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UNITED STATES
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 Quarter Ended September 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
__________________________
Commission file number 0-19339
EDMARK CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C>
Washington 91-0858263
(State of Incorporation) (I.R.S. Employer Identification No.)
6727 185th Ave. N.E., Redmond, WA 98052
(Address of Principal Executive Offices) (Zip Code)
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(206) 556-8400
(Registrant's telephone number, including area code)
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 October 19, 1995 there were 6,584,834 shares outstanding of the
Registrant's Common Stock, no par value.
Page 1 of 12 sequentially numbered pages.
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EDMARK CORPORATION
FORM 10-Q
INDEX
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Page
Number
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 1995
(unaudited) and June 30, 1995 3-4
Condensed Statements of Operations (unaudited) -
Three Months Ended September 30, 1995 and 1994 5
Condensed Statements of Cash Flows (unaudited) -
Three Months Ended September 30, 1995 and 1994 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
EDMARK CORPORATION
Condensed Balance Sheets
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<CAPTION>
September 30, June 30,
Assets 1995 1995
------ ------------- ----------
(unaudited)
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Current Assets:
Cash and short-term investments $30,002,227 8,204,275
Trade accounts receivable, net 4,775,207 3,570,732
Inventories 2,169,395 1,685,757
Refundable Federal income taxes 59,677 59,677
Deferred Federal income taxes 558,985 629,601
Prepaid expenses and other
current assets 240,110 308,407
----------- ----------
Total current assets 37,805,601 14,458,449
----------- ----------
Equipment and leasehold improvements, at cost 4,176,431 3,620,715
Less accumulated depreciation
and amortization (1,609,800) (1,388,720)
----------- ----------
Net equipment and
leasehold improvements 2,566,631 2,231,995
----------- ----------
$40,372,232 16,690,444
=========== ==========
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See accompanying notes to condensed financial statements.
3
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EDMARK CORPORATION
Condensed Balance Sheets
(Continued)
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<CAPTION>
September 30, June 30,
1995 1995
------------- ----------
(unaudited)
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Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Trade accounts payable $ 1,078,675 916,165
Accrued liabilities 1,550,369 1,460,465
Deferred revenue 661,336 626,581
----------- ----------
Total current liabilities 3,290,380 3,003,211
----------- ----------
Stockholders' Equity:
Common stock, no par value 36,115,162 12,962,182
Retained earnings 966,690 725,051
----------- ----------
Total stockholders' equity 37,081,852 13,687,233
----------- ----------
$40,372,232 16,690,444
=========== ==========
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See accompanying notes to condensed financial statements.
4
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EDMARK CORPORATION
Condensed Statements of Operations
(unaudited)
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<CAPTION>
Three months ended
September 30,
-------------------------------------
1995 1994
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Net revenues $6,931,826 4,136,863
Cost of sales 1,665,701 1,273,491
---------- ---------
Gross profit 5,266,125 2,863,372
---------- ---------
Operating expenses:
Sales and marketing 2,481,407 1,634,077
General and administrative 630,376 474,423
Research and development 2,040,276 988,794
---------- ---------
Total operating expenses 5,152,059 3,097,294
---------- ---------
Operating income (loss) 114,066 (233,922)
Interest income 208,839 79,854
---------- ---------
Earnings (loss) before income taxes 322,905 (154,068)
Income taxes 81,266 0
---------- ---------
Net earnings (loss) $ 241,639 (154,068)
========== =========
Net earnings (loss) per share $.03 $(.03)
==== =====
Weighted average number of shares
outstanding 7,203,997 5,395,351
========== =========
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See accompanying notes to condensed financial statements.
5
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EDMARK CORPORATION
Condensed Statements of Cash Flows
(unaudited)
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<CAPTION>
Three Months Ended
September 30,
--------------------------------
1995 1994
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Net cash used in operating activities $ (799,312) (53,015)
----------- ---------
Cash flows from investing activities:
Decrease in short-term investments 3,419,565 441,237
Purchase of equipment and leasehold improvements (555,716) (221,672)
----------- ---------
Net cash provided by
investing activities 2,863,849 219,565
----------- ---------
Cash flows from financing activities -
proceeds from sale of common stock and
exercise of stock options and stock warrants 23,152,980 189,563
----------- ---------
Net increase (decrease) in cash and
cash equivalents 25,217,517 356,113
Cash and cash equivalents at beginning of period 4,028,632 477,694
----------- ---------
Cash and cash equivalents at end of period 29,246,149 833,807
Short-term investments 756,078 6,517,396
----------- ---------
Cash and short-term investments at end of period $30,002,227 7,351,203
=========== =========
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See accompanying notes to condensed financial statements.
6
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EDMARK CORPORATION
Notes to Condensed Financial Statements
(1) BASIS OF PRESENTATION
The unaudited condensed financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The
accompanying condensed financial statements and related notes should
be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1995 Annual Report to Shareholders.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of only normal recurring accruals, necessary
for a fair presentation of the results for the interim periods
presented.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the fiscal year 1995
financial statements in order for them to conform to the fiscal year
1996 presentation.
(3) INVENTORIES
Inventories consist of the following:
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<CAPTION>
September 30, June 30,
1995 1995
------------- --------
(unaudited)
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Work in Process $1,415,349 976,722
Finished Goods 754,046 709,035
---------- ---------
$2,169,395 1,685,757
========== =========
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(4) EARNINGS (LOSS) PER SHARE
Per share information is based on the weighted average number of
common shares and common share equivalents outstanding during each
period presented. When dilutive, common stock equivalents are
calculated using the treasury stock method.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company has been developing and publishing educational materials for
children since its inception in 1970. The Company entered the consumer
multimedia educational software market during fiscal 1993, with the release of
its first two titles during the 1992 holiday season. As of September 30, 1995,
the Company had published ten multimedia educational software titles. During
the quarter, the Company released Trudy's Time and Place House, the fourth
title in the award winning Early Learning House Series, and also released
Windows 95 versions of six existing titles. The Company expects to release the
fourth title in the Imagination Express Destination Series, Destination: Ocean,
the third title in the Thinkin' Things Series, Thinkin' Things Collection 3,
the first title in a new Strategy Games Series, Strategy Games of the World,
and a Macintosh version of KidDesk Family Edition, all in time for the upcoming
1995 holiday season. All of the Company's multimedia titles are available for
both Windows and Macintosh computers on CD-ROM.
RESULTS OF OPERATIONS
Net Revenues
Net revenue was comprised of the following ($000's):
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Three Months Ended
September 30,
---------------------------------
1995 1994 Change
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Multimedia educational software products:
Consumer channel $3,801 1,507 152%
Education channel 795 535 48%
------ -----
Subtotal 4,596 2,042 125%
Special education products 1,772 2,095 (15%)
Other 564 0 nm
------ -----
Total $6,932 4,137 68%
====== =====
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Net revenues were $6,932,000 in the quarter ended September 30, 1995, an
increase of 68% from $4,137,000 in the year ago quarter.
Sales of multimedia educational software products in the consumer channel were
$3,801,000 in the quarter ended September 30, 1995, an increase of 152% from
$1,507,000 in the year ago quarter. The significant increase in consumer
channel sales when compared to the year ago quarter is due primarily to
increased product available for sale coupled with broader retail shelf space
presence. At the time of product shipment, the Company establishes allowances
for stock balancing, including stock balancing related to the transition to
Windows 95 as well as the transition from floppy disk to CD-ROM
8
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product, price protection and returns of defective, shelf-worn and damaged
products, and for estimated potential future returns of products. Actual
product returns during the current quarter amounted to $464,000, and the
Company's allowance for sales returns at September 30, 1995, was $1,398,000.
Sales of multimedia educational software products in the education channel were
$795,000 in the quarter ended September 30, 1995, an increase of 48% from
$535,000 in the year ago quarter. This increase is due primarily to increased
product available for sale.
Sales of special educational software products were $1,772,000 in the quarter
ended September 30, 1995, a decline of 15% from $2,095,000 in the year ago
quarter, reflecting the Company's strategic emphasis on its multimedia software
products.
The Company also recognized $564,000 of research and development co-funding
revenue during the quarter related to the previously announced strategic
alliance with Harcourt Brace School Publishers.
Cost of Revenues
Cost of revenues was $1,666,000 in the quarter ended September 30, 1995, an
increase of 31% from $1,273,000 in the year ago quarter, but decreased as a
percentage of net revenues to 24% in 1995 from 31% in 1994. Excluding revenues
under the Harcourt Agreement, cost of revenues was 26% in 1995. The decrease
as a percentage of net revenues was primarily due to the relative mix of
revenue shifting to products with higher gross profit margins. Costs
associated with revenue recognized under the strategic alliance with Harcourt
are included with research and development expense.
Operating Expenses
Sales and marketing expenses were $2,481,000 in the quarter ended September 30,
1995, an increase of 52% from $1,634,000 in the year ago quarter, but decreased
as a percentage of net revenues to 36% in 1995 from 40% in 1994. The expense
increase is primarily due to increased costs associated with increased sales of
the Company's line of multimedia educational software products. However, these
costs increased at a rate less than the increase in sales due to greater
economies of scale.
General and administrative expenses were $630,000 in the quarter ended
September 30, 1995, an increase of 33% from $474,000 in the year ago quarter,
but decreased as a percentage of net revenues to 9% in 1995 from 11% in 1994.
The expense increase is primarily due to higher salaries and costs associated
with the Company's expanded operations. However, these costs increased at a
rate less than the increase in sales due to greater economies of scale.
9
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Research and development expenses were $2,040,000 in the quarter ended
September 30, 1995, an increase of 106% from $989,000 in the year ago quarter,
and increased as a percentage of net revenues to 29% in 1995 from 24% in 1994.
The increase in research and development expenses was primarily attributable to
costs associated with continued expansion of the Company's line of multimedia
educational software products. Salaries and related costs represent a
substantial portion of this expense increase.
Income Taxes
Income tax expense in the quarter ended September 30, 1995, amounted to
$81,000, or 25% of pretax income. The Company's effective tax rate differed
from the statutory rate due to valuation allowances on deferred tax assets and
tax exempt interest income.
LIQUIDITY AND CAPITAL RESOURCES
On August 9, 1995, the Company consummated a public offering of 1,121,250
shares of Common Stock, of which 638,873 shares were sold by the Company, which
raised net proceeds of approximately $22.5 million. As of September 30, 1995,
the Company had cash and short-term investments of $30.0 million and working
capital of $34.5 million.
The Company uses its working capital to finance ongoing operations, fund the
development and introduction of new products and acquire capital equipment.
During the current quarter, the Company's operating activities used cash of
$799,000 to support working capital requirements related to higher sales
volume, and the Company invested $556,000 in equipment and leasehold
improvements.
The Company expects that cash flows from operations and existing cash and
short-term investments will be adequate to meet the Company's cash requirements
for the remainder of fiscal year 1996. The Company's cash and short-term
investments may decline during fiscal year 1996 for several reasons, including
higher planned levels of product development activities compared to fiscal year
1995 and greater working capital requirements associated with higher planned
sales levels.
10
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
a) On July 14, 1995, the Company's Board of Directors approved a
three-for-two stock split effected in the form of a 50% share
dividend to shareholders of record as of July 27, 1995 and
paid on August 3, 1995.
b) On August 9, 1995, the Company consummated a public offering
of 1,121,250 shares of its Common Stock at $37.75 per share,
of which 638,873 were sold by the Company and 482,377 by a
group of selling shareholders. Net proceeds of approximately
$22.5 million were received by the Company from the sale.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the first
quarter ended September 30, 1995.
11
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SIGNATURES
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.
Edmark Corporation
(Registrant)
Date
October 19, 1995 /s/ Sally G. Narodick
-----------------------------------------------
Sally G. Narodick
Chairman and Chief Executive Officer
October 19, 1995 /s/Paul Bialek
-----------------------------------------------
Paul N. Bialek
Vice President - Finance and Administration and
Chief Financial Officer
(Principal Accounting and Financial Officer)
12
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTER
ENDED SEPTEMBER 30, 1995
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 29,246,149
<SECURITIES> 756,078
<RECEIVABLES> 4,775,207
<ALLOWANCES> 0
<INVENTORY> 2,169,395
<CURRENT-ASSETS> 37,805,601
<PP&E> 4,176,431
<DEPRECIATION> 1,609,800
<TOTAL-ASSETS> 40,372,232
<CURRENT-LIABILITIES> 3,290,380
<BONDS> 0
<COMMON> 36,115,162
0
0
<OTHER-SE> 966,690
<TOTAL-LIABILITY-AND-EQUITY> 40,372,232
<SALES> 6,931,826
<TOTAL-REVENUES> 6,931,826
<CGS> 1,665,701
<TOTAL-COSTS> 1,665,701
<OTHER-EXPENSES> 5,152,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 322,905
<INCOME-TAX> 81,266
<INCOME-CONTINUING> 241,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241,639
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
