-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gam6TCe0VQag2/8aBMsdCr4FwKTQicA9TC7XADTG84wH/tn6qEgz3scd8Xhp/q1m QUdWtiQV+kz4gr49/lMlZQ== 0000891554-97-000629.txt : 19970716 0000891554-97-000629.hdr.sgml : 19970716 ACCESSION NUMBER: 0000891554-97-000629 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRODERBUND SOFTWARE INC /DE/ CENTRAL INDEX KEY: 0000812490 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942768218 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15811 FILM NUMBER: 97641018 BUSINESS ADDRESS: STREET 1: 500 REDWOOD BLVD CITY: NOVATO STATE: CA ZIP: 94948-6121 BUSINESS PHONE: 4153824400 MAIL ADDRESS: STREET 1: 500 REDWOOD BLVD CITY: NOVATO STATE: CA ZIP: 94948-6121 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q __X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 1997 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to______ Commission file number 0-15811 BRODERBUND SOFTWARE, INC. (Exact name of registrant as specified in its charter) Delaware 94-2768218 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Redwood Blvd. Novato, CA 94948-6121 (Address of principal executive offices) Telephone Number (415) 382-4400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No___ As of May 31, 1997 there were 20,694,023 shares of the Registrant's Common Stock Outstanding. BRODERBUND SOFTWARE, INC. Table of Contents PART I. FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at May 31, 1997 and August 31, 1996 ......................................... 3 Condensed Consolidated Statements of Operations Three and Nine Months Ended May 31, 1997 and 1996 .......................... 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended May 31, 1997 and 1996 ................................. 5 Notes to Condensed Consolidated Financial Statements .............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 7 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................. 15 Signature ................................................................. 16 2 PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements BRODERBUND SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) May 31, 1997 August 31, 1996 ------------ --------------- ASSETS (Unaudited) Current assets: Cash and short-term investments $127,120 $150,893 Accounts receivable, net 15,553 5,956 Inventories 4,443 3,140 Deferred income taxes 19,554 15,057 Other current assets 1,100 869 -------- -------- Total current assets 167,770 175,915 Equipment and improvements, net 7,598 7,014 Purchased technology and advances, net 17,166 13,090 Investments in affiliates 6,133 4,053 Other assets 1,219 360 -------- -------- $199,886 $200,432 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,523 $ 4,442 Accrued compensation 6,369 8,794 Accrued income taxes 9,404 8,966 Other accrued expenses 9,889 11,220 -------- -------- Total current liabilities 32,185 33,422 Deferred income taxes 1,889 1,462 -------- -------- Total liabilities 34,074 34,884 Stockholders' equity: Common stock 26,115 31,383 Retained earnings 139,697 134,165 -------- -------- Total stockholders' equity 165,812 165,548 -------- -------- $199,886 $200,432 ======== ======== See accompanying notes. 3 BRODERBUND SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three months ended Nine months ended May 31, May 31, ------- ------- 1997 1996 1997 1996 --------- --------- --------- --------- Net revenues $ 39,294 $ 34,993 $ 145,101 $ 153,998 Cost of revenues 12,868 10,287 50,303 50,243 --------- --------- --------- --------- Gross margin 26,426 24,706 94,798 103,755 Operating expenses: Sales and marketing 12,615 6,760 37,988 26,840 Research and development 10,578 6,758 27,818 21,771 General and administrative 3,224 2,961 9,740 8,721 Charge for acquired in-process technology and amortization 1,427 -- 12,991 -- --------- --------- --------- --------- Total operating expenses 27,844 16,479 88,537 57,332 --------- --------- --------- --------- Income (loss) from operations (1,418) 8,227 6,261 46,423 Interest and dividend income, net 1,435 1,907 4,507 4,915 Equity in earnings (loss) of joint venture -- -- (603) 1,291 Terminated merger fee, net -- -- -- 15,464 --------- --------- --------- --------- Income before income taxes 17 10,134 10,165 68,093 Provision for income taxes 6 3,953 4,721 27,137 --------- --------- --------- --------- Net income $ 11 $ 6,181 $ 5,444 $ 40,956 ========= ========= ========= ========= Net income per share $ 0.00 $ 0.29 $ 0.26 $ 1.90 ========= ========= ========= ========= Shares used in computing net income per share 21,048 21,435 21,083 21,583 ========= ========= ========= =========
See accompanying notes. 4 BRODERBUND SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine months ended May 31, ------- 1997 1996 --------- --------- Cash flows from operating activities: Net income $ 5,444 $ 40,956 Adjustments to reconcile net income to net cash provided by operating activities: Equity in (earnings) loss of joint venture 603 (1,291) Depreciation and amortization 2,388 2,033 Deferred income taxes (2,562) (2,986) Charge for acquired in-process technology and amortization 12,991 -- Changes in operating assets and liabilities (11,253) 12,014 --------- --------- Net cash provided by operating activities 7,611 50,726 Cash flows from investing activities: Additions to equipment and improvements (2,878) (2,645) Investments in affiliates (2,683) -- Purchase of Living Books, net of cash (7,594) -- Advance royalties (4,727) (3,075) Other (655) (80) --------- --------- Net cash (used in) investing activities (18,537) (5,800) Cash flows from financing activities: Repurchase of common stock (14,574) -- Employee stock purchase plan 891 -- Exercise of stock options 841 1,658 Tax benefit of stock option exercises 254 1,444 --------- --------- Net cash provided by (used in) financing activities (12,588) 3,102 --------- --------- Translation adjustment (259) (79) --------- --------- Increase (decrease) in cash and short-term investments (23,773) 47,949 Cash and short-term investments, beginning of period 150,893 126,547 --------- --------- Cash and short-term investments, end of period $ 127,120 $ 174,496 ========= =========
See accompanying notes 5 BRODERBUND SOFTWARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The condensed consolidated financial statements for Broderbund Software, Inc. (the "Company") for the three and nine months ended May 31, 1997 and 1996 are unaudited and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report (Form 10-K) for the year ended August 31, 1996. The results of operations for the three months and nine months ended May 31, 1997 are not necessarily indicative of the results for the entire fiscal year ending August 31, 1997. Note 2. Recently Issued Accounting Principles In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation" which will be effective for the Company's fiscal year ending August 31, 1997. SFAS No. 123 permits a company to choose either a new fair value based method or the current Accounting Principles Board Opinion No. 25 intrinsic value based method of accounting for its stock-based compensation arrangements. The Company has elected to continue to follow current practice but SFAS No. 123 requires pro forma disclosures of net income and earnings per share computed as if the fair value based method had been applied. In February 1997, the FASB issued Statement No. 128 (SFAS No. 128), "Earnings per Share" which will be effective for the Company's fiscal year ending August 31, 1998. SFAS No. 128 requires a change in the method currently used to compute earnings per share and that all prior periods be restated. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share but the impact on the calculation of fully diluted earnings per share is not expected to be material. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the consolidated financial statements and the notes thereto and in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report (Form 10-K) for the fiscal year ended August 31, 1996. This Quarterly Report on Form 10-Q, and in particular Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward looking statements regarding future events or the future performance of the Company that involve certain risks and uncertainties including, but not limited to, those discussed in "Factors Affecting Future Operating Results" below at pages 11 to 14, as well as in the Company's 1996 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission ("S.E.C."). Actual events or the actual future results of the Company may differ materially from any forward looking statements due to such risks and uncertainties. The Company assumes no obligation to update these forward looking statements to reflect actual results or changes in factors or assumptions affecting such forward looking statements. This analysis is provided pursuant to applicable S.E.C. regulations and is not intended to serve as a basis for projections of future events. RESULTS OF OPERATIONS The following table sets forth certain consolidated statement of income data as a percentage of net revenues for the periods indicated:
Three months ended Nine months ended May 31, May 31, ------- ------- 1997 1996 1997 1996 ---- ---- ---- ---- Net revenues 100% 100% 100% 100% Cost of revenues 33% 29% 35% 33% ---- ---- ---- ---- Gross margin 67% 71% 65% 67% Operating expenses: Sales and marketing 32% 19% 26% 17% Research and development 27% 19% 19% 14% General and administrative 8% 9% 7% 6% Charge for acquired in-process technology and amortization 4% -- 9% -- ---- ---- ---- ---- Total operating expenses 71% 47% 61% 37% ---- ---- ---- ---- Income (loss) from operations (4%) 24% 4% 30% Interest and dividend income, net 4% 5% 3% 3% Equity in earnings of joint venture -- -- -- 1% Terminated merger fee, net -- -- -- 10% ---- ---- ---- ---- Income before income taxes -- 29% 7% 44% Provision for income taxes -- 11% 3% 17% ---- ---- ---- ---- Net income -- 18% 4% 27% ==== ==== ==== ====
7 NET REVENUES The Company derives revenue from products which are published by Broderbund (published products) and products from other software publishers which are distributed by Broderbund (affiliated label products). The Company sells its products in North America through distributors and retailers, as well as directly to consumers. The Company's international sales are derived from a foreign subsidiary and licensing and distribution arrangements with foreign distributors. Net revenues for the third quarter of fiscal 1997 were $39.3 million, an increase of 12% from the $35.0 million recorded in the third quarter of fiscal 1996. The increase for the third quarter of fiscal 1997 was due to the release of The Last Express(TM), 3D Home Interiors(TM) and 3D Home Architect(R) Deluxe, as well as strong showings for other products, including various Click Art(R) Image Paks(TM), Learning Advantage Libraries(TM) and various Family Tree Maker's (TM) Family Archive CD Collection products. The increase was also impacted by sales of T/Maker products which were not included in the same period last year, since the acquisition of T/Maker was concluded in the fourth quarter of fiscal 1996. These revenue increases were offset, in part, by an increase in product returns experienced in the quarter. For the first nine months of fiscal 1997 and 1996, net revenues were $145.1 million and $154.0 million, respectively, a decrease of 6%. This decrease was largely a result of the Company's aggressive sales and marketing strategy of decreasing prices and increasing marketing and promotions to increase unit volume and market share, as further discussed below and in prior filings. Net revenues in the personal productivity category for the third quarter of fiscal 1997 were up 18% over the same period last year. The increase in the productivity revenues during this third quarter compared to the third quarter of the prior year was primarily due to the release of 3D Home Architect Deluxe and new Click Art Image Paks. For the first nine months of fiscal year 1997, the productivity category posted a 15% increase in net revenues over the first nine months of fiscal year 1996. The personal productivity category comprised 54% and 52% of the Company's total net revenue for the third quarter and first nine months of fiscal 1997, respectively. Net revenues in the entertainment category increased 37% for the third quarter and decreased 34% for the first nine months of fiscal 1997 compared to fiscal 1996, respectively. The increase for the third quarter of fiscal 1997 was primarily due to the release of The Last Express. The decrease for the first nine months of fiscal 1997 was primarily attributable to a decrease in revenues from Myst(R) due to reductions in pricing, which was partially offset by the release of The Last Express this quarter. The entertainment category comprised 17% and 15% of the Company's total net revenues for the third quarter and first nine months of fiscal 1997, respectively. Net revenues in the education category decreased 21% for the third quarter and 11% for the first nine months of fiscal 1997 as compared to fiscal 1996 after adjusting prior year revenues to include Living Books revenues in this category rather than as affiliated label revenue. The decreases in this category were primarily a result of decreases experienced in the unit volume of Carmen Sandiego(R) and Early Learning product lines for the third quarter of fiscal 1997 as compared to fiscal 1996 and due to decreases in prices for the first nine months of fiscal 1997 as compared to fiscal 1996. The education category comprised 27% and 30% of the Company's total net revenues for the third quarter and first nine months of fiscal 1997, respectively. Net revenues from sales of affiliated label products declined 309% and 33% for the third quarter and first nine months of fiscal 1997 compared to fiscal 1996, respectively, after excluding the effects of Living Books affiliated label revenue from prior periods. The decrease in the third quarter of fiscal 1997 was attributable to the fact that without Living Books, affiliated label sales were minimal for the third quarter of fiscal 1997. This category comprised 2% and 4% of the Company's total net revenues for the third quarter and first nine months of fiscal 1997, respectively. 8 During the third quarter of fiscal 1997, the Company released a total of eight new titles, nine upgrades to existing products and two international versions. In the same period of the prior year, the Company released a total of two new titles, three upgrades to existing products and one international version. COST OF REVENUES Cost of revenues includes cost of goods sold, royalties paid to developers and accrued technical support costs, which relate primarily to telephone support provided to consumers shortly after they purchase software. The Company does not capitalize software development costs as the impact on the financial statements would be immaterial. In the third quarter of fiscal 1997, the Company's gross margin was 67% compared to 71% in the third quarter of fiscal 1996. For the first nine months of fiscal 1997 and 1996, gross margin was 65% and 67%, respectively. The decrease in gross margins for such periods was primarily due to the impact of lower prices on revenues; however this decrease was partially offset by an increase in the mix of published products, which carry a higher gross margin, versus affiliated label products. The Company currently expects the gross margin to decline to the low to mid 60% range as the revenue from published entertainment titles, which have a higher royalty rate, become a higher percentage of overall revenue. SALES AND MARKETING Sales and marketing expenses increased 85% to $12.6 million in the third quarter of fiscal 1997 from $6.8 million in the third quarter of fiscal 1996. Similarly for the first nine months of fiscal 1997, sales and marketing expenses increased 42% to $38.0 million from $26.8 million in the comparable period last year. The increase was primarily due to the Company's increased emphasis on advertising and promotions related to new product releases as well as significant increases in marketing costs with the Company's channel partners. In addition, market development funds granted increased substantially. The Company also incurred additional expenses in order to monitor its channel partners' compliance with these programs and to track inventory levels at individual retail outlets. Further, the inclusion of sales and marketing expenses of Living Books due to the acquisition of Random House's 50% interest in the Living Books joint venture in the second quarter of fiscal 1997 contributed to the increase in the third quarter of fiscal 1997 compared to the same quarter of fiscal 1996. The intense competition for high quality and adequate levels of retail shelf space continues to increase as the number of software products increases. As a result, the Company believes that it may sustain, or incur further increases in, sales and marketing expenses in the future, particularly in the entertainment category where it is common for significant marketing costs to be incurred in advance of product release, in an effort to more clearly distinguish its products from its competitors' products and to obtain adequate shelf space. RESEARCH AND DEVELOPMENT Research and development expenses increased 56% to $10.6 million in the third quarter of fiscal 1997 from $6.8 million in the third quarter of fiscal 1996. Similarly for the first nine months of 1997, research and development expenses increased 28% to $27.8 million from $21.8 million for the same period in the prior year. The increase was primarily due to higher employee-related expenses from increased headcount as the number of new products under development has increased in fiscal 1997, as well as expanded localization efforts to adapt products for foreign markets, which were partially offset by lower bonus and profit sharing provisions due to the decline in profitability. The increase in the third quarter of fiscal 1997 was partially attributable to the inclusion of research and development resulting from the acquisition of Random House's 50% interest in the Living Books joint venture in the second quarter of fiscal 1997. The Company continues to invest in the development of CD-ROM based multimedia products with expanded sound, graphics, animation video and/or information content. The development of products with more content increases research and development costs and in future periods, the development of products for emerging platforms, such as DVD, and new technologies, such as 3-D, may cause development expenses to increase even further. To partially offset this increase in content costs, the Company has implemented, and continues to develop, 9 proprietary development systems to reduce the number of programming hours required to bring a product to market on multiple platforms. GENERAL AND ADMINISTRATIVE General and administrative expenses increased 7% to $3.2 million in the third quarter of fiscal 1997 from $3.0 million in the third quarter of fiscal 1996. General and administrative expenses increased 12% to $9.7 million in the first nine months of fiscal 1997 from $8.7 million in the same period in the prior year. The increases were primarily due to the Company's increased staffing and the related employee expenses. CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY AND AMORTIZATION The Company is amortizing, over a three year period, the value of the technology purchased in the Company's acquisition of Random House's 50% interest in the Living Books joint venture in January 1997, T/Maker Company in August 1996 and Banner Blue Software, Inc. in April 1995. The $1.4 million recorded in the third quarter of fiscal 1997 represents amortization of the technologies acquired. For the first nine months of fiscal 1997, the Company recorded a charge of $9.5 million for acquired in-process technology and incurred amortization of purchased technology of $3.5 million. NONOPERATING INCOME Included in nonoperating income is interest and dividend income and other nonrecurring items. Interest and dividend income was $1.4 million and $1.9 million in the third quarter of 1997 and 1996, respectively. The decrease was primarily due to lower cash balances in the current quarter. Nonoperating income decreased 82% for the first nine months of fiscal 1997 when compared to the same period for fiscal 1996. Interest and dividend income was $4.5 million and $4.9 million in the first nine months of 1997 and 1996, respectively. This decrease was primarily the result of lower cash balances. In fiscal 1996, the Company recorded a pretax gain of $15.5 million, net of expenses related to a terminated merger. In addition, prior to the acquisition of Random House's 50% interest in Living Books in the second quarter of fiscal 1997, the equity in earnings of the Living Books joint venture was included as nonoperating income. PROVISION FOR INCOME TAXES The Company's effective income tax rate decreased to 35.3% from 39.0% for the third quarter of fiscal year 1997 and 1996, respectively. The Company's effective income tax rate increased to 46.4% from 39.9% for the first nine months of fiscal year 1997 and 1996, respectively. Excluding the impact of the in-process technology write-off for the first nine months of fiscal 1997, the effective income tax rate would have been 38.5%. The decrease in the effective income tax rate for the third quarter and first nine months of fiscal 1997, excluding the in-process technology write-off, was primarily due to an increase of tax-exempt interest income as a percentage of income before income taxes. NET INCOME Net income was $11.2 thousand or $0.00 per share in the third quarter of fiscal 1997 compared with net income of $6.2 million or $0.29 per share for the same period in 1996. For the first nine months of fiscal 1997, net income was $5.4 million or $0.26 per share compared with $41.0 million or $1.90 per share for fiscal 1996. Excluding the one-time charge resulting from 10 the Living Books acquisition, net income for the nine month period totaled $12.1 million or $0.57 per share. Excluding the one-time gain, net income for the nine months ended May 31, 1996 was $31.7 million or $1.47 per share. LIQUIDITY AND CAPITAL RESOURCES To date, the Company's primary source of liquidity has been cash generated from operations. The Company's working capital decreased $6.9 million during the first nine months of fiscal 1997 to $135.6 million from $142.5 million at August 31, 1996. Cash and short-term investments decreased $23.8 million to $127.1 million at May 31, 1997 from $150.9 million at the end of the prior fiscal year. The decrease in cash and short-term investments was due to the purchase of Random House's share of the Living Books joint venture for approximately $7.6 million, net of the cash balance, during the second quarter and the purchase of 500,000 shares of the Company's common stock in the open market during the second and third quarters for approximately $14.6 million. During the third quarter of fiscal 1997, the Company announced the signing of a letter of intent to acquire Parsons Technology from Intuit Inc. The acquisition is expected to be completed in the fourth quarter of this fiscal year. This transaction will be accounted for as a purchase. The Company expects that at least 50% of the purchase price will be allocated to in-process technology and charged to expense at the time of closing. The Company uses its working capital to finance ongoing operations and to fund the expansion and development of its product lines. In addition, the Company evaluates from time to time, acquisitions of products or companies that complement the Company's business. Management believes the existing cash and short-term investments balances and cash generated from operations will be sufficient to meet the Company's liquidity and capital needs for the coming year. FACTORS AFFECTING FUTURE OPERATING RESULTS Broderbund operates in a rapidly changing environment that is subject to many risks and uncertainties. Some of the important risks and uncertainties which may cause the Company's operating results to differ materially and/or adversely are discussed below and in the Company's Annual Report and Form 10-K for the 1996 fiscal year, both of which are on file with the S.E.C. FLUCTUATIONS IN PERFORMANCE AND OPERATING RESULTS The Company has experienced, and expects to continue to experience, significant fluctuations in operating results due to a variety of factors, including but not limited to, the rate of growth of the consumer software market, market acceptance of the Company's products or those of its competitors, the timing of new product introductions, expenses relating to the development and promotion of new product introductions, changes in pricing policies by the Company or its competitors, projected and actual changes in platforms and technologies, timely and successful adaptation to such platforms or technologies, the accuracy of forecasts of consumer demand, product returns, market seasonality, the timing of orders from major customers and order cancellations, and changes or disruptions in the consumer software distribution channels. The Company's business has generally been highly seasonal, with net revenues and operating income normally highest in the first fiscal quarter during the calendar year-end holiday selling season, lower in the second fiscal quarter, and lowest in the seasonally slow third and fourth fiscal quarters. The Company also believes that the market conditions which resulted in the year-over-year decline in revenues and profitability experienced in the first nine months of fiscal 1997 may continue in future periods. The Company has adjusted its sales and marketing strategy in an effort to increase prices on several products, and increase net revenues while maintaining the increases in unit volume and market 11 share achieved during the first half of the current fiscal year when prices on such products were lowered. However, there can be no assurance that the Company will be successful in implementing the strategy, or that, if successfully implemented, such strategy will be effective or will generate or sustain revenue growth, unit volume or market share in the future. In addition to seasonal and product pricing factors, the Company anticipates that its quarterly results for the fourth quarter will be affected by the timing and the number of new product releases or upgraded versions of existing products, as well as marketing and promotional expenditures in connection with the product releases and the timing of product announcements or introductions by the Company's competitors. Products are generally shipped as orders are received, therefore quarterly sales and operating results depend on the volume and timing of orders received during the quarter, which are difficult to predict. A significant portion of the Company's operating expenses are relatively fixed and planned expenditures are based on sales forecasts. Thus, if net revenue levels are below expectations due to either the timing of orders received or delays in product releases, operating results are likely to be materially adversely affected. Due to the foregoing factors, the Company believes that quarter to quarter comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Any significant shortfall in net revenues and earnings from the levels expected by securities analysts and stockholders could result in a substantial decline in the trading price of the Company's common stock. There can be no assurance that the Company's stock price will remain at or near its current level. Moreover, the Company's stock is subject to the volatility generally associated with technology stocks and may also be affected by broader market trends or the results reported by other market participants. For example, during fiscal 1996, the price per share of the Company's common stock ranged from $28.50 to $76.88 and in the first nine months of fiscal 1997 ranged from $18.38 to $35.13. INDUSTRY AND COMPETITION Recent data indicates a slowdown in the growth of end user demand for consumer software for calendar year 1996 and the first five months of calendar year 1997 when compared to the same periods in prior years. There can be no assurance that such demand will not continue to slow or decline. If such results persist, the Company's future growth in net revenues could be adversely affected. In addition, the intense competition in the consumer software business continues to accelerate as an increasing number of companies, many of which have financial, managerial, technical and intellectual property resources greater than those of the Company, offer products that compete directly with one or more of the Company's products. As a result, an increasingly large number of products are competing for limited shelf space. As discussed above and in prior filings, the Company decreased prices on a number of its products in order to increase market share, including its best-selling series, The Print Shop, as well as Myst, which placed negative pressure on net revenues and gross margins. Although the Company is attempting to increase prices on certain products, there can be no assurance that its attempts will be successful or that product prices will not continue to decline as competition increases, and if such conditions persist, the Company's net revenues and profitability could be materially and adversely affected. Further, there can be no assurance that sales of the Company's existing products will continue to sustain market acceptance and to generate significant levels of revenue in subsequent quarters or that a shortfall in revenue from any product could be replaced in a timely manner. In addition, sales of products on older platforms and in certain product lines have declined, and there can be no assurance that sales of these products will not decline further or experience lower than expected sales levels. Retailers of the Company's products typically have a limited amount of shelf space and promotional resources for which there is intense competition. For example, there are 19 products available from Living Books and it has become increasingly difficult to maintain shelf space in the retail channel for all of these products. There can be no assurance that retailers will continue to purchase all of these products or provide these products with adequate levels of shelf space and 12 promotional support. In addition, competition for creative talent, including independent developers, has also intensified, and the attraction and retention of key personnel have become increasingly difficult. PRODUCTS AND PLATFORMS The Company's future success will depend in large part on its ability to develop and release new products on a timely basis and to achieve widespread market acceptance for such products. There can be no assurance that expected new product introductions will not experience material delays, that new products introduced by the Company will achieve any significant degree of market acceptance, or that such acceptance will be sustained for any length of time. In addition, because the Company expects that the cost of developing and introducing new products will continue to increase, the financial risks associated with new product development will increase as will the risks associated with material delays in the introduction of such new products. The Company's increased focus and commitment towards the development and introduction of entertainment titles increases the risk associated with the development and marketing of products and their market acceptance since the entertainment sector is more hit-driven, and with titles generally having a relatively shorter life-cycle. Further, the substantial year-over-year decline in Myst revenues during the second half of fiscal 1996 and first nine months of fiscal 1997 was not fully replaced, and there can be no assurance that the shortfall from the continuing decline in Myst revenues will be replaced in a timely manner. The Myst sequel product, Riven(TM): The Sequel to Myst(R), is currently on schedule for commercial release in the first quarter of fiscal 1998, but there can be no assurance that it will achieve widespread market acceptance or that its remaining development effort will not be delayed. In addition, the Company believes that electronic or internet products and services will become an increasingly important platform and distribution media. The Company's failure to timely and successfully adapt to and utilize such technologies and media could materially and adversely affect its competitive position and its fiscal results. DISTRIBUTION The distribution channels through which consumer software products are sold have been characterized by intense competition and continuing uncertainties, and there can be no assurance that distributors and retailers will continue to purchase the Company's products or provide the Company's products with adequate levels of shelf space and promotional support. There is increasing pressure from distributors and retailers to obtain marketing and promotional funds and discounts in connection with access to shelf space, in-store promotion and sale of products which has an adverse impact on the Company's net revenues and profitability, and there can be no assurance that these pressures will not continue or increase. In addition, the Company also permits distributors and retailers to return products under certain circumstances and in recent periods, the Company has experienced an increase in the rate of returns as the competition in the distribution channel increases and as mass merchants, office and warehouse stores become an increasing percentage of the Company's sales. The Company believes that the rate of product returns may continue at this rate, and there can be no assurance that return rates will not increase further. The Company establishes allowances based on estimated future returns of product after considering various factors, and accordingly, if the level of actual returns exceeds management's estimates, it could have a material adverse impact on the Company's operating results. Further, certain distributors and retailers have experienced business difficulties and there can be no assurance such difficulties for these or additional distributors and retailers will not continue which could have an adverse effect on the operating results and financial condition of the Company. The Company manufactures its products based upon estimated future sales, and accordingly, if the level of actual orders of products falls short of management's estimates, inventory levels could be excessive which could lead to inventory write-offs and have an adverse impact on the Company's operating results. 13 Because of the foregoing factors, as well as other factors affecting the Company's operating results and financial condition, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. 14 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended May 31, 1997. 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BRODERBUND SOFTWARE, INC. (Registrant) Dated: July 15, 1997 By: /s/ Michael J. Shannahan ------------------------ Michael J. Shannahan Vice President and Chief Financial Officer (Principal Financial Officer) 16 EX-27 2 FDS --
5 9-MOS AUG-31-1997 MAR-01-1997 MAY-31-1997 127,120 0 42,069 (26,516) 4,443 167,770 21,104 (13,506) 199,886 32,185 0 0 0 26,115 139,697 199,886 0 145,101 50,303 88,537 0 0 0 10,165 4,721 0 0 0 0 5,444 0.26 0.26
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