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Broderbund lays off 70 employees

Broderbund Software lays off 70 employees, in a cost-cutting move, and watches its stock drop more than 8 percent as a result.

Broderbund Software (BROD), in a cost-cutting move, laid off 70 employees today.

The layoffs come just one day before the previously planned resignation of the company's president is scheduled to take effect.

The entertainment and educational software maker's stock fell more than 8 percent on the news, to end at 18-7/8, down 1-3/4 from Friday's close of 20-5/8.

Broderbund held a company-wide meeting today to break the news and to discuss the cutbacks, and to lay out a game plan going forward. The individuals affected by the layoffs were informed this morning.

The company has been hit in the past with warning revenues and layoffs, and that carried over today with the announcement that it would trim 70 people, or about 7 percent of its work force, from its payroll, primarily from the product development and product marketing divisions in Novato, California, said Eric Winkler, a company spokesman. The company will have 1,030 employees remaining after the layoffs.

The cutbacks come at a time of fierce competition in the educational software market, which has been consolidating of late. Earlier this month, for example, The Learning Company (TLC) agreed to buy Mindscape for $150 million in cash and stock.

This is the first phase of Broderbund's restructuring program that was announced last week, when the company reported its earnings, said Winkler.

"We are looking at other areas to do cost-cutting," he said, noting that the company hoped to eliminate $5 million in spending per year. "We hoped to have all cost-cutting completed by the third quarter [which ends in May]."

Lawrence Marcus, an analyst with BT Alex. Brown, said eliminating those positions is definitely a step toward realizing a crucial part of the company's strategy--becoming more profitable.

"It looks like they are moving toward that goal and making the tough decisions [to accomplish that goal]," he said. "Now they need to defend their brands, extend them, and create new brands."

The company said it will take a one-time pretax charge of $2 million in the current third fiscal quarter.

The duties of Broderbund's president and chief operating officer, Bill McDonagh, who announced his resignation in January, will be assumed by J. Mark Hattendorf, Alma Rodoni, and Dan Steever as of tomorrow. Those individuals were promoted to group vice president positions as part of a management restructuring that resulted from McDonagh's exit.

Broderbund may have surprised Wall Street last December with a stronger-than-expected boost originating from sales of Riven, sequel to the computer game blockbuster Myst. But the company's problems clearly are not over.

Last week, Broderbund posted earnings of $3.9 million, or 18 cents per share, up from $3.2 million, or 15 cents per share, reported for the like quarter a year ago. Meanwhile, quarterly sales rose to $78.6 million from $44.3 million, a jump that was attributed to strong sales from Riven, Myst, and Carmen Sandiego.

While earnings were in line with expectations, analysts are concerned about the reduction in sales from core productivity and education segments. Sales from those key areas fell more than 20 percent year-to-year.

"While we expect the company to work aggressively to build these two declining segments, we do not expect to see any meaningful gains for at least another quarter or so," Michael Wallace, an analyst with UBS Securities, said in a recent report.

Wallace said he expects the segments to bounce back during the latter half of fiscal 1998 and into fiscal 1999, behind the release of several new products, including Family Tree Maker, Print Shop 6, and a 3D Home Architect title under the This Old House brand.

"We believe that Broderbund will come under increased pressure in this market segment from The Learning Company," Wallace said. "TLC?s purchase of Mindscape could pose a real threat, as Mindscape leverages TLC?s distribution, direct sales, and school channels to sell its products."

Today's layoffs, combined with a restructuring program initiated last fall, brings the total number of jobs eliminated at Broderbund during the past year to 150, said Winkler. The laid off individuals are being offered outplacement services and severance packages "well above 2 months worth of salary," he said.