<PAGE> 1
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 March 31, 1996
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)
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)
(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 May 2, 1996 there were 6,619,832 shares outstanding of the Registrant's
Common Stock, no par value.
Page 1 of 14 sequentially numbered pages.
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EDMARK CORPORATION
FORM 10-Q
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - March 31, 1996
(unaudited) and June 30, 1995 3-4
Condensed Statements of Operations (unaudited) -
Three and Nine Months Ended March 31, 1996 and 1995 5
Condensed Statements of Cash Flows (unaudited) -
Nine Months Ended March 31, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT 14
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
EDMARK CORPORATION
Condensed Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
Assets 1996 1995
------ ---- ----
(unaudited)
<S> <C> <C>
Current Assets:
Cash and short-term investments $ 29,927,735 8,204,275
Trade accounts receivable, net of allowances
for doubtful accounts and sales returns of
$1,891,680 at March 31, and $1,103,771
at June 30 6,503,514 3,570,732
Inventories 1,959,197 1,685,757
Refundable Federal income taxes 0 59,677
Deferred Federal income taxes 1,035,531 629,601
Prepaid expenses and other
current assets 747,986 308,407
------------ -----------
Total current assets 40,173,963 14,458,449
------------ -----------
Equipment and leasehold improvements, at cost 4,801,494 3,620,715
Less accumulated depreciation
and amortization (2,140,409) (1,388,720)
------------ -----------
Net equipment and
leasehold improvements 2,661,085 2,231,995
Long-term investments 1,348,682 --
------------ -----------
$ 44,183,730 16,690,444
============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
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EDMARK CORPORATION
Condensed Balance Sheets
(Continued)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Trade accounts payable $ 1,305,804 916,165
Accrued liabilities 2,192,822 1,460,465
Federal income taxes payable 1,146,370 0
Deferred revenue 104,807 626,581
----------- ----------
Total current liabilities 4,749,803 3,003,211
----------- ----------
Shareholders' Equity:
Common stock, no par value 36,199,464 12,962,182
Retained earnings 3,234,463 725,051
----------- ----------
Total shareholders' equity 39,433,927 13,687,233
----------- ----------
$44,183,730 16,690,444
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
4
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EDMARK CORPORATION
Condensed Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
-------------------------- -------------------------
1996 1995 1996 1995
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 6,109,706 5,563,075 25,747,779 16,396,150
Cost of sales 1,305,142 1,446,661 6,038,147 4,907,450
----------- --------- ---------- ----------
Gross profit 4,804,564 4,116,414 19,709,632 11,488,700
----------- --------- ---------- ----------
Operating expenses:
Sales and marketing 2,612,995 1,663,288 9,083,246 5,254,393
General and administrative 737,074 523,486 2,090,027 1,525,869
Research and development 2,001,060 1,139,040 5,938,678 3,103,359
----------- --------- ---------- ----------
Total operating expenses 5,351,129 3,325,814 17,111,951 9,883,621
----------- --------- ---------- ----------
Operating income (loss) (546,565) 790,600 2,597,681 1,605,079
Interest income 268,892 116,001 774,428 279,653
----------- --------- ---------- ----------
Earnings (loss) before
income taxes (277,673) 906,601 3,372,109 1,884,732
Income tax expense (benefit) (138,056) 62,705 862,697 130,637
--------- ---------- ----------
Net earnings (loss) $ (139,617) 843,896 2,509,412 1,754,095
=========== ========= ========== ==========
Net earnings (loss) per share $ (0.02) 0.13 0.34 0.28
=========== ========= ========== ==========
Weighted average number
of shares outstanding 6,613,300 6,471,539 7,299,304 6,219,572
=========== ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
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EDMARK CORPORATION
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------
1996 1995
------------ ----------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 1,015,639 (432,818)
------------ ----------
Cash flows from investing activities:
Decrease (increase) in short term investments (3,461,911) 1,952,744
Purchase of equipment and leasehold improvements (1,180,779) (523,203)
------------ ----------
Net cash provided by (used in)
investing activities (4,642,690) 1,429,541
------------ ----------
Cash flows from financing activities - net
proceeds from sale of common stock and
exercise of stock options and stock warrants 23,237,282 280,031
------------ ----------
Net increase in cash and
cash equivalents 19,610,231 1,276,754
Cash and cash equivalents at beginning of period 4,028,632 477,694
------------ ----------
Cash and cash equivalents at end of period 23,638,863 1,754,448
Short-term investments 6,288,872 5,005,889
------------ ----------
Cash and short-term investments at end of period $ 29,927,735 6,760,337
============ ==========
</TABLE>
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:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---------- ---------
(unaudited)
<S> <C> <C>
Work in Process $1,157,484 976,722
Finished Goods 801,713 709,035
---------- ---------
$1,959,197 1,685,757
========== =========
</TABLE>
(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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Mangement's Discussion
and Analysis of Financial Condition and Results of Operations in Edmark
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1995. This analysis has been prepared pursuant to the applicable rules and
regulations of the Securities and Exchange Commission and is not intended to
serve as a basis for projections of future events. The following contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results anticipated by those
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in Part I of the Edmark Corporation
Annual Report on Form 10-K for the fiscal year ended June 30, 1995.
The Company's business is highly seasonal. Generally, sales of products in the
consumer channel are highest during the holiday quarter, the Company's second
fiscal quarter, and weakest during the Company's third fiscal quarter, while
sales of products in the education channel tend to be higher during the
Company's first and fourth fiscal quarters.
The Company's quarterly operating results also fluctuate or may fluctuate as a
result of the number, amount and timing of new product introductions, product
shipments, acceptance by customers of new products, product mix, product
returns, promotional programs, marketing expenditures and product development
expenditures. Net revenues in any quarter are principally dependent on orders
booked and shipped in that quarter. A significant portion of the Company's
operating expense is relatively fixed, and planned expenditures in any given
quarter are based on sales forecasts. Accordingly, if net revenues do not meet
the Company's expectations in any given quarter, operating results could be
adversely affected. In addition, if planned product introductions are delayed
beyond the peak selling seasons, the Company's operating results could be
adversely affected. There can be no assurance that the recent year-to-year and
quarter-to-quarter revenue growth rates will be sustained. Any significant
shortfall in net revenues from levels expected by securities analysts or
shareholders could result in substantial volatility in the trading price of the
Company's common stock.
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 March 31, 1996, the
Company had published 13 multimedia educational software titles. All of the
Company's multimedia titles are available for
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both Windows and Macintosh computers on CD-ROM. At March 31, 1996, nine of the
Company's PC-based multimedia software titles were designed for Windows 95. The
Company's CD-ROM products are manufactured in both Windows and Macintosh
versions, and products which are designed for Windows 95 are compatible with
Windows 3.1.
RESULTS OF OPERATIONS
Net Revenues
Net revenues were comprised of the following ($000s):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
1996 1995 Change 1996 1995 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Multimedia software products:
Consumer channel $2,963 2,026 46% $16,414 8,110 102%
Education channel 1,365 931 47% 3,165 2,066 53%
------ ----- ------- -----
Subtotal 4,328 2,957 46% 19,579 10,176 92%
Special education products 1,261 1,606 (22%) 4,546 5,220 (13%)
Other 521 1,000 (48%) 1,623 1,000 62%
------ ----- ------- -----
Total $6,110 5,563 10% $25,748 16,396 57%
====== ===== ======= =====
</TABLE>
The increase in consumer channel sales when compared to the comparable prior
year periods is due primarily to an increase in the number of products available
for sale coupled with broader retail distribution. At the time of product
shipment, the Company establishes allowances for stock balancing, including
stock balancing related to the transition to Windows 95 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 $1,109,000, and the Company's allowance for
sales returns at March 31, 1996, was $1,813,000. A significant majority of the
Company's consumer channel product sales are derived from CD-ROM product.
The increase in sales of multimedia software products in the education channel
is due primarily to an increase in the number of products available and expanded
distribution in the education market.
The Company expects sales of its special education products will continue to
decline over time, reflecting the Company's strategic emphasis on its multimedia
software products.
The Company also recognized $521,000 of research and development co-funding
revenue during the quarter related to the previously announced strategic
alliance with Harcourt Brace School Publishers. For the nine month period, these
revenues were $1,623,000. There were no comparable co-funding revenues in the
respective prior year
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periods. In the year ago quarter, the Company recognized $1.0 million of revenue
related to the licensing of certain software technology to Harcourt, which
substantially affects all of the following comparisons when stated as a
percentage of net revenues. The Company has not, and does not expect to, receive
any additional technology license fees under this agreement.
Cost of Revenues
Cost of revenues was $1,305,000 in the current quarter, a decrease of 10% from
$1,447,000 in the year ago quarter, and decreased as a percentage of net
revenues to 21% from 26%. For the nine month period, cost of revenues was
$6,038,000, an increase of 23% from $4,907,000 in the prior year period, but a
decrease as a percentage of net revenues to 23% from 30%. The decreases as a
percentage of net revenues for both periods were primarily due to the relative
mix of revenue shifting to products with higher gross profit margins. Excluding
revenues under the Harcourt Agreement, cost of revenues as a percentage of net
revenues was 23% in the current quarter and 25% for the nine month period,
compared to 32% in each of the comparable prior year periods. 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 $2,613,000 in the current quarter, an increase
of 57% from $1,663,000 in the year ago quarter, and increased as a percentage of
net revenues to 43% from 30%. For the nine month period, sales and marketing
expenses were $9,083,000, up 73% from $5,254,000 in the prior year period, and
increased as a percentage of net revenues to 35% from 32%. The expense increases
were primarily due to higher salaries and other costs associated with increased
sales of the Company's line of multimedia educational software products.
General and administrative expenses were $737,000 in the current quarter, an
increase of 41% from $523,000 in the year ago quarter, and increased as a
percentage of net revenues to 12% from 9%. For the nine month period, general
and administrative expenses were $2,090,000, up 37% from $1,526,000 in the prior
year period, but a decrease as a percentage of net revenues to 8% from 9%. The
expense increases were primarily due to higher salaries and other costs
associated with the Company's expanded operations.
Research and development expenses were $2,001,000 in the current quarter, an
increase of 76% from $1,139,000 in the year ago quarter, and increased as a
percentage of net revenues to 33% from 20%. For the nine month period, research
and development expenses were $5,939,000, up 91% from $3,103,000 in the prior
year period, and increased as a percentage of net revenues to 23% from 19%. The
increase in research and development expenses was primarily attributable to
costs associated with continued expansion of the Company's line of multimedia
software products. Salaries and related costs represent a substantial portion of
this expense increase.
10
<PAGE> 11
Income Taxes
Income taxes amounted to a benefit of $138,000 in the quarter and an expense of
$863,000 for the nine month period. The Company's effective tax rate for both
the quarter and nine month period differed from the statutory rate due to
reductions in 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 March 31, 1996, the Company
had cash and short-term investments of $29.9 million and working capital of
$35.4 million.
The Company uses its working capital to finance ongoing operations, to fund the
development and introduction of new products and to acquire capital equipment.
During the nine month period ended March 31, 1996, the Company's operating
activities provided cash of $1.0 million, and the Company invested $1.2 million
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 next 12 months. The Company's cash and short-term investments may
decline during that period for several reasons, including higher planned levels
of product development activities and greater working capital requirements
associated with higher planned sales levels.
11
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company remains a defendant in Power Industries, Inc. v. Edmark Corporation,
U.S. District Court for the district of Massachusetts, which was originally
described in Part II - Item 1 of the Company's Form 10-Q for the quarter ended
December 31, 1995.
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
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
27 Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the third
quarter ended March 31, 1996.
12
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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
May 2, 1996 /s/Sally G. Narodick
------------------------------------
Sally G. Narodick
Chairman and Chief Executive Officer
May 2, 1996 /s/Paul Bialek
------------------------------------
Paul N. Bialek
Vice President - Finance and Administration and
Chief Financial Officer
(Principal Accounting and Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 29,927,735
<SECURITIES> 0
<RECEIVABLES> 8,395,194
<ALLOWANCES> 1,891,680
<INVENTORY> 1,959,197
<CURRENT-ASSETS> 40,173,963
<PP&E> 4,801,494
<DEPRECIATION> 2,140,409
<TOTAL-ASSETS> 44,183,730
<CURRENT-LIABILITIES> 4,749,803
<BONDS> 0
0
0
<COMMON> 36,199,464
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 39,433,927
<SALES> 6,109,706
<TOTAL-REVENUES> 6,109,706
<CGS> 1,305,142
<TOTAL-COSTS> 1,305,142
<OTHER-EXPENSES> 5,351,129
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (277,673)
<INCOME-TAX> (138,056)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (139,617)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
