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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission file number 0-15811
BRODERBUND SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2768218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 REDWOOD BLVD.
NOVATO, CA 94948-6121
(Address of principal executive offices)
TELEPHONE NUMBER (415) 382-4400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of February 28, 1998 there were 20,934,154 shares of the Registrant's Common
Stock Outstanding.
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BRODERBUND SOFTWARE, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page
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Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at February 28, 1998
and August 31, 1997 ............................................ 3
Condensed Consolidated Statements of Operation-Three and Six Months
Ended February 28, 1998 and 1997 ............................... 4
Condensed Consolidated Statements of Cash Flows-Six Months
Ended February 28, 1998 and 1997 ............................... 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ............... 17
Item 6. Exhibits and Reports on Form 8-K .................................. 17
Signature ................................................................. 18
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
FEBRUARY 28, AUGUST 31,
1998 1997
------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and short-term investments $137,058 $ 94,078
Accounts receivable, net 11,505 18,047
Inventories 7,892 4,527
Deferred income taxes 24,182 14,975
Other current assets 4,037 3,799
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Total current assets 184,674 135,426
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Property and equipment, net 17,835 18,664
Purchased technology and other intangibles 16,236 20,308
Deferred income taxes 12,187 11,002
Other assets 571 1,203
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$231,503 $186,603
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,586 $ 8,928
Accrued compensation 9,070 8,545
Accrued income taxes 23,371 4,621
Other accrued expenses 21,841 14,397
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Total current liabilities 63,868 36,491
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Other liabilities 1,950 2,030
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Total liabilities 65,818 38,521
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Stockholders' equity:
Common stock 30,202 27,422
Retained earnings 135,483 120,660
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Total stockholders' equity 165,685 148,082
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$231,503 $186,603
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SEE ACCOMPANYING NOTES.
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BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net revenues $78,623 $ 44,315 $177,820 $ 105,806
Cost of revenues 34,381 15,258 69,018 37,435
Amortization of purchased technology 2,217 1,292 4,439 2,314
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Gross margin 42,025 27,765 104,363 66,057
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Operating expenses:
Sales and marketing 19,734 11,220 46,753 25,374
Research and development 12,062 9,527 25,074 17,240
General and administrative 5,078 3,610 11,963 6,517
Charge for acquired in-process technology - 9,250 - 9,250
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Total operating expenses 36,874 33,607 83,790 58,381
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Income (loss) from operations 5,151 (5,842) 20,573 7,676
Interest and dividend income, net 965 1,524 2,184 3,073
Equity in losses of joint venture -- -- -- (603)
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Income (loss) before income taxes 6,116 (4,318) 22,757 10,146
Provision (benefit) for income taxes 2,232 (856) 8,296 4,713
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Net income (loss) $ 3,884 $ (3,462) $ 14,461 $ 5,433
------------------------------------------
------------------------------------------
Basic earnings (loss) per share $ 0.19 $ (0.17) $ 0.69 $ 0.26
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------------------------------------------
Diluted earnings (loss) per share $ 0.18 $ (0.17) $ 0.68 $ 0.26
------------------------------------------
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Common shares outstanding 20,872 20,601 20,873 20,643
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Common shares assuming dilution 21,250 20,601 21,351 21,128
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SEE ACCOMPANYING NOTES.
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BRODERBUND SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
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<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28,
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1998 1997
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OPERATING ACTIVITIES
Net income $ 14,461 $ 5,433
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Equity in losses of joint venture -- 603
Depreciation and amortization 7,171 3,933
Deferred income taxes (647) (5,666)
Charge for acquired in-process technology -- 9,250
Changes in operating assets and liabilities 21,123 4,590
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Net cash provided by operating activities 42,108 18,143
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INVESTING ACTIVITIES
Additions to equipment and improvements (1,903) (1,520)
Investments in affiliates -- (850)
Purchase of Living Books, net of cash -- (7,594)
Other (78) (3,275)
-----------------------
Net cash used in investing activities (1,981) (13,239)
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FINANCING ACTIVITIES
Repurchase of common stock -- (12,453)
Employee stock purchase plan 379 413
Exercise of stock options 1,520 672
Tax benefit from exercise of stock options 881 217
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Net cash provided by (used in) financing activities 2,780 (11,151)
-----------------------
Translation adjustment 73 (125)
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Increase (decrease) in cash and short-term investments 42,980 (6,372)
Cash and short-term investments, beginning of period 94,078 150,893
-----------------------
Cash and short-term investments, end of period $ 137,058 $ 144,521
-----------------------
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</TABLE>
SEE ACCOMPANYING NOTES.
5
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BRODERBUND SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements for Broderbund Software, Inc.
(the "Company") for the six months ended February 28, 1998 and 1997 are
unaudited and reflect all adjustments, consisting of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
(Form 10-K) for the year ended August 31, 1997. The results of operations for
the three months and six months ended February 28, 1998 are not necessarily
indicative of the results for the entire fiscal year ending August 31, 1998.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (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.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition." SOP 97-2 establishes standards relating to the recognition of
all aspects of software revenue. SOP 97-2 is effective for transactions
entered into in fiscal years beginning after December 15, 1997. The Company
does not expect the adoption of SOP 97-2 to have a material impact on the
Company's consolidated results of operations.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes standards relating to the capitalization of internal use
software. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. The Company does not expect adoption of SOP 98-1 to have a
material impact on the Company's consolidated results of operations.
NOTE 3. EARNINGS PER SHARE
The FASB issued SFAS No. 128, Earnings Per Share, effective for periods
ending after December 15, 1997. The Company has adopted the new standard for
the second quarter of fiscal 1998 and has restated prior period amounts to
"basic" and "diluted" earnings per share. "Basic" earnings per share is
calculated by dividing net income or loss by the weighted average common
shares outstanding during the period. "Diluted" earnings per share reflects
the net incremental shares that would be issued if outstanding stock options
were exercised.
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In the case of a net loss, it is assumed that no incremental shares would be
issued because they would be anti-dilutive. In addition, certain options are
considered anti-dilutive because the options' exercise price was above the
average market price during the period. Anti-dilutive shares are not
included in the computation of diluted earnings per share, in accordance with
SFAS No. 128. The following table reflects the total potentially diluted
shares that would be outstanding if such anti-dilutive shares were included.
(IN THOUSANDS)
<TABLE>
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THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Weighted average common shares outstanding 20,872 20,601 20,873 20,643
Incremental shares
-stock options 378 621 478 485
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Diluted shares assuming net income 21,250 21,222 21,351 21,128
Options with exercise price greater than market price 2,562 543 1,071 608
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Total potentially diluted shares 23,812 21,765 22,422 21,736
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</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report (Form 10-K) for the fiscal year ended August 31, 1997.
This Quarterly Report on Form 10-Q, and in particular Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains forward
looking statements regarding future events or the future performance of the
Company that involve certain risks and uncertainties including, but not limited
to, those discussed in "Factors Affecting Future Operating Results" below at
pages 12 to 16, as well as in the Company's 1997 Annual Report on Form 10-K,
as filed with the Securities and Exchange Commission ("S.E.C."). Actual events
or the actual future results of the Company may differ materially from any
forward looking statements due to such risks and uncertainties. The Company
assumes no obligation to update these forward looking statements to reflect
actual results or changes in factors or assumptions affecting such forward
looking statements. This analysis is provided pursuant to applicable S.E.C.
regulations and is not intended to serve as a basis for projections of future
events.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income data as
a percentage of net revenues for the periods indicated:
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THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 44% 34% 39% 35%
Amortization of purchased technology 3% 3% 2% 2%
------------------------------------
Gross margin 53% 63% 59% 63%
Operating expenses:
Sales and marketing 25% 25% 26% 24%
Research and development 15% 22% 14% 17%
General and administrative 6% 8% 7% 6%
Charge for acquired in-process
technology -- 21% -- 9%
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Total operating expenses 46% 76% 47% 56%
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Income (loss) from operations 7% (13%) 12% 7%
Nonoperating income 1% 3% 1% 2%
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Income (loss) before income taxes 8% (10%) 13% 9%
Provision (benefit) for income taxes 3% (2%) 5% 4%
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Net income (loss) 5% (8%) 8% 5%
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NET REVENUES
The Company derives revenue from products which are published by Broderbund
(published products) and products from other software publishers which are
distributed by Broderbund (affiliated label products). The Company sells its
products in North America through distributors and retailers, as well as
directly to consumers. The Company's international sales are derived from a
foreign subsidiary and licensing and distribution arrangements with foreign
distributors.
Net revenues for the second quarter of fiscal 1998 were $78.6 million, an
increase of 77% from the $44.3 million recorded in the second quarter of fiscal
1997. For the first half of fiscal 1998 and 1997, net revenues were $177.8
million and $105.8 million, respectively, up 68%. The increase in net revenues
in these periods was primarily due to the release of RIVEN-TM-: THE SEQUEL TO
MYST-Registered Trademark-. The increase was also impacted by sales generated by
the Company's "Broderbund Direct" business, which is the combined efforts of
what was formerly known as Broderbund's direct-to-consumer business and Parsons
Technology's (acquired in August 1997 from Intuit, Inc.) direct-to-consumer
business.
Net revenues in the personal productivity category for the second quarter and
first half of fiscal 1998 were up 39% and 33%, respectively, over the comparable
prior year periods primarily due to revenues generated from products acquired in
the purchase of Parsons Technology which offset a decline in the personal
productivity category for both the quarter and first half of fiscal 1998 when
compared to the comparable periods in fiscal 1997. Excluding the effect of the
Parsons Technology acquisition, the decrease in the personal productivity
category was primarily a result of aggressive pricing and marketing competition
in THE PRINT SHOP category, which had a negative effect on the Company's revenue
and market share in the category. Although the Company has taken steps to
respond to the competitive pressures, including new promotional and pricing
strategies, there can be no guarantee that the Company's responses will be
effective in the market or that the Company will be successful in regaining
market share. The personal productivity category comprised 40% of the Company's
total net revenues for both the second quarter and first half of fiscal 1998.
Net revenues in the entertainment category increased 402% and 348% for the
second quarter and first half of fiscal 1998, respectively, compared to the
comparable periods in fiscal 1997. These increases seen in fiscal 1998 were
primarily due to the release of RIVEN: THE SEQUEL TO MYST and to a lesser extent
the recent release of THE JOURNEYMAN PROJECT 3-Registered Trademark-: LEGACY OF
TIME-TM-. The entertainment category comprised 41% and 39% of the Company's
total net revenues for the second quarter and first half of fiscal 1998,
respectively.
Net revenues in the education category decreased 24% and 17% for the second
quarter and first half of fiscal 1998, respectively, as compared to the same
periods in fiscal 1997 after adjusting prior year revenues to include Living
Books (a joint venture with Random House until the Company acquired Random
House's 50% interest in the Living Books joint venture in the second quarter of
fiscal 1997) revenues in this category for the entire period rather than as
affiliated label revenue. The decreases in this category were primarily the
result of a decline in sales from MATH WORKSHOP-TM-, LOGICAL JOURNEY OF THE
ZOOMBINIS-TM-, THE AMAZING WRITING MACHINE-Registered Trademark- and GREEN EGGS
AND HAM BY DR. SEUSS, related to both a decrease in units sold and to pricing
pressures. The recent release of CARMEN SANDIEGO MATH DETECTIVE-TM- late in the
second quarter of fiscal 1998 partially offset this decline. The education
category comprised 12% and 15% of the Company's total net revenues for the
second quarter and first half of fiscal 1998, respectively.
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Net revenues from sales of affiliated label products increased 88% and 117% for
the second quarter and first half of fiscal 1998, respectively, compared to
fiscal 1997, after excluding the effects of Living Books affiliated label
revenue from prior periods as discussed above. These increases for both the
second quarter and first half of fiscal 1998 were primarily due to the release
of ENCYCLOPAEDIA BRITANNICA-Registered Trademark- CD 98. This category comprised
6% of the Company's total net revenues for both the second quarter and first
half of fiscal 1998.
During the second quarter of fiscal 1998, the Company released a total of six
new titles, including one new affiliated label title. In the same period of the
prior year, the Company released a total of 12 new titles, including three new
affiliated label titles.
COST OF REVENUES AND AMORTIZATION OF PURCHASED TECHNOLOGY
Cost of revenues includes cost of goods sold, royalties paid to developers and
accrued technical support costs, which relate primarily to telephone support
provided to consumers shortly after they purchase software. The Company does not
capitalize software development costs as the impact on the financial statements
would be immaterial. Amortization of purchased technology is the value of the
technology purchased in the Company's acquisitions of Parsons Technology in
August 1997, Random House's 50% interest in the Living Books joint venture in
January 1997, T/Maker Company in August 1996 and Banner Blue Software, Inc. in
April 1995, each amortized ratably over a three year period from the date of
acquisition.
In the second quarter of fiscal 1998, the Company's gross margin was 53%
compared to 63% in the second quarter of fiscal 1997. For the first half of
fiscal 1998, the Company's gross margin was 59% compared to 63% for the first
half of fiscal 1997. The decreases in gross margin for these periods were
primarily due to a change in the Company's revenue mix related to the success
of RIVEN: THE SEQUEL TO MYST, on-going demand for MYST-Registered Trademark-
and strong affiliated label sales. The entertainment and affiliated label
categories, which carry a lower margin than the Company's other products,
primarily due to royalty payments and distribution only affiliated label
agreements, were 47% and 45% of total revenue for the second quarter and first
half of fiscal 1998, respectively, as compared to 21% and 19% of total
revenue for the royalty payments and distribution only affiliated label
agreement comparable periods in fiscal 1997, respectively. In addition,
customer rebates and returns for the second quarter of fiscal 1998 were a
greater percentage of net sales than in the comparable prior year period.
Also due to the purchases of Living Books and Parsons Technology,
amortization of purchased technology increased 72% and 92% in the second
quarter and first half of fiscal 1998, respectively, compared to the
comparable periods in fiscal 1997. The Company expects that gross margin will
return to the low 60% range by the end of the fiscal year as the Company's
sales mix should return to its historical trends.
SALES AND MARKETING
Sales and marketing expenses increased 76% to $19.7 million in the second
quarter of fiscal 1998 from $11.2 million in the second quarter of fiscal 1997.
Similarly for the first half of fiscal 1998, sales and marketing expenses
increased 84% to $46.8 million from $25.4 million for the same period in fiscal
1997. These increases were primarily due to the addition of sales and marketing
efforts of the Parsons Technology portion of Broderbund Direct. In addition, the
Company has continued to emphasize consumer advertising and promotions related
to new product releases, including RIVEN: THE SEQUEL TO MYST, as well as
promotional spending with the Company's channel partners. The Company also
incurred additional expenses in order to monitor its channel partners'
compliance with these programs and to track inventory levels at individual
retail outlets. The intense competition for high
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quality and adequate levels of retail shelf space continues to increase as
the number of software products increases. As a result, the Company believes
that it may sustain, or incur further increases in sales and marketing
expenses in the future, particularly in the entertainment category where it
is common for significant marketing costs to be incurred in advance of
product release, in an effort to more clearly distinguish its products from
its competitors' products and to obtain adequate shelf space.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 27% to $12.1 million in the second
quarter of fiscal 1998 from $9.5 million in the second quarter of fiscal 1997.
For the first half of fiscal 1998, research and development expenses increased
46% to $25.1 million from $17.2 million for the comparable period in fiscal
1997. The acquisitions of the Parsons Technology portion of Broderbund Direct
and Living Books have contributed to higher employee-related expenses from
increased headcount, and higher numbers of new products under development. The
Company continues to invest in the development of CD-ROM based multimedia
products with expanded sound, graphics, animation video and/or information
content. The development of products with more content increases research and
development costs and in future periods, the development of products for
emerging platforms, such as DVD and the Internet, and new technologies, such as
3-D, may cause development expenses to increase even further. To partially
offset this increase in content costs, the Company has implemented, and
continues to develop, proprietary development systems to reduce the number of
programming hours required to bring a product to market on multiple platforms.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 42% to $5.1 million in the second
quarter of fiscal 1998 from $3.6 million in the second quarter of fiscal 1997.
For the first half of fiscal 1998, general and administrative expenses increased
85% to $12.0 million from $6.5 million for the comparable period in fiscal 1997.
The increases were primarily due to the Company's increase in staffing and the
related employee expenses, principally as a result of the Parsons Technology
acquisition in August of 1997, as well as increased legal costs.
NONOPERATING INCOME
Included in nonoperating income is interest and dividend income and other
nonoperating items. Interest and dividend income was $1.0 million and $1.5
million in the second quarter of 1998 and 1997, respectively. Interest and
dividend income was $2.2 million and $3.1 million for the first half of fiscal
1998 and 1997, respectively. These decreases were primarily due to lower cash
balances in the current periods related to cash used to fund the purchases of
Parsons Technology and Living Books, as well as the repurchase of a total of
500,000 shares of the Company's stock in the open market in the second and third
quarters of fiscal 1997. Prior to the acquisition of Random House's 50% interest
in Living Books in the second quarter of fiscal 1997, the equity in losses of
the Living Books joint venture was included as nonoperating income (loss).
PROVISION FOR INCOME TAXES
The Company's effective income tax rate increased to a net provision rate of
36.5% from a net benefit rate of 19.8% for the second quarter of fiscal year
1998 and 1997, respectively. The increase in the effective income tax rate for
the second quarter of fiscal 1998 was primarily attributable to the impact of
the in-process technology write-off in the second quarter of fiscal 1997.
Excluding this write-off
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the tax rate would have been a net provision rate of 38.5% for the second
quarter of fiscal 1997. The primary reason for the decrease from 38.5% to
36.5% was the extension of the federal research and development tax credit
and favorable changes in the State of California's research and development
tax credit rules. The Company's effective income tax rate decreased to 36.5%
from 46.5% for the first half of fiscal year 1998 and 1997, respectively. The
decrease in the effective income tax rate for the first half of fiscal 1998
was primarily due to the same factors as discussed above for the second
quarter.
NET INCOME
Net income and diluted earnings per share were $3.9 million and $0.18,
respectively, for the second quarter of fiscal 1998 compared to a net loss of
$3.5 million and diluted loss per share of $0.17 for the same period in 1997.
Net income and diluted earnings per share were $14.5 million and $0.68,
respectively, in the first half of fiscal 1998 compared to $5.4 million and
$0.26 per share for the same period in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's primary source of liquidity has been cash generated from
operations. The Company's working capital increased $21.9 million during the
first half of fiscal 1998 to $120.8 million from $98.9 million at August 31,
1997. Cash and short-term investments increased $43.0 million to $137.1 million
at February 28, 1998 from $94.1 million at the end of the prior fiscal year. The
increase in cash and short-term investments was primarily due to the collection
of accounts receivable generated from revenue recognized in the seasonally high
first quarter of 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, acquisitions of products or companies
that complement the Company's business. In particular, the consumer software
sector is experiencing a period of significant consolidation, and the Company
currently expects to participate in the consolidation in an aggressive
manner, as smaller, previously independent companies seek to ally themselves
with larger companies with greater access to capital, distribution,
intellectual property and managerial expertise.
Management believes the existing cash and short-term investments balances and
cash generated from operations will be sufficient to meet the Company's
liquidity and capital needs for the coming year.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Broderbund operates in a rapidly changing environment that is subject to many
risks and uncertainties. Some of the important risks and uncertainties which may
cause the Company's operating results to differ materially and/or adversely are
discussed below and elsewhere in this Form 10-Q. An additional discussion is
included in the Company's 10-Q for the first quarter of the 1998 fiscal year, as
well as the Annual Report and Form 10-K for the 1997 fiscal year, all of which
are on file with the S.E.C.
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FLUCTUATIONS IN PERFORMANCE AND OPERATING RESULTS
The Company has experienced, and expects to continue to experience, significant
fluctuations in operating results due to a variety of factors, including but not
limited to, the rate of growth of the consumer software market, market
acceptance of the Company's products or those of its competitors, the timing of
new product introductions, expenses relating to the development and promotion of
new product introductions, changes in pricing policies by the Company or its
competitors, projected and actual changes in platforms and technologies, timely
and successful adaptation to such platforms or technologies, the accuracy of
forecasts of consumer demand, product returns, market seasonality, the timing of
orders from major customers and order cancellations, and changes or disruptions
in the consumer software distribution channels and the successful acquisition
and integration of new businesses, products and technologies.
The Company's business has generally been highly seasonal, with net revenues
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. 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 quarter. Additionally,
the Company's operating expenses are based in part on its expectations of future
revenues and are relatively fixed in the short term. Accordingly, any revenue
shortfall below expectations, due to either the timing of orders received or
delays in product releases, could have an immediate and significant adverse
effect on the Company's consolidated results of operations and financial
condition. 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.
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 the first
half of fiscal 1998, the price per share of the Company's common stock ranged
from $21.00 to $37.25, during fiscal 1997 ranged from $18.38 to $35.13 and
during fiscal 1996 ranged from $28.50 to $76.88. 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.
INDUSTRY AND COMPETITION
End user demand for consumer software has historically been volatile in this
industry, affected by changing technology, limited hardware platform life
cycles, hit products, competition, seasonality, consumer spending and other
economic trends. The Company believes that this volatility in consumer demand
seen in this industry will continue which could have a material adverse affect
on the Company's future growth in net revenues. In addition, the intense
competition in the consumer software business continues to accelerate as an
increasing number of companies, many of which have financial, 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
consumer demand and retail shelf space. Further, consolidation in the industry
has resulted in smaller, independent competitor companies being bought by larger
companies who then may have access to greater financial, managerial or
distribution resources than the Company, which could have a material, adverse
effect on the Company's financial results. In addition, competitors have
actively developed, aggressively marketed and aggressively priced, products
directly competitive to the Company's best-selling series, THE PRINT
SHOP-Registered Trademark-, which has caused a reduction in revenues in THE
PRINT SHOP product line. Although
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the Company has taken steps to respond to such competitive pressures, there
can be no assurances that the Company's efforts will be effective in the
market or that the Company will be successful in regaining market share.
Further, in the education category, competitors have significantly reduced
retail prices on key brand and premium line products, in some cases pricing
products at retail (and after rebate) at or near zero. Although the Company
believes that such tactics are not sustainable in the long term, in the short
term such competitive tactics could have a material, adverse effect on the
Company's performance in the education category.
As discussed above and in prior filings, in early fiscal 1997 the Company
decreased prices on a number of its products including THE PRINT SHOP series,
as well as MYST, in order to gauge price elasticity, while significant
volume increases were seen this move placed negative pressure on net revenues
and gross margins. In the second half of fiscal 1997, the Company adjusted its
sales and marketing strategy in an effort to increase prices on several
products, and increase net revenues while minimizing effects on unit volume and
market share achieved in early fiscal 1997 when prices on such products were
lowered, however aggressive pricing and marketing competition continued in the
market. Accordingly the Company has initiated efforts to develop a product line
with a variable pricing strategy to address consumer demands at multiple price
points and to respond to the intense pricing and marketing competition. There
can be no assurance that such efforts will be successful.
Due to changes in platforms, technologies and consumer preferences in the
industry, sales of products on older platforms and in certain product lines have
declined. The Company takes efforts to forecast such technology, lifecycle and
consumer demand changes, and manage such products accordingly. However, the
sales of these products may continue to 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 21 products available from the
Company's Living Books product line and it has become increasingly difficult to
maintain shelf space in the retail channel for all of these products. Retailers
may not purchase all of these products or provide these products with adequate
levels of shelf space and promotional support and although the Company has
initiated aggressive direct-to-consumer efforts to offset such trends they may
not be successful.
Competition for employees in the consumer software business is intense as
competition in the industry increases. The attraction and retention of key
personnel and other creative talent, including independent developers, has
intensified and become increasingly difficult. Further, like many companies in
the technology sector, the Company relies in part on stock option grants to
attract and retain key personnel, and however, in light of the decrease in the
Company's stock price in recent periods the effectiveness of such benefits are
diminished.
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. The MYST sequel product, RIVEN: THE
SEQUEL TO MYST, was released in the first quarter of fiscal 1998, and the
initial sales of the highly anticipated sequel product were the primary
reason for the significant increase in net revenues for the first half of
fiscal 1998 compared to prior periods. However, the Company does not expect
that the revenues from RIVEN: THE SEQUEL TO MYST will continue at the rate
experienced during the initial sell-in period, nor that the product will
achieve prolonged and continued widespread market acceptance. In particular,
the Company believes that sales of RIVEN: THE SEQUEL TO MYST will decrease
during the seasonally slow third and fourth quarters and there can be no
assurance that revenues will increase during the subsequent fiscal quarters.
Because of complexities in
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<PAGE>
technology and consumer preferences associated with developing and publishing
consumer software, new product introductions can be subject to material
delays. In addition, new products introduced by the Company may not achieve
any significant degree of market acceptance, or that such acceptance, if
achieved, will be sustained for any length of time. Since 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 until the release of RIVEN: THE SEQUEL TO MYST, and there can
be no guarantee that the shortfall from the continuing decline in MYST
revenues will continue to be replaced by its sequel product, or by other
products.
The Company believes that electronic or Internet products and services will
become an increasingly important platform and distribution media. The Company
has initiated steps to take advantage of opportunities created by the Internet
and on-line networks, including developing a customer database and commerce
infrastructure and integrating those functions into the Company's legacy
operations to improve scalability. In addition, the Company has developed online
competencies in various areas and will be leveraging these across the Company's
product lines and customer segments. The Company's failure to timely and
successfully adapt to and utilize such new technologies and media, like the
Internet, could materially and adversely affect its competitive position and its
financial results. Just as the Company competes with other forms of
entertainment (e.g., books, television), the Company now competes with the
Internet because potential customers for the Company's software are spending
increasing amounts of time online, and therefore may be less likely to purchase
the Company's (and its competitors) software.
DISTRIBUTION
The distribution channels through which consumer software products are
traditionally sold have been characterized by intense competition, consolidation
and continuing uncertainties. The Company believes that this competition,
consolidation and uncertainty will increase which may affect the levels at which
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. The Company has experienced 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, the Company believes that these pressures will continue or
increase.
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 in the traditional retail channel.
The Company believes that the rate of product returns may continue at this pace,
and it is possible that return rates will increase further. The Company
establishes allowances based on estimated future returns of product after
considering various factors, and accordingly, if the level of actual returns
exceeds management's estimates, it could have a material adverse impact on the
Company's operating results. Further, certain distributors and retailers have
experienced business and financial difficulties, such difficulties for these or
additional distributors and retailers may continue or increase 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
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<PAGE>
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. 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. The Company maintains a reserve for uncollectible receivables
which it believes is adequate, however, due to factors outside of the Company's
control, the reserve may prove to be insufficient which could have an adverse
effect on the operating results and financial condition of the Company. The
Company has significantly increased its efforts to sell its products
direct-to-consumer, including its acquisition of Parsons Technology, a
direct-to-consumer software specialist, and increasing its telemarketing and
Internet efforts, however there can be no guarantees that such efforts will
successfully offset the changes in the retail channel.
IMPACT OF YEAR 2000
Many computer systems were not designed to handle any dates beyond the year
1999, and therefore computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is still
assessing the impact the year 2000 issue will have on its internal information
systems and has begun corrective efforts in these areas. The Company does not
anticipate that addressing the year 2000 problem for its internal information
systems will have a material impact on its operations or financial results.
However, there can be no guarantee that these costs will not be greater than
anticipated, or that corrective actions undertaken will be completed before the
year 2000 problems could occur.
The Company has certain key relationships with suppliers. If these suppliers
fail to adequately address the year 2000 issue for the products they provide the
Company, this could have a material adverse impact on the Company's operations
and financial results. The Company is still assessing the effect the year 2000
issue will have on its suppliers and, at this time, cannot determine the impact
it will have.
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.
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<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on January 22,
1998. The results of voting were as follows:
PROPOSAL 1: ELECTION OF DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
<S> <C> <C>
Douglas G. Carlston 19,745,776 91,665
Edmund R. Auer 19,745,226 92,215
Gary L. Buckmiller 19,745,476 91,965
Scott D. Cook 19,746,778 90,663
Joseph P. Durrett 19,727,234 110,207
William P. Egan 19,745,109 92,332
William M. McDonagh 19,719,105 118,336
Lawrence H. Wilkinson 19,746,876 90,565
</TABLE>
PROPOSAL 2: APPROVAL TO INCREASE BY 1,500,000 SHARES THE NUMBER OF
SHARES AUTHORIZED UNDER THE COMPANY'S 1996 EMPLOYEE AND CONSULTANT
STOCK OPTION PLAN
<TABLE>
<S> <C>
Votes For: 11,452,509
Votes Against: 4,278,941
Votes Abstaining: 35,781
Broker Non-votes: 4,070,210
</TABLE>
PROPOSAL 3: RATIFICATION OF ERNST & YOUNG LLP, OR ITS INTENDED
SUCCESSOR COMPANY, ERNST & YOUNG LLP/KPMG PEAT MARWICK LLP, AS THE
COMPANY'S INDEPENDENT AUDITORS
<TABLE>
<S> <C>
Votes For: 19,757,140
Votes Against: 55,508
Votes Abstaining: 24,793
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On February 27, 1998, a current report on Form 8-K was filed with
the SEC, and subsequently amended on March 19, 1998, in
connection with the Company's decision to replace Ernst & Young,
LLP, its independent accountants, with KPMG Peat Marwick, LLP.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRODERBUND SOFTWARE, INC.
(Registrant)
Dated: April 14, 1998
By: /s/ J. Mark Hattendorf
------------------------
J. Mark Hattendorf
Vice President and
Chief Financial Officer
(Principal Financial Officer)
18
