 square feet of office space for its European subsidiary in the United
Kingdom, and leases office space for sales representatives in the United States.
The Company expects that its office, manufacturing and warehouse space will be
sufficient for its needs through fiscal 1998.
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, results of operations or cash flows 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, 1997.
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 52 Chief Executive Officer and Director
William M. McDonagh 41 President, Chief Operating Officer and
Director
Thomas L. Marcus 44 Vice President, Business Development,
General Counsel and Secretary
Daniel J. Steever. 39 General Manager and Group Vice President
J. Mark Hattendorf 47 Vice President, Finance and Chief
Financial Officer
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. 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. Steever joined the Company in June 1997 as General Manager and Group
Vice President. In his role, Mr. Steever oversees North American retail sales
and the Parsons division. He had previously served as President and Chief
Executive Officer of Marketing Force, Inc. from 1994 to 1996 and Regional Vice
President/General Manager at ADVO, Inc. west coast region from 1992 to 1994 and
northeastern region from 1990 to 1992. Mr. Steever received a B.S.M.E. from the
University of Virginia.
Mr. Hattendorf has recently joined the Company as Vice President, Finance
and Chief Financial Officer. Prior to joining the Company, Mr. Hattendorf served
as Executive Vice President, Chief Financial Officer of Acclaim Entertainment,
Inc. from June 1996 to November 1997, as Vice President-Administration and Chief
Financial Officer of Prodigy Services Company from October 1995 to June 1996, as
Senior Vice President and Chief Financial Officer of Herbalife International,
Inc. from September 1993 to October 1995 and as a financial and general
management consultant to various entertainment, real estate and financial
service organizations from May 1991 to September 1993. Mr. Hattendorf, a
certified public accountant, received a B.S. and M.B.A. from the Loyola
Marymount University of Los Angeles.
15
<PAGE>
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 1997 High Low
First Quarter $30.63 $22.38
Second Quarter 35.13 29.00
Third Quarter 30.88 18.38
Fourth Quarter 29.50 21.50
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
The Company has not paid cash dividends and has no present plans to do so.
There were 432 stockholders of record on August 31, 1997, excluding stockholders
whose stock is held in nominee or street name by brokers.
16
<PAGE>
Item 6. SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended August 31,
1997 1996 1995 1994 1993
-----------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues $ 190,787 $ 186,207 $ 171,594 $ 111,774 $ 95,583
Cost of revenues 65,056 58,259 60,997 40,589 39,119
Amortization of purchased technology 5,427 645 95 -- --
-----------------------------------------------------------
Gross margin 120,304 127,303 110,502 71,185 56,464
-----------------------------------------------------------
Operating expenses:
Sales and marketing 57,311 34,381 25,143 18,621 15,051
Research and development 43,670 29,244 22,784 16,016 13,671
General and administrative 13,603 11,256 11,085 7,500 7,112
Charge for acquired in-process
technology 29,297 8,009 -- -- --
Restructuring charges 1,986 -- -- -- --
-----------------------------------------------------------
Total operating expenses 145,867 82,890 59,012 42,137 35,834
-----------------------------------------------------------
Income (loss) from operations (25,563) 44,413 51,490 29,048 20,630
Interest and dividend income, net 5,556 6,499 6,364 1,791 1,295
Equity in earnings (loss) of joint
venture (603) 217 3,886 -- --
Terminated merger fees, net -- 15,464 -- (11,000) --
-----------------------------------------------------------
Income (loss) before income taxes (20,610) 66,593 61,740 19,839 21,925
Provision (benefit) for income taxes (7,128) 29,816 25,553 8,778 8,297
-----------------------------------------------------------
Net income (loss) $ (13,482) $ 36,777 $ 36,187 $ 11,061 $ 13,628
===========================================================
Net income (loss) per share $ (0.65) $ 1.71 $ 1.72 $ 0.55 $ 0.68
===========================================================
Shares used in computing per share
data 20,686 21,509 21,037 20,145 20,006
===========================================================
Balance Sheet Data
at August 31
Cash and short-term investments $ 94,078 150,893 $ 126,547 $ 75,000 $ 54,316
Working capital 98,935 142,493 119,894 73,005 54,770
Total assets 186,603 200,432 161,551 97,651 77,229
Stockholders' equity 148,082 165,548 128,882 80,179 62,010
</TABLE>
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
NET REVENUES
- --------------------------------------------------------------------------------
(In thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
Net revenues $190,787 2% $186,207 9% $171,594
- --------------------------------------------------------------------------------
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 retailers and distributors as well
as directly to consumers. The Company's international sales, representing 11%,
11% and less than 10% of revenues in fiscal 1997, 1996 and 1995, respectively,
are derived from a subsidiary in the United Kingdom, as well as licensing
arrangements with foreign distributors.
The top selling products during fiscal 1997 were from products in The Print
Shop family and the Family Tree Maker line and from Myst. Each of these products
are encountering increased competition as existing consumer software companies
broaden their product lines and/or increase their focus to compete more directly
with the Company's products. During fiscal 1997, the Company released 46 new
titles in both the published and affiliated label areas, as compared to 42 and
36 new titles in fiscal 1996 and 1995, respectively.
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 26% year over year in fiscal 1997 compared to
30% in fiscal 1996. Growth in this product line was primarily due to the
purchase of T/Maker Company in the last month of fiscal 1996 (i.e., increases in
sales of products in the Click Art product line) and increases in sales in the
Family Tree Maker line. The education line of products decreased approximately
8% in fiscal 1997 as compared to a 13% increase in fiscal 1996 due mainly to the
decline in sales for Carmen Sandiego and Early Learning titles; these figures
include Living Books' results for both fiscal years. The entertainment category
decreased in fiscal 1997 by 31% compared to a decrease of 15% in fiscal 1996.
This was primarily due to a significant decline in Myst revenue which was only
slightly offset by the release of The Last Express and Warlords III: Reign of
Heroes in fiscal year 1997. Net revenues from the affiliated label products
declined 24% and 9% in fiscal 1997 and 1996, respectively, due to the Company's
decision to reduce the number of affiliated label products offered.
Overall, the 2% increase in net revenues in fiscal year 1997 over 1996 was
due to new product releases, the expansion of the Company's overall product
offerings as a result of new business acquisitions, as well as growth in the
Company's direct-to-consumer business of more than 50% over fiscal year 1996.
The 9% increase in net revenues during fiscal 1996 as compared to fiscal 1995
resulted primarily from the revenue generated by Family Tree Maker products for
a full twelve months in fiscal 1996 versus only five months in fiscal 1995. Also
contributing to the growth in fiscal 1996 was the release of new products.
18
<PAGE>
COST OF REVENUES
- --------------------------------------------------------------------------------
(In thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
Cost of revenues $65,056 12% $58,259 (4%) $60,997
Percentage of net revenues 34% 31% 36%
Amortization of purchased
technology $5,427 741% $645 579% $95
Percentage of net revenues 3% 0% 0%
- --------------------------------------------------------------------------------
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 increased in fiscal 1997 and decreased in fiscal 1996 as a
percentage of net revenues when compared to the respective previous fiscal year.
The increase in fiscal 1997 was primarily due to the increase in business with
mass-merchant retailers, and the increasingly competitive nature of that
distribution channel, which resulted in increases in returns, as well as costs
incurred for pricing allowances and price protection programs. Lower average
selling prices also raised cost of revenues as a percentage of revenues in
fiscal 1997. The decrease in fiscal 1996 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 net revenue in fiscal 1996 compared
to 18% in fiscal 1995.
Amortization of purchased technology of $5.4 million in fiscal 1997
represents a portion of the excess purchase price related to the value of
technology purchased which will have a benefit to the Company in future periods,
which the Company has estimated to be a three year period from time of
acquisition.
OPERATING EXPENSES
- --------------------------------------------------------------------------------
(In thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
Sales and marketing $57,311 67% $34,381 37% $25,143
Percentage of net revenues 30% 18% 15%
Research and development $43,670 49% $29,244 28% $22,784
Percentage of net revenues 23% 16% 13%
General and administrative $13,603 21% $11,256 2% $11,085
Percentage of net revenues 7% 6% 6%
Charge for acquired in-
process technology $29,297 266% $ 8,009 -- --
Percentage of net revenues 15% 4% --
Restructuring charges $ 1,986 -- -- -- --
Percentage of net revenues 1% -- --
- --------------------------------------------------------------------------------
All operating expenses showed significant increases in fiscal 1997 as
compared to fiscal 1996 because of the impact of acquisitions (T/Maker, Living
Books and Parsons Technology) on the Company's cost base.
19
<PAGE>
Sales and marketing expenses increased in fiscal 1997 from fiscal 1996
primarily due to an increased emphasis on advertising and promotions and other
sales and marketing programs, including direct-to-consumer marketing, as well as
a higher level of staffing to support the additional programs, and in
particular, the Company's launch of its new entertainment titles with increased
marketing efforts. Sales and marketing expenses also included the costs from
Living Books for eight months of fiscal 1997, subsequent to the completion of
the acquisition of Random House's 50% share in the joint venture. Sales and
marketing expenses increased in fiscal 1996, as compared to fiscal 1995,
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 1997 as compared to
fiscal 1996 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. In addition, the Company reserved $5.2 million for royalty
advances in fiscal 1997. Also, subsequent to January 1997, research and
development expenses include the costs for Living Books. The increase in
research and development expenses in fiscal 1996 as compared to fiscal 1995 was
due primarily to the investment in staffing and the publishing of more
technologically sophisticated, easy to use and content rich multimedia products.
General and administrative costs increased for fiscal 1997 as compared to
fiscal 1996 as a result of increased headcount and office space as a result of
acquisitions. General and administrative costs for fiscal 1996 and 1995 were
relatively constant as a percentage of net revenues as an effort was made to
maintain expense levels consistent with the prior years.
The charge for acquired in-process technology of $29.3 million for fiscal
1997 represents a portion of the excess purchase price related to acquisitions
made by the Company during the fiscal year including Parsons Technology and
Living Books. This charge is made at the time of the acquisition.
Consistent with the Company's test for internally developed software, for
each of these acquisitions the Company determined the amounts allocated to
developed and in-process research and development based on whether technological
feasibility had been achieved and whether there was any alternative future use
for the technology. Due to the absence of detailed program designs, evidence of
technological feasibility was established through the existence of a completed
working model at which point functions, features and technical performance
requirements can be demonstrated. As of the respective dates of the
acquisitions, the Company concluded that the in-process research and development
had no alternative future use after taking into consideration the potential for
usage of the software in different products, resale of the software and internal
usage.
In accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," the
Company recorded a charge to operating expenses of approximately $2.0 million in
fiscal year 1997. Included in the restructuring charges is approximately $1.2
million for employee severance related to certain restructuring programs. The
remaining balance of approximately $0.8 million was due to exit costs related to
these restructuring programs (see Note 11, Restructuring Charges, for additional
details).
20
<PAGE>
NONOPERATING INCOME AND EXPENSES
- --------------------------------------------------------------------------------
(In thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
Interest and dividend
income, net $5,556 (15)% $ 6,499 2% $6,364
Percentage of net revenues 3% 3% 4%
Equity in earnings of joint
venture $ (603) (378)% $ 217 (94)% $3,886
Percentage of net revenues 0% 0% 2%
Terminated merger fees, net -- (100)% $15,464 100% --
Percentage of net revenues -- 8% --
- ----------------------------------------------- ------------ -------------------
Investment income decreased in fiscal 1997 as compared to fiscal 1996 due
to a decrease in the Company's cash balances primarily related to the purchase
of Random House's 50% interest in the Living Books joint venture, the purchase
of Parsons Technology and the purchase of the Company's common stock in the open
market. Investment income increased in fiscal 1996 as compared to fiscal 1995
due to higher average invested cash balances.
In fiscal 1997, the contribution from the Company's 50% equity interest in
Living Books, a joint venture between the Company and Random House, decreased
from fiscal 1996 because of declining unit sales and pricing pressure. In fiscal
1996, the contribution from the Company's 50% equity interest in Living Books
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.
PROVISION FOR INCOME TAXES
- --------------------------------------------------------------------------------
(In thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
Provision (benefit) for
income taxes $(7,128) (124)% $29,816 17% $25,553
Effective income tax rate (34.6)% 44.8% 41.4%
- --------------------------------------------------------------------------------
The Company's effective income tax rate, as a percentage of pre-tax income
(loss), decreased in fiscal 1997 due to the nondeductible one time charges
related to acquisitions of in-process research and development during the year.
The Company's effective income tax rate increased in fiscal 1996 as compared to
fiscal 1995 as the charge for acquired in-process technology resulting from the
acquisition of T/Maker Company did not provide any tax benefit for fiscal 1996.
A more complete analysis of the differences between the federal statutory and
the Company's effective income tax rates is presented in Note 6 to the
consolidated financial statements.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
- --------------------------------------------------------------------------------
(In thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
Net income (loss) $(13,482) (137)% $36,777 2% $36,187
Percentage of net revenues (7)% 20% 21%
Net income (loss) per share $ (0.65) $ 1.71 $ 1.72
- --------------------------------------------------------------------------------
21
<PAGE>
For fiscal 1997, net loss was $13.5 million or $0.65 per share. Excluding
the one-time charges resulting from the charge for acquired in-process
technology, royalty advance charges and restructuring costs the Company would
have recognized net income of $9.8 million or $0.46 per share. For fiscal 1996,
net income was $36.8 million or $1.71 per share. 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.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
(In thousands) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
Cash and short-term
investments $94,078 (38)% $150,893 19% $126,547
Working capital $98,935 (31)% $142,493 19% $119,894
Net cash provided by
operating activities $ 9,293 (82)% $ 50,516 24% $ 40,622
- --------------------------------------------------------------------------------
At August 31, 1997, cash and short-term investments decreased to $94.1
million from $150.9 million at August 31, 1996. The decrease in cash and
short-term investments was due primarily to a decline in cash provided by
operating activities from $50.5 million in fiscal 1996 to $9.3 million in fiscal
1997, cash used to purchase Parsons Technology and Random House's 50% interest
in the Living Books joint venture, as well as the purchase of 500,000 shares of
the Company's common stock in the open market during fiscal year 1997. At August
31, 1997, accounts receivable, net of allowances of $27.5 million, increased
$12.1 million to $18.0 million. At August 31, 1996, cash and short-term
investments increased to $150.9 million from $126.5 million in fiscal 1995. In
fiscal 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. At
August 31, 1996, 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 1998.
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.
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 elsewhere in this Form 10-K.
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
22
<PAGE>
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 and the successful acquisition and integration of new businesses,
products and technologies.
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 profitability experienced in 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 unit volume and market share achieved during fiscal 1997 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
results for fiscal 1998 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 sales and
operating results depend on the volume and timing of orders received during the
fiscal year, 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 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 1997, the price per share of the Company's common stock ranged from
$18.38 to $35.13 and in fiscal 1996 ranged from $28.50 to $76.88.
INDUSTRY AND COMPETITION
Data indicates that there has been an overall slowdown in the growth of end
user demand for consumer software for calendar year 1996 and for the majority 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.
23
<PAGE>
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 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 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: The Sequel to Myst, was released
in the first quarter of fiscal 1998, but there can be no assurance that it will
achieve widespread market acceptance.
The Company believes that electronic or Internet products and services will
become an increasingly important platform and distribution media. Although the
Company has initiated steps, at significant costs, to take advantage of
opportunities created by the Internet and on-line networks 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. 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
financial results. In addition, the Company believes that potential customers
for its software are spending increasing amounts of time online, and therefore
may be less likely to purchase the Company's (and its competitors) software.
Just as the Company competes with other forms of entertainment (e.g., books,
television), the Company now competes with the Internet.
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
24
<PAGE>
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.
Sales to a limited number of distributors and retailers have constituted
and are expected to continue to constitute a substantial amount of the Company's
revenues. Arrangements with these accounts generally may be terminated at any
time by the distributor or retailer. The loss of, a significant reduction in
sales to or inability to collect receivables from, or any other adverse change
in the Company's relationship with, 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, sales of the Company's products
are typically made on credit, with terms that vary depending upon the customer
and the nature of the product. The Company's retailers and distributors compete
in a volatile industry and are subject to the risk of bankruptcy or other
business failure, and certain distributors and retailers have experienced
difficulties. Although the Company maintains a reserve for uncollectible
receivables which it believes is adequate, there can be no assurance that its
reserve will prove to be sufficient or that the 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.
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.
25
<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, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended August 31, 1997. Our audits also included the
financial statement schedule listed in the Index at 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, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended August 31, 1997, 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 3, 1997
26
<PAGE>
Broderbund Software, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31,
1997 1996
-------------------
(In thousands
except share data),
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments $ 94,078 $150,893
Accounts receivable, net of allowances of $27,452
in 1997 and $27,611 in 1996 18,047 5,956
Inventories 4,527 3,140
Deferred income taxes 14,975 15,057
Other current assets 3,799 869
-------------------
Total current assets 135,426 175,915
-------------------
Property and equipment, net 18,664 7,014
Purchased technology and other intangibles 20,308 13,090
Deferred income taxes 11,002 --
Investments in affiliates -- 4,053
Other assets 1,203 360
-------------------
Total assets $186,603 $200,432
===================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 8,928 $ 4,442
Accrued liabilities 24,567 25,149
Other current liabilities 2,996 3,831
-------------------
Total current liabilities 36,491 33,422
-------------------
Deferred income taxes -- 1,462
Other liabilities 2,030 --
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000 shares;
issued and outstanding 20,768,132 and 20,670,060 shares, respectively 27,422 31,383
Retained earnings 120,660 134,165
-------------------
Total stockholders' equity 148,082 165,548
-------------------
Total liabilities and stockholders' equity $186,603 $200,432
===================
</TABLE>
See accompanying notes.
27
<PAGE>
Broderbund Software, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended August 31,
----------------------------------
1997 1996 1995
----------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenues $ 190,787 $ 186,207 $ 171,594
Cost of revenues 65,056 58,259 60,997
Amortization of purchased technology 5,427 645 95
----------------------------------
Gross margin 120,304 127,303 110,502
----------------------------------
Operating expenses:
Sales and marketing 57,311 34,381 25,143
Research and development 43,670 29,244 22,784
General and administrative 13,603 11,256 11,085
Charge for acquired in-process technology 29,297 8,009 --
Restructuring charges 1,986 -- --
----------------------------------
Total operating expenses 145,867 82,890 59,012
----------------------------------
Income (loss) from operations (25,563) 44,413 51,490
Interest and dividend income, net 5,556 6,499 6,364
Equity in earnings (loss) of joint venture (603) 217 3,886
Terminated merger fees, net -- 15,464 --
----------------------------------
Income (loss) before income taxes (20,610) 66,593 61,740
Provision (benefit) for income taxes (7,128) 29,816 25,553
----------------------------------
Net income (loss) $ (13,482) $ 36,777 $ 36,187
==================================
Net income (loss) per share $ (0.65) $ 1.71 $ 1.72
==================================
Shares used in computing per share data 20,686 21,509 21,037
==================================
</TABLE>
See accompanying notes.
28
<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, 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
Exercise of stock options 135 1,833 -- 1,833
Tax benefits relating to stock options -- 568 -- 568
Repurchase of common stock (500) (14,574) -- (14,574)
Purchase of Living Books 419 7,321 -- 7,321
Shares issued under employee stock purchase
plan 44 891 -- 891
Foreign currency translation adjustment -- -- (588) (588)
Unrealized gain on short-term investments -- -- 565 565
Net loss -- -- (13,482) (13,482)
---------------------------------------------------
Balances at August 31, 1997 20,768 $ 27,422 $ 120,660 $ 148,082
===================================================
</TABLE>
See accompanying notes
29
<PAGE>
Broderbund Software, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended August 31,
1997 1996 1995
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (13,482) $ 36,777 $ 36,187
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in (earnings) loss of joint venture 603 (217) (3,886)
Depreciation and amortization 11,151 3,164 2,258
Deferred income taxes (10,874) (120) (5,394)
Charge for acquired in-process technology 29,297 8,009 --
Write-off of purchased technology -- -- 1,678
Royalty advance reserve 5,192 -- --
Changes in current assets and liabilities:
Accounts receivable (6,050) 1,924 (5,582)
Inventories 111 (578) (201)
Other current assets (1,957) 317 (429)
Income taxes (4,345) 9,453 669
Accounts payable 2,874 (1,652) 438
Accrued compensation (2,361) (2,268) 5,709
Other accrued liabilities (866) (4,293) 9,175
-----------------------------------
Net cash provided by operating activities 9,293 50,516 40,622
-----------------------------------
Investing activities
Net additions to equipment and improvements (4,445) (3,963) (3,383)
Dividends received from joint venture -- 1,000 2,500
Short-term investments (42,096) (17,702) 33,842
Business combinations, net of cash acquired (44,414) (21,020) --
Investments in affiliates (4,848) (3,450) --
Adjustment for effect of pooling-of-interests on prior
periods -- -- 2,225
Other (531) 1,374 (708)
-----------------------------------
Net cash provided (used) for investing activities (96,334) (43,761) 34,476
-----------------------------------
Financing activities
Exercise of stock options 1,833 2,128 4,069
Tax benefit from exercise of stock options 568 1,548 6,213
Employee stock purchase plan 891 -- --
Repurchase of common stock (14,574) (3,433) --
-----------------------------------
Net cash provided by (used) financing activities (11,282) 243 10,282
-----------------------------------
Translation adjustment (588) (78) (20)
-----------------------------------
Increase (decrease) in cash (98,911) 6,920 85,360
Cash and equivalents, beginning of year 108,999 102,079 16,719
-----------------------------------
Cash and equivalents, end of year 10,088 108,999 102,079
Short-term investments 83,990 41,894 24,468
-----------------------------------
Cash and short-term investments, end of year $ 94,078 $ 150,893 $ 126,547
===================================
Supplemental disclosure of cash flow information
Income tax payments, net $ 7,617 $ 18,857 $ 24,168
===================================
Interest payments $ 40 $ 81 $ 39
===================================
Supplemental disclosure of non-cash investing and
financing activities
Issuance of restricted stock for purchase of Living
Books $ 7,321 -- --
===================================
</TABLE>
See accompanying notes.
30
<PAGE>
Broderbund Software, Inc.
Notes to Consolidated Financial Statements
August 31, 1997, 1996, and 1995
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
Prior to January 1997, the Company and Random House, Inc. (collectively,
the "Partners") participated in a joint venture to publish story-based
multimedia software for children. The joint venture, Living Books, combined
resources of these two publishers and was 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 was responsible for all research and
development, manufacturing and marketing costs associated with the Living
Books products. The Partners were each distributing Living Books products
through their respective distribution channels under an affiliated label
arrangement. The Company had revenues of $8,817,000, $18,041,000 and
$22,393,000 during fiscal 1997, 1996, and 1995, respectively, from
distribution of Living Books products as an affiliated label product.
Prior to January 1, 1997 the Company reported its share in earnings and
losses of Living Books under the equity method of accounting. The Company's
share was based on the partnership's most recent quarter end results, which
were reported on a calendar year basis. The Company's equity (loss) in the
earnings of the joint venture for the six months ended December 31, 1996
and the years ended June 30, 1996 and 1995 amounted to $(603,000), $217,000
and $3,886,000, respectively. The Company received distributions from the
joint venture during fiscal 1997 and 1996 of $0 and $1,000,000,
respectively, which reduced the Company's investment in the joint venture.
As of January 1, 1997, the Company purchased Random House's 50% share in
this joint venture (see Note 2, Business Combinations). Results of Living
Books after this date are reflected in the accompanying financial
statements.
The Company has minority interests in Live Picture, Inc., Babycenter, Inc.,
Classifieds 2000, Inc., Classified Project, Inc., Cyberian Outpost, Inc.,
E-Ticket, Inc., Index Stock Photography, Inc., Netcentives, Inc., Net
Contents, Inc., Netplay, Inc. and N/Volve, Inc. These investments are
recorded at cost and were fully reserved for on the August 31, 1997
Consolidated Balance Sheet in connection with the Company's restructuring
(see Note 11, Restructuring Charges).
31
<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. Short-term investments consist principally of municipal bonds and
U.S. government agency notes.
The Company accounts for investments under Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS No. 115"). 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.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over estimated useful lives
ranging from three to seven years for equipment and improvements and thirty
years for buildings.
Purchased Technology and Other Intangibles
Purchased technology, net of amortization, at August 31, 1997, 1996 and
1995 of $20,308,000, $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 1997, 1996, and 1995 was
$5,427,000, $645,000 and $95,000, respectively. Certain amounts reported in
prior years have been reclassified to conform with fiscal year 1997
presentation.
Advances at August 31, 1996 of $1,520,000 represent prepayments of
royalties made to independent software developers under development
agreements. These advances were charged to cost of revenues at the
contractual royalty rate based on actual net product sales. In the fourth
quarter of fiscal year 1997 the Company has reserved for 100% of advances
on the balance sheet, which resulted in a pretax charge of $5.2 million.
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 1997, 1996, or 1995
because the impact on the financial statements would not be material.
32
<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 one customer
were 12%, 11% and 22% of total net revenues in fiscal 1997, 1996 and 1995,
respectively. Net revenues from sales to a different customer were 11% and
13% of total net revenues in fiscal 1996 and 1995, respectively.
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 $10,933,000,
$11,999,000 and $13,424,000 in fiscal 1997, 1996 and 1995, respectively.
Advertising Costs
The Company charges advertising costs to sales and marketing expense as
incurred. Advertising costs were $16,139,000, $6,383,000 and $3,025,000 in
fiscal 1997, 1996 and 1995, respectively. Printing and postage related to
direct mail offers are expensed over the life of the mailing, not to exceed
90 days and are included in Other current assets on the balance sheet at
August 31, 1997.
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 stockholders' 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 1997,
1996 or 1995.
Recently Issued Accounting Standards
The Company adopted 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 121") effective for the fiscal
year ended August 31, 1997. SFAS 121 requires that impairment losses be
recorded on long-lived assets and certain identifiable intangibles when
indicators of impairment are present and the undiscounted cash flows
estimated by those assets are less than the assets' carrying amounts.
Adoption of this standard did not have a material impact on the Company's
consolidated financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
establishes a fair value method of accounting for stock-based employee
compensation plans. As permitted under SFAS 123, the Company has elected to
follow Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees" in accounting for stock-based awards to
employees. As such, the Company has continued to measure compensation
expense using the intrinsic value based method for stock-based employee
compensation plans and has provided pro forma disclosures of net income and
earnings per share as if the accounting provisions of SFAS 123 had been
adopted (see Note 7, Stockholders' Equity).
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation
of basic and diluted earnings per share for periods ending after December
15, 1997, for all entities with complex capital structures. At that time,
the Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. There will be no impact
33
<PAGE>
1. Accounting Policies (continued)
on the Company's primary or fully diluted earnings (loss) per share for the
year ended August 31, 1997 because the Company incurred a loss for the
period. The impact is expected to result in an increase in primary earnings
per share for the year ended August 31, 1996 of $0.07 per share and no
change to fully diluted earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying of
comprehensive income and its components. The Company will adopt SFAS No.
130 effective September 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes new
requirements for the reporting of information regarding operating segments,
products, services, geographic areas and major customers. The Company will
adopt SFAS No. 131 effective September 1, 1998.
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 inventories. Actual results could differ from those
estimates.
Net Income (Loss) Per Share
Net income (loss) 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 1997 presentation.
2. Business Combinations
Parsons Technology
On August 6, 1997, the Company acquired Parsons Technology from Intuit Inc.
Parsons Technology is a leading direct-to-consumer marketing organization
and has an experienced product development group. The acquisition has been
accounted for under the purchase method, and had an aggregate purchase
price of approximately $31,000,000 in cash, including acquisition costs.
Approximately $10,000,000 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 $9,311,000 to purchased
technology and other intangible assets. The amount allocated to in-process
research and development was charged to operations at the time of
acquisition. The purchased technology and other intangible assets are being
amortized over three years from the date of acquisition. The operating
results of Parsons Technology, which were 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.
Living Books
As of January 1, 1997, the Company acquired the remaining 50% interest in
the Living Books joint venture. The acquisition was accounted for under the
purchase method of accounting and was accomplished by a combination of cash
and restricted stock, with an aggregate purchase price of approximately
$18,370,000, including acquisition costs. In connection with the
acquisition, a portion of the excess purchase price, approximately
$9,250,000 was allocated to in-process technology and charged to operations
at the time of acquisition. Approximately $4,853,000
34
<PAGE>
2. Business Combinations (continued)
was allocated to purchased technology and is being amortized over three
years from the date of acquisition. The operating results of Living Books,
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. Prior to this date, the Company and Random
House, Inc. were equal partners in the joint venture to publish Living
Books products.
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 were not material in relation to those
of the Company, have been included in the consolidated financial statements
for the periods 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.
Cash and short-term investments, at fair value, consist of the following:
August 31,
1997 1996
-------------------------
(In thousands)
Cash and equivalents:
Cash and money market funds $ 4,848 $ 1,149
Municipal securities -- 53,812
Commercial paper 2,240 1,500
Money market preferreds 3,000 49,200
Corporate notes -- 3,338
-------------------------
10,088 108,999
-------------------------
Short-term investments:
Money market preferreds 3,024 2,675
Municipal securities 65,947 22,831
Commercial paper 1,000 --
U.S. government agencies 11,530 15,884
Corporate equity fund 473 504
Corporate notes 2,016 --
-------------------------
83,990 41,894
-------------------------
Cash and short-term investments $ 94,078 $150,893
=========================
35
<PAGE>
3. Fair Value of Financial Instruments (continued)
Cash and short-term investments had an aggregate cost of $93,754,000 and
$151,140,000 at August 31, 1997 and 1996, respectively. At August 31, 1997
cash and short-term investments included gross unrealized gains of $388,000
and losses of $70,000. 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, 1997 short-term investments of $13,305,000 were
contractually due within one year with the balance due after one year but
before two years.
4. Property and Equipment
Property and equipment consist of the following:
August 31,
1997 1996
------------------------
(In thousands)
Computer equipment $ 14,702 $ 10,169
Furniture 8,960 6,134
Leasehold improvements 3,717 1,947
Buildings 6,194 --
Land 1,048 --
------------------------
34,621 18,250
Accumulated depreciation and amortization (15,957) (11,236)
------------------------
$ 18,664 $ 7,014
========================
5. Other Accrued Liabilities
Other accrued liabilities consist of the following:
August 31,
1996 1996
------------------------
(In thousands)
Accrued compensation $ 8,545 $ 8,794
Accrued royalties 5,701 4,101
Accrued income taxes 4,621 8,966
Accrued sales and marketing costs 3,714 3,288
Accrued restructuring 1,986 --
------------------------
$ 24,567 $ 25,149
========================
6. Income Taxes
The Company's pretax income from foreign operations for fiscal 1997, 1996
and 1995 was $901,000, $1,648,000 and $88,000, respectively.
36
<PAGE>
6. Income Taxes (continued)
Significant components of the provision for income taxes are as follows:
Years ended August 31,
---------------------------------
1997 1996 1995
---------------------------------
(In thousands)
Current:
Federal $ 2,767 $ 22,392 $ 23,920
State 642 7,002 6,789
Foreign 337 542 238
---------------------------------
Total current 3,746 29,936 30,947
Deferred:
Federal (8,677) (93) (4,299)
State (2,197) (27) (1,095)
---------------------------------
Total deferred (10,874) (120) (5,394)
---------------------------------
$ (7,128) $ 29,816 $ 25,553
=================================
The principal reasons that the aggregate income tax provisions differ from
taxes computed at the applicable federal statutory rate are reflected
below:
Years ended August 31,
---------------------------------
1997 1996 1995
---------------------------------
(In thousands)
Income tax provision at federal
statutory rate $ (7,214) $ 23,308 $ 21,609
State income taxes, net of federal
tax benefit (1,010) 4,533 3,701
Charge for acquired in-process
technology 907 2,803 --
Other 189 (828) 243
---------------------------------
$ (7,128) $ 29,816 $ 25,553
=================================
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:
August 31,
--------------------
1997 1996
--------------------
(In thousands)
Deferred tax assets:
Accruals and reserves not currently deductible $15,554 $14,900
Purchased technology 10,674 581
Other, net 2,758 2,142
--------------------
28,986 17,623
--------------------
Deferred tax liabilities:
Purchased technology 2,104 3,855
Other, net 905 173
--------------------
3,009 4,028
--------------------
Net deferred tax assets $25,977 $13,595
====================
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.
37
<PAGE>
7. 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, 1997
and 1996. 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. In fiscal year 1997, 44,000 shares were issued
under the plan at an average price of $20.25 per share. In fiscal year
1996, there were no shares issued under the Plan. At August 31, 1997, the
Company had 206,000 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 6,250,000 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.
In fiscal year 1997, the Company offered to cancel and reissue certain
stock options granted in fiscal years 1996 and 1995. The Company issued
970,000 stock options in fiscal year 1997 related to this reissuance. This
reissuance is included in the table below under shares granted and
forfeited for fiscal year 1997. Changes in options outstanding during the
three years ending August 31, 1997 are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number of Exercise Price Price Per
Shares Per Share Share
---------------------------------------------
<S> <C> <C> <C>
Options outstanding at August 31, 1994 1,792,000 $ 1.00 - $28.32 $14.59
Granted 660,000 $32.25 - $72.00 $48.18
Assumed in the acquisition
of Banner Blue Software 42,000 $ 3.97 - $27.54 $13.02
Exercised (388,000) $ 1.50 - $28.32 $10.51
Forfeited (150,000) $10.62 - $32.25 $18.50
----------
Options outstanding at August 31, 1995 1,956,000 $ 1.00 - $72.00 $26.44
Granted 1,042,000 $33.13 - $76.73 $53.85
Exercised (151,000) $ 1.00 - $32.25 $14.08
Forfeited (138,000) $10.63 - $72.00 $40.66
----------
Options outstanding at August 31, 1996 2,709,000 $ 1.00 - $76.73 $36.98
Granted 2,067,000 $18.50 - $31.00 $27.43
Exercised (135,000) $ 1.00 - $28.32 $13.58
Forfeited (1,272,000) $10.63 - $72.00 $52.72
----------
Options outstanding at August 31, 1997 3,369,000 $ 1.00 - $76.73 $26.11
==========
Outstanding options exercisable at August 31, 1997 870,000
==========
Options available for grant at August 31, 1997 1,613,000
==========
</TABLE>
38
<PAGE>
7. Stockholders' Equity (continued)
At August 31, 1997, a total of 4,982,000 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.
The following table summarizes information regarding options outstanding
and options exercisable as of August 31, 1997:
<TABLE>
<CAPTION>
Outstanding options Exercisable options
-------------------------------------------------------------------------------
Weighted average
------------------------
Contractual Weighted
Range of per share Number of life Exercise Number of average
exercise prices shares (in years) price shares exercise price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 18.50 725,000 5.62 $ 12.28 533,000 $ 10.22
$ 18.66 - $ 27.50 790,000 8.42 $ 25.09 148,000 $ 22.29
$ 27.54 - $ 28.38 388,000 8.45 $ 28.34 53,000 $ 28.18
$ 28.75 - $ 28.75 896,000 9.22 $ 28.75 -- $ --
$ 31.00 - $ 76.73 570,000 7.88 $ 39.50 136,000 $ 39.76
--------------------------------------------------------------------------------
$ 1.00 - $ 76.73 3,369,000 7.94 $ 26.11 870,000 $ 17.96
================================================================================
</TABLE>
Pro Forma Information
Under APB 25, the intrinsic value method, the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, thus no compensation expense is recognized in
the Company's financial statements. Pro forma information regarding net
income (loss) and net income (loss) per share is required by SFAS 123, and
has been determined as if the Company had accounted for its employee stock
options (including shares issued under the Employee Stock Purchase Plan,
collectively called "options") under the fair value method of that
Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its options. The following weighted average assumptions were
used in determining the fair value of the Company's stock-based awards to
employees:
Options ESPP
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1997
-----------------------------------------
Expected life (in years) 3.5 3.5 0.5
Expected volatility 51% 49% 51%
Risk-free interest rate 5.9% 5.9% 5.5%
Expected dividend yield 0.0% 0.0% 0.0%
The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized when they occur. The weighted
average estimated fair value of employee stock options granted during
fiscal years 1997 and 1996 was $7.98 and $19.09 per option, respectively.
The weighted average estimated fair value of shares granted under the
Employee Stock Purchase Plan during fiscal year 1997 was $7.00 per share,
39
<PAGE>
7. Stockholders' Equity (continued)
respectively. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting
period. The Company's pro forma information is as follows:
Fiscal Year Fiscal Year
1997 1996
--------- --------
(in thousands, except for net income
(loss) per share information)
Pro forma net income (loss) $ (22,882) $ 33,506
Pro forma net income (loss) per share $ (1.11) $ 1.56
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to August
31, 1995, the pro forma effect will not be fully reflected until fiscal
year 1999.
8. Profit Sharing and Retirement Plan
The Company has a 401(k) Profit Sharing Plan covering substantially all
employees. The Company contributes $0.25 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 $945,000, $2,508,000 and $2,547,000 in fiscal 1997, 1996 and
1995 respectively.
9. Lease Commitments
The Company leases office and warehouse space under operating leases. Rent
expense under operating leases was $5,181,000, $3,628,000 and $2,808,000 in
fiscal 1997, 1996 and 1995, respectively. Future minimum lease payments
under operating leases are as follows:
Year ended
August 31,1997
--------------
(In thousands)
1998 $ 5,898
1999 5,584
2000 4,747
2001 4,215
2002 1,192
2003 and thereafter 744
--------------
$ 22,380
==============
10. Litigation
The Company is subject to pending claims and litigation. Management, after
review and consultation with counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon
the consolidated financial condition of the Company.
11. Restructuring Charges
In accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activiy (Including Certain Costs Incurred in a
Restructuring)," the Company recorded a charge to operating expenses of
$1,986,000 in the fourth quarter of fiscal 1997. Restructuring charges
included costs pertaining to certain restructuring programs. These
restructuring programs pertained to the consolidation of facilities and
discontinuation of certain projects which resulted in a
40
<PAGE>
11. Restructuring Charges (continued)
reduction of the workforce of approximately 50 people. Following is a
summary of significant components of the charge:
Year ended
August 31, 1997
--------------
(In thousands)
Restructuring Costs
Employee severance $ 1,194
Exit costs, principally costs of
vacating certain facilities 792
--------------
$ 1,986
==============
12. 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.
13. Operations by Geographic Area
Information regarding the Company's operations in the United States and
foreign areas is presented below:
August 31,
1997 1996
------------------------
(In thousands)
Net Revenue
North America
Customers in the United States $ 170,273 $ 166,426
Customers in Canada 5,793 5,664
Customers in Asia/Pacific 4,208 3,312
Other exports -- 157
Intercompany revenues 2,640 2,055
------------------------
182,914 177,614
Europe 10,513 10,648
Consolidating eliminations (2,640) (2,055)
------------------------
$ 190,787 $ 186,207
========================
Income from Operations
North America $ (26,349) $ 42,823
Europe 786 1,590
------------------------
$ (25,563) $ 44,413
========================
Identifiable Assets
North America $ 181,475 $ 195,347
Europe 5,128 5,085
------------------------
$ 186,603 $ 200,432
========================
For fiscal 1995 revenues from foreign sources were less than 10% of
consolidated net revenues.
41
<PAGE>
14. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------
November February May August Fiscal
30 28/29 31 31 Year
-----------------------------------------------------------------
In thousands, except for per share data
<S> <C> <C> <C> <C> <C>
Fiscal year 1997:
Net revenues $61,491 $44,316 $39,294 $45,686 $190,787
Gross margin 38,292 27,766 24,999 29,247 120,304
Net income (loss) 8,895 (3,462) 11 (18,926) (13,482)
Net income (loss) per share 0.42 (0.16) -- (0.91) (0.65)
Fiscal year 1996:
Net revenues $70,961 $48,044 $34,993 $32,209 $186,207
Gross margin 46,041 33,009 24,706 23,547 127,303
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
</TABLE>
42
<PAGE>
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 1998 Annual Meeting of Stockholders.
43
<PAGE>
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:
Page
1. Index to Financial Statements.
Report of Independent Auditors 26
Consolidated Balance Sheets - August 31, 1997 and 1996 27
Consolidated Statements of Operations - Years Ended
August 31, 1997, 1996 and 1995 28
Consolidated Statements of Stockholders' Equity --
Years Ended August 31, 1997, 1996 and 1995 29
Consolidated Statements of Cash Flows -- Years Ended
August 31, 1997, 1996 and 1995 30
Notes to Consolidated Financial Statements 31
2. Financial Statement Schedules.
The following financial statement schedule of Broderbund Software,
Inc. for the fiscal years ended August 31, 1997, 1996 and 1995 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 48
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.
3.3 (6) 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.
44
<PAGE>
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.
10.11 (7) Stock Purchase Agreement among Broderbund Software, Inc.,
Intuit Inc. and Parsons Technology, 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.
(6) Incorporated by reference to the exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter ended February 28, 1997.
(7) Incorporated by reference to the exhibit filed with the registrant's Form
8-K dated November 10, 1997.
45
<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.
46
<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 26th day of November, 1997.
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:
Signature Title Date
- ------------------------- ---------------------------- -----------------
/s/ Joseph P. Durrett Chief Executive Officer November 26, 1997
- ------------------------- (Principal Executive
Joseph P. Durrett Officer) and Director
/s/ William M. McDonagh President, Chief Operating November 26, 1997
- ------------------------- Officer and Director
William M. McDonagh (Principal Financial
Accounting Officer)
/s/ Douglas G. Carlston Chairman, Board of Directors November 26, 1997
- -------------------------
Douglas G. Carlston
/s/ Edmund R. Auer Director November 26, 1997
- -------------------------
Edmund R. Auer
/s/ Gary L. Buckmiller Director November 26, 1997
- -------------------------
Gary L. Buckmiller
/s/ Scott D. Cook Director November 26, 1997
- -------------------------
Scott D. Cook
/s/ William P. Egan Director November 26, 1997
- -------------------------
William P. Egan
/s/ Lawrence H. Wilkinson Director November 26, 1997
- -------------------------
Lawrence H. Wilkinson
47
<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>
Allowance for returns:
Year ended August 31, 1997 $21,368 $26,788 $29,926 $4,505 $22,735
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
Allowance for doubtful accounts:
Year ended August 31, 1997 $ 6,243 $ 694 $ 2,802 $ 582 $ 4,717
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
</TABLE>
(1) Represents balances assumed from Parsons Technology acquisition in fiscal
1997, Random House's 50% interest in Living Books joint venture acquisition
in fiscal 1997, T/Maker Company acquisition in fiscal 1996 and the Banner
Blue Software acquisition in fiscal 1995
48
Exhibit 11.1
BRODERBUND SOFTWARE, INC.
Computation of Net Income (Loss) Per Share
<TABLE>
<CAPTION>
Year ended August 31,
-----------------------------------
1997 1996 1995
-----------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Primary:
Weighted average common shares outstanding
for the period 20,686 20,682 20,027
Common equivalent shares assuming conversion
of stock options -- 827 1,010
-----------------------------------
Shares used in per share calculation 20,686 21,509 21,037
===================================
Net income (loss) used in per share calculation $(13,482) $36,777 $36,187
===================================
Net income (loss) per share $(0.65) $1.71 $1.72
===================================
</TABLE>
Exhibit 23.1
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 3, 1997, 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, 1997.
Ernst & Young LLP
San Francisco, California
November 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 94,078
<SECURITIES> 0
<RECEIVABLES> 45,499
<ALLOWANCES> 27,452
<INVENTORY> 4,527
<CURRENT-ASSETS> 135,426
<PP&E> 34,406
<DEPRECIATION> 15,742
<TOTAL-ASSETS> 186,603
<CURRENT-LIABILITIES> 36,491
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 186,603
<SALES> 0
<TOTAL-REVENUES> 190,787
<CGS> 70,483
<TOTAL-COSTS> 145,867
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,610)
<INCOME-TAX> (7,128)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,482)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
