FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Broderbund Software, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %>
500 Redwood Boulevard
Novato, CA 94948-6121
(415) 382-4400
http://www.broderbund.com

UNION CITY, Ca., December 22, 1996/FOOLWIRE/ --- Broderbund Software released their first quarter 1997 results last Thursday after the market close. They reported earnings and overall operations in line with expectations. Revenues declined 13% to $61.5 million. Net income declined 44% to $8.9 million and earnings per share declined 43% to $0.42.

PRODUCT RELEASES. In their first quarter last year, Broderbund released Learn the Art of Magic, Prince of Persia, In the First Degree, and Family Tree Maker 3.0. Out of the Living Books division they released Dr. Seuss' ABCs. In their affiliated labels, Ascendency came out from the Logic Factory, a number of multimedia products came out from Inroads, Welcome to the Future came out from Blue Sky, Stings and Eastwood came out from Starwave, and Tsunami released Silent Steel. In the first quarter this year they released Williams-Sonoma Guide to Good Cooking, Where in the USA is Carmen Sandiego, various Family Archive CDs. From Living Books they released Green Eggs and Ham from Dr. Seuss. Their affiliated labels released Live Pix, Real Audio Player Plus, and a couple of titles from Head Bone. Looking forward to their second quarter, they have an education title called Orly's Draw Story, their first entertainment title called Kuala Lumpor - Journey to the Edge, a furniture library for their 3D Home Architect product, and a new product in their Print Shop line called Print Shop Press Writer, and a number of Family Archive CDs. In Living Books, Arthur's Reading Race and a couple of bible stories -- Daniel and the Lion's Den and The Story of Creation -- will come out. In addition to that, they have major updates to the Print Shop line. Print Shop basic will be released on a CD format, Deluxe 3 has a number of additional graphics and also will be released in CD format and will contain about 3 CDs because they are adding about 10,000 graphics to the product primarily from their T/Maker acquisition, and Print Shop Ensemble 3 will also include a number of new graphics and will be both Windows 3.1 and Windows '95 compatible.

REVENUE BREAKDOWN BY PRODUCT CATEGORY. Productivity was up 22% and represented 51% of sales in the quarter. Entertainment was down 51% and represented 13% of sales in the quarter. Education was up 9% and represented 20% of sales. Affiliated labels was down 44% and represented 16% of sales. The growth in productivity was provided by continued increase in sales from the Family Tree Maker. They released a new version 3 Home Architect in August and that sold very well in their first quarter compared to the same period a year ago. Their Quick Art line also contributed. The entertainment sales decline was impacted signficantly by comparison to last year's first quarter when they had In the First Degree. And, Myst declined this quarter as well compared to the prior quarter by about 31%. The increase in education is attributable to their new Carmen Sandiego line -- both Carmen Sandiego USAs and Carmen world. The affiliated labels decline were the result of two big entertainment titles in their first quarter last year as well as a decline in their Living Books titles. However, Green Eggs and Ham was very comparable to product revenue last year for Dr. Seuss's ABCs.

INTERNATIONAL SALES. The international market was basically flat in the first quarter and didn't reach 10% of total revenues. Obviously the most significant decline was Myst and that severely impacted their ability to show any growth. But they are seeing increases internationally in the productivity line as well as the Banner Blue products and 3D Home Architect. They are trying to build up those markets and then try to position themselves for the rollout of entertainment titles which they think will be more successful internationally.

THE INTERNET. They have costs associated with the Internet throughout the income statement. It is in R&D because of the activities they are doing both in enhancing their products and new product initiatives that have Internet applications. On the marketing side, because they are doing pretty significant outreach and enticement to get closer to their customers, they are just starting some of that process in terms of trying to capitalize on the Internet to its full potential. And, in G&A in terms of system and support costs, there is Internet related expenses. They expect to see some direct to customer initiatives through the Internet that may start showing up on the income statement but they are going to try to do that in a controlled fashion to try to fund the expenditures along with the payback. They think the leverage of the Internet and the potential higher margin activities that they can do direct will largely work to hold margins that would otherwise probably erode if they weren't doing those type of activities. Broderbund's competitors have operating profits ranging from negatives to about 10%. So having a 20% operating profit is still quite steep.

GROSS MARGIN. The gross margin, as expected, was about 64% compared to 65% in Q1 last year. The decline is due in part to lower selling prices, but that was also offset by having a higher component of published sales as compared to affiliated labels. In Q1 this year, 84% of their revenues was from published titles versus 75% in last year's Q1.

OPERATING EXPENSES. Sales and marketing increased 31% to $14.2 million. As they indicated, they are going to be much more aggressive in providing marketing funds to their channel partners, which they did. At the same time they have hired a number of part-time merchandisers whose role is to do a number of store checks, making sure the features Broderbund allotted for in their marketing funds are actually being providing to them as well as checking how Broderbund titles are being stocked. They think that has really helped how they look in the stores and was a worthwhile investment. R&D and G&A are basically up 4% and 3% respectively which is more in line with just cost of living as opposed to anything else. Amortization of $1 million will be constant for approximately the next 3 years and that is the amortization of the acquisition that Banner Blue made of Automated Archives and Broderbund's acquisition of T/Maker.

NON-OPERATING INCOME. Interest income increased to $1.5 million compared to the prior year's $1.3 million due to their increase in cash balances this year. They realized a loss from Living Books of about $600,000 as compared to last year in Q1 where they had earnings of approximately $300,000. That was due to the decline in the sales of Living Books products.

TAXES. Income taxes were provided at 38.5% for the quarter and the decline there is the result of having higher interest income, of which a significant portion is tax exempt. As their interest earnings as a percentage of their pre-tax earnings increases, they will realize a lower effective tax rate. Deferred income taxes increased to $18.5 million from $17.7 million in the prior year quarter. This is due to increasing the reserves and various accruals which are not deductable for tax purposes.

BALANCE SHEET. Their cash and short-term investments decreased about $1.8 million in the quarter, ending up at approximately $149 million. This is attributable to what happened in sales for the quarter and is reflected in their accounts receivable balance of approximately $34 million. They think this is primarily due to how late Thanksgiving was and the fact that Broderbund is shipping more direct into their retailers as opposed to shipping through distributors. In doing so, they stagger when Broderbund ships and the bulk of the shipments went out in the last half of the quarter which impacted accounts receivable. The reserves were increased $5.2 million and stand at $32.8 million at the end of the quarter. That compares to an increase in the first quarter last year of $5.9 million and the balance at the end of the first quarter last year was $29.6 million. The reserves increased not only due to an increase in Broderbund's accounts receivable, but also in this quarter, Broderbund was providing certain sell-through incentives to their retail customer base. They took their large retail accounts and provided them with an incentive based on sell-through so that if they were able to generate sell-through numbers of X amount, Broderbund would provide them with rebates so they would end up having a lower cost. The incentives are based only on Christmas sales and will not continue. Broderbund provided for those incentives being realized and they will probably be realized and paid in their second fiscal quarter. DSOs ended up at about 49 days and were at about 22 days in the same period last year.

INVENTORY POSITION. Inventory levels remained similar to the prior year at $3.3 million. What is interesting here is that even though their balance remained the same, they added a warehouse facility in Chicago and have stocked that facility as well. The purpose for the facility in Chicago is to accommodate their commitment to their direct accounts to be able to deliver within three days of an order directly to stores. Last year their percentage of direct business was about 35% and in the first quarter this year it is closer to 55%.

PURCHASED TECHNOLOGY. Purchased technology in advance declined from $13.1 million at the end of their fiscal year in August to $12 million. That reflects the amortization of the $1 million discussed previously. Some of the products included in those advances are shipping, so as they pay the royalties they are taking it away from the advance, but they have also added to the advance account for the attainment of certain milestones on some of the products that they are capitalizing.

INVESTMENTS IN AFFILIATE LABELS. Investments decreased from $4.1 million to $3.6 million. That is reflecting the loss in the Living Books investment. And they made another minor online investment in a new enterprise.

CURRENT LIABILITIES. The increases in current liabilities are attributable, for the most part, to their income taxes and the reason for that is that last year when they were making payments they were overpaying. This year they are being a little better in cash management. Therefore the liability for the payments they have made was a little larger than it was in the year earlier period.

OUTLOOK FOR Q2 AND AHEAD. Looking forward, they expect their gross margin and their operating margin to be in line with what they were in the first quarter. They think revenues will be lower than last year, but not 10-15% like this quarter, more around 5% lower. The operating margins should stay in the mid-60s and obviously that is going to be based on their sales mix but they think it's a reasonable assumption. Their operating profit should be around 20-22%. Obviously they will see a decline in sales and marketing expenses, but they think they will also see some offsetting increases to R&D and possibly G&A. The tax rate should remain about 38.5%. There could be some minor variations based on percentage of interest income to pre-tax. They don't expect to realize a loss in the second quarter for their joint venture with Living Books. In fact, it is possible they will be recognizing some earnings. There was a restructuring of Living Books that was done in very early November/late October and in that time period they decreased the fixed cost base somewhat, although primarily their issue there is a revenue problem not a cost problem. To that end, they have had a number of discussions about their product strategy going forward. They cannot be very specific, but are looking at it hard in an effort to both get the cost in line with where they think the revenues should be. They think they have a strong business there. They may not have the same growth potential that they thought they did a few years ago, but they think they have a strong basis in that business and should be able to turn it into a very profitable business and grow it in line with the industry growth rate.

SUMMARY. They went into this quarter knowing that they had a very difficult comparison last year and last quarter created the expectations that it was going to be a difficult quarter for them to match up with. At the same time they went into the quarter with several strategic imperatives. The number one imperative was to regain market share. While they don't have all the data in and won't until probably the end of January, early signs are good that they are measuring up to what they set out to do. Their productivity lineup has been very strong throughout the holiday season. Most of their products in the productivity line have sold in very well, albeit late, but the early return from sell-through numbers look encouraging. The education market is a tougher market and, while they are not satisfied with single-digit growth there, it is growing nonetheless and they think in that market unless you have a "Disney" kind of title, it is difficult succeeding in that market right now. On the entertainment side it is basically a titles thing. Myst is doing exceedingly well for its fourth Christmas and they expect that when the final results are in, they will see Myst again in the top ten and perhaps in the top 5 among all entertainment titles this holiday season. The good news is that it is doing extremely well, the bad news is that it is coming off a tremendous holiday season last year so the comparables don't look so good. The overall tone they would like to convey is that the early signs are encouraging, but it's very early. They have a lot of work to do and they are not satisfied where they are at but are hoping they have started to turn the corner.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.