<PAGE> 1
Eight characters or symbols from the Company's software products appear in a
horizontal line in the middle of the page.
1996
ANNUAL REPORT
[LOGO] EDMARK
------
<PAGE> 2
We do it for the kids...
[Lower left-hand corner]
1 Company Overview
2 Product Line
6 Letter to the Shareholders
8 Selected Financial Data
9 Management's Discussion and Analysis
of Financial Condition and Results of Operations
16 Statements of Operations
17 Balance Sheets
18 Statements of Shareholders' Equity
19 Statements of Cash Flows
20 Notes to Financial Statements
27 Independent Auditors' Report
28 Corporate Information
<PAGE> 3
Towards the top of the page, a computer screen from the Company's Thinkin'
Things Collection 2 educational software product appears, depicting the Tuney
Loon character from that product and the various icons that may be used to
navigate that product.
Photographs of five children-illustrative of the end users of the Company's
educational software products--appear in a horizontal line in the middle of
the page.
Edmark's products are designed to actively
engage children in their own learning while
they play with charming characters and
delightful sound, music and graphics.
|____________________________________________|
______________________________________________
| |
We believe that children are very
capable and that they love to be
challenged. We're dedicated to developing
educationally rich products that cause
children to really think and that encourage
them to recognize and believe in the
power of their own minds.
In developing our products, we combine
innovative technologies with proven
educational strategies to provoke thinking,
to develop self-esteem and to encourage
kids to investigate, experiment, role-play
and construct ideas and projects.
<PAGE> 4
In a horizontal line in the middle of the page appear covers of four of the
Company's educational software products, two from the Mighty Math Series
(Carnival Countdown and Number Heroes) and two from the Early Learning Series
(Millie's Math House and Bailey's Book House).
EARLY
The EARLY LEARNING SERIES helps children from
MIGHTY MATH SERIES
The programs in the MIGHTY MATH SERIES teach both basic skills
and the conceptual underpinnings of curriculum-based math
subjects from addition and subtraction to algebra and geometry.
Towards the bottom of the page, computer screens from two of the Company's
educational software products appear, one depicting clowns on a circus pole
(providing addition and subtraction problems for children) from Mighty Math
Carnival Countdown and one depicting a game show (providing math and logic
exercises for children) from Mighty Math Number Heroes.
EDMARK'S AWARD-WINNING PRODUCT LINE IS ORGANIZED INTO FAMILIES OF PRODUCTS.
Our product families are designed to deliver real education results, making
Edmark a name that parents and teachers trust and seek by name.
Also appearing at seven different areas on the page are depictions of
characters from the Company's Mighty Math Series and Millie's Math House
product.
<PAGE> 5
In a horizontal line in the middle of the page appear covers of four of the
Company's educational software products, three from the Early Learning Series
(Sammy's Science House, Trudy's Time and Place House and Stanley's Sticker
Stories) and one from the Strategy Series (Strategy Challenge Collection 1).
EDMARK MAKES A STRONG COMMITMENT TO PARENTS AS WELL AS CHILDREN
Every Edmark product contains a rich assortment of tools and materials to
invite parents to participate in their children's learning and integrate
learning into everyday situations.
LEARNING SERIES
ages 2 to 6 develop math, reading, science, geography, time-telling and writing
skills.
STRATEGY SERIES
Through the challenging games in the STRATEGY SERIES, children build skills and
problem-solving strategies they can use throughout their lives.
Towards the bottom of the page, computer screens from two of the Company's
educational software products appear, one depicting a letter machine (helping
children to learn the alphabet) from Bailey's Book House and one depicting a
weather station (helping children to learn temperature and weather) from
Sammy's Science House. Between the screens is a depiction of the Stanley
character from the Company's Sammie's Science House product.
Towards the top of the page are depictions of characters and symbols from the
Company's Strategy Series products and a computer screen depicting the Go-moku
character (playing an ancient game to help children learn strategy) from the
Strategy Challenge Collection 1 product.
<PAGE> 6
In a horizontal line in the middle of the page appear covers of four of the
Company's educational software products, three from the Thinkin' Things Series
and the KidDesk Family Edition product.
THINKIN' THINGS SERIES
With the highly creative programs in the THINKIN' THINGS SERIES, kids develop
the thinking and problem-solving skills necessary for success.
Towards the bottom of the page, computer screens from two of the Company's
educational software products appear, one depicting the Stockto character (who
helps children examine and analyze situations) from Thinkin' Things Collection
3 and one depicting a desk top with icons from KidDesk Family Edition (which
spills over onto the bottom of page 5). To the left of the screens one
character and five symbols from the Company's Thinkin' Things Collection 2
product appear.
KIDDESK
FAMILY EDITION
KIDDESK FAMILY EDITION provides hard drive security for parents and computing
fun for kids.
Towards the top of the page, a depiction of the Tuney Loon character playing a
xylophone from Thinkin' Things Collection 1 and 2 appears, along with a
computer screen depicting the Oranga Banga character (who teaches repitition
and memory) from Thinkin' Things Collection 1.
<PAGE> 7
In a horizontal line in the middle of the page, the covers of all four of the
Company's products from the Imagination Express Series appear.
WE'RE PROUD OF OUR DEDICATION TO DEVELOPING EFFECTIVE LEARNING TOOLS
Edmark products have won many major educational software awards and continue to
be recognized for educational excellence by parents, reviewers and -- of course
- -- children.
IMAGINATION EXPRESS SERIES
In the IMAGINATION EXPRESS SERIES, kids develop creativity, writing and
communication skills while creating amazing interactive stories and movies.
Towards the bottom of the page, computer screens from two of the Company's
educational software products, Imagination Express: Destination Ocean and
Imagination Express: Destination Neighborhood, appear (providing different
environments to enhance the creation of interactive stories by children). A clip
art picture of the world and a fish symbol from the Company's Destination:
Ocean product also appear, along with the remainder of the KidDesk desk top
that spills over from page 4.
Towards the top of the page, a depiction of a toucan bird appears, along with a
computer screen depicting a rain forest destination, both from Imagination
Express: Destination Rain Forest.
<PAGE> 8
LETTER TO THE SHAREHOLDERS
TO OUR SHAREHOLDERS:
Enclosed you will find our annual report with the results for fiscal year 1996.
This was a difficult and challenging year in our industry. Our team delivered
major accomplishments both in new product development and overall growth for
the Company. However, we did not achieve all of our goals, and our stock price
has reflected the challenges.
Net revenues for the year ended June 30, 1996, increased 42% to
$32,188,000, compared to net revenues of $22,719,000 in the prior year. Net
earnings for fiscal 1996 were $2,013,000, essentially flat with net earnings of
$2,024,000 in the prior year. We had more shares outstanding this year,
resulting in earnings per share of $0.28 in fiscal year 1996, compared to $0.32
in the prior year.
Sales of the Company's multimedia software products grew 67% in the current
year to $23,860,000, compared to $14,267,000 in the prior year. Consumer market
sales of multimedia software products grew 72% to $18,694,000, compared to
$10,865,000 in the prior year. Education market sales of multimedia products
grew 52% to $5,166,000 from $3,402,000 in the prior year. Growth in both markets
was fueled by new product releases and expansion of our distribution channels.
Sales of our more mature special education products, sold only in the
school channel, declined by 14% to $6,080,000, reflecting our strategic
concentration on multimedia products. Net revenues also included $2,248,000 in
development co-funding fees from our strategic alliance with Harcourt Brace
School Publishers. Last year, license and co-funding fees totaled $1,348,000.
During fiscal year 1996, Edmark released five new multimedia titles for
both the consumer and school markets. We released two new titles in our
award-winning Early Learning Series -- Trudy's Time & Place House and Stanley's
Sticker Stories -- and added Thinkin' Things Collection 3 as the newest member
of our Thinkin' Things Series. We also released Imagination Express,
Destination: Ocean, and the first product in our brand new Strategy Series,
Strategy Challenges Collection 1.
We also released three titles for the school market. Imagination Express,
Destination: Time Trip, USA, and Imagination Express, Destination: Pyramids,
were developed under our strategic alliance with Harcourt Brace. Words Around Me
is a new multimedia product for the special education market.
Shortly after the end of the fiscal year, the Company also released the
first two titles in a new math series developed under the strategic alliance
with Harcourt Brace. Mighty Math Carnival Countdown, for children from ages five
to eight, and Mighty Math Number Heroes, for children from ages eight to eleven,
shipped in July 1996.
We began this year by noting that our industry was becoming increasingly
competitive and that exclusive distribution agreements and industry
consolidations were changing the competitive landscape. Our strategy to compete
in this environment was to strengthen our balance sheet, increase our rate of
new product introduction and expand our distribution channels while building our
brand identity.
In August 1995, the Company completed a stock offering that raised $22.3
million to strengthen our balance sheet.
Research and development expenditures for fiscal year 1996 grew 76% to
$8,122,000 in support of our new product development activities. Research and
development costs of $2,248,000 were offset by co-funding fees from Harcourt
Brace under our strategic alliance.
In addition to serving our traditional special education segment, we
increased our penetration into the K-6 school market. We also added an
authorized dealer
6
<PAGE> 9
program and a new regional sales force for the sale of our products in the
school markets.
We expanded our international distribution agreement, which resulted in
our products being localized in several additional languages this year. While
the international market is still small, we believe it is an attractive growth
opportunity for the Company.
In the consumer market, we were able to achieve significant expansion
during the first half of the year in the number of retail outlets carrying
Edmark products. This allowed us to increase our market share during the first
half of the year and achieve substantial growth in sales of consumer multimedia
products. However, during the last six months of the year, we saw a slowdown in
consumer demand for educational software products and an increase in competitive
products. Our year over year growth rate in sales of consumer products for the
second half of the year was down significantly from the first half of the year,
and our market share declined.
The fact that our new product release schedule for calendar year 1996 was
substantially weighted toward the latter half of the calendar year also impacted
our results. We look forward to releasing a total of six products in the last
six months of calendar 1996, including two products that shipped in July. Our
plans for calendar 1997 call for a more balanced distribution of new product
releases throughout the year.
We also had turnover in our marketing department during fiscal year 1996,
which cost us momentum in the retail channel. We plan to add resources to this
department during the coming year to enable us to clearly establish and
differentiate our brand in the marketplace.
During this past year, there has been major consolidation in the
educational and consumer software industry. We also have seen some new
competitors, including toy and entertainment companies who are bringing their
brand equity into the software arena. The challenges presented by these
competitors, together with an apparent slowdown in the rate of purchases of new
computers and educational software, have impacted our results for the period and
adversely impacted our stock price.
In the near term, we expect to continue to face a very promotional and
competitive environment in the retail channel, with large numbers of products
vying for limited shelf space. To differentiate our brand in this environment,
we plan to substantially increase our marketing efforts and to focus on the end
users of our products, including the point of purchase in the retail channel. We
also plan to increase our direct mail and Internet marketing activities to both
our existing customer base and to new consumers who value high quality
educational software products for their children and grandchildren. During this
period, we plan to compete aggressively, which will impact our near term
opportunities for growth. We are confident that our concentration on superior
product quality and our continuing investment in building our brand with
consumers will serve the Company well.
Our talented and dedicated employees remain committed to building great
products and enhancing shareholder value in the year ahead.
Sincerely,
/s/Sally Narodick
- -------------------------------------
Sally Narodick
Chairman and Chief Executive Officer
7
<PAGE> 10
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
June 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
FOR YEARS ENDED
<S> <C> <C> <C> <C> <C>
Net revenues $32,187,944 22,718,705 11,663,352 8,733,038 5,962,526
Revenue growth rate 42% 95% 34% 46% 38%
Gross profit 24,559,020 15,951,873 6,197,377 4,852,297 3,349,812
Gross profit margin 76% 70% 53% 56% 56%
Operating expenses:
Sales and marketing 12,232,139 7,467,261 4,639,931 2,699,397 1,412,149
General and administrative 2,782,816 2,070,043 1,824,950 1,581,408 1,305,806
Research and development 8,122,177 4,615,062 2,145,907 443,865 106,917
-------------------------------------------------------------------------------------
Total operating expenses 23,137,132 14,152,366 8,610,788 4,724,670 2,824,872
Operating income (loss) 1,421,888 1,799,507 (2,413,411) 127,627 524,940
Net earnings (loss) 2,013,158 2,023,677 (1,937,404) 125,759 364,290
Net earnings (loss) per share $ 0.28 0.32 (0.40) 0.03 0.10
Weighted average number of
shares outstanding 7,297,962 6,326,097 4,864,101 4,512,252 3,481,158
AS OF THE YEAR ENDED
Cash, short and long-term
marketable securities $32,796,593 8,204,275 7,436,327 4,003,751 508,280
Total assets 43,408,225 16,690,444 12,431,680 8,459,854 3,826,372
Working capital 30,496,055 11,455,238 9,707,325 5,932,106 2,052,603
Shareholders' equity $40,491,010 13,687,233 11,175,976 7,675,695 3,102,789
Common shares issued and outstanding 6,626,672 5,477,970 5,361,475 4,509,475 3,517,975
Number of employees 209 156 121 88 45
</TABLE>
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company has been developing and publishing educational materials for
children since its inception in 1970. Prior to fiscal 1993, the Company was
engaged primarily in developing and publishing special education products. 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 June 30, 1996, the Company had published 14 multimedia educational
software titles for sale in both the consumer and education markets.
The Company sells its multimedia educational software products in the
consumer market using multiple channels of distribution, including distributors,
specialty software stores, retail chains, computer superstores, mass merchants,
and others. These products are also distributed in the education market through
educational dealers, catalogs, and direct mail.
The Company also continues to offer its special education products in the
education market. These products include software and print products and the
TouchWindow product. The Company also distributes software and print products
published by others for the special education market.
On December 15, 1994, the Company entered into a strategic alliance with
Harcourt Brace School Publishers, a publisher in the educational market and a
division of Harcourt Brace & Company (the "Harcourt Agreement"). Pursuant to the
Harcourt Agreement, the Company agreed to collaborate with Harcourt in the
development of multimedia educational software products. Under the Harcourt
Agreement, the Company receives ongoing research and development co-funding fees
and received a one-time license fee in fiscal 1995.
NET REVENUES
<TABLE>
<CAPTION>
($ 000s) 1996 Change 1995 Change 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Multimedia software products:
Consumer channel $18,694 72% $10,865 231% $ 3,286
Education channel 5,166 52% 3,402 264% 934
------- ------- -------
Subtotal 23,860 67% 14,267 238% 4,220
======= ======= =======
Special education
products 6,080 (14%) 7,104 (5%) 7,443
Other 2,248 67% 1,348 na 0
------- ------- -------
Total $32,188 42% $22,719 95% $11,663
======= ======= =======
- -------------------------------------------------------------------------------------------
</TABLE>
1996 COMPARED TO 1995.
Net revenues were $32,188,000 in fiscal 1996, an increase of 41.7% from
$22,719,000 in fiscal 1995.
MULTIMEDIA EDUCATIONAL SOFTWARE PRODUCTS. Net revenues from the Company's
multimedia educational software products were $23,860,000 in fiscal 1996, an
increase of 67.2% from $14,267,000 in fiscal 1995.
Consumer channel sales of the Company's multimedia educational software
products represented 58.1% of fiscal 1996 net revenues compared to 47.8% in
fiscal 1995, and were $18,694,000 in fiscal 1996, an increase of 72% from
$10,865,000 in fiscal 1995. The significant increase in consumer channel sales
was due primarily to an increase in the number of products available for sale
and a broader retail shelf space
<PAGE> 12
presence. The Company had a total of 14 multimedia educational software titles
at June 30, 1996, compared to nine titles at June 30, 1995. During fiscal 1996,
the Company released five new titles compared to four new titles in fiscal 1995.
Sales of CD-ROM products represented 84% of total consumer channel sales in
fiscal 1996 compared to 51% in fiscal 1995.
At the time of product shipment, the Company establishes allowances for
stock balancing, price protection, and returns of defective, shelf-worn and
damaged products, and for other estimated future returns of products. Product
returns during fiscal 1996 amounted to $3,655,000 or 16.1% of gross consumer
sales compared to $2,426,000 or 17.3% of gross consumer sales in fiscal 1995.
The increase in returns was primarily related to inventory stock balancing and
returns of product associated with an industry shift to Windows 95-based
products. The Company believes that returns due to defective product or
customers' dissatisfaction were insignificant. The Company's allowance for
product returns amounted to $1,387,000 at June 30, 1996, compared to $1,054,000
at June 30, 1995.
Sales of multimedia educational software products in the education channel
were $5,166,000 in fiscal 1996, an increase of 52% from $3,402,000 in fiscal
1995. This increase was primarily due to the Company's new product releases as
well as from increased penetration into the school market.
SPECIAL EDUCATION PRODUCTS. Sales of special education products were
$6,080,000 in fiscal 1996, a decrease of 14% from $7,104,000 in fiscal 1995. The
decline represented primarily decreased sales of products developed and
published by other companies.
OTHER. Under the Harcourt Agreement, the Company recognized research and
development co-funding revenue of $2,248,000 in fiscal 1996 and $348,000 in
fiscal 1995. In fiscal 1995, the Company also received a one-time fee of $1.0
million for the licensing of certain software technology and as a non-refundable
advance on royalties from future Harcourt sales.
1995 COMPARED TO 1994.
Net revenues were $22,719,000 in fiscal 1995, an increase of 95% from
$11,663,000 in fiscal 1994.
MULTIMEDIA EDUCATIONAL SOFTWARE PRODUCTS. Net revenues from the Company's
multimedia educational software products were $14,267,000 in fiscal 1995, an
increase of 238% from $4,220,000 in fiscal 1994.
Consumer channel sales of the Company's multimedia educational software
products represented 47.8% of fiscal 1995 net revenues compared to 28.2% in
fiscal 1994, and were $10,865,000 in fiscal 1995, an increase of 231% from
$3,286,000 in fiscal 1994. The significant increase in consumer channel sales
was due primarily to an increase in the number of products available for sale
and a broader retail shelf space
<PAGE> 13
presence. The Company had a total of nine multimedia educational software titles
at June 30, 1995, compared to five titles at June 30, 1994. During fiscal 1995,
the Company released four new titles compared to three new titles in fiscal
1994. Sales of CD-ROM products represented 51% of total consumer channel sales
in fiscal 1995. Substantially all of the Company's CD-ROM products were released
in the Company's 1995 second fiscal quarter.
Product returns during fiscal 1995 amounted to $2,426,000, or 17.3% of
gross consumer sales, compared to $309,000, or 8.2% of gross consumer sales in
fiscal 1994. The increase in returns was primarily related to inventory stock
balancing, returns of floppy disk products and returns of MS-DOS-based products
associated with an industry shift to CD-ROM-based and Windows-based products.
The Company believes that returns due to defective products or customers'
dissatisfaction were insignificant. The Company's allowance for product returns
amounted to $1,054,000 at June 30, 1995, compared to $310,000 at June 30, 1994.
Sales of multimedia educational software products in the education channel
were $3,402,000 in fiscal 1995, an increase of 264% from $934,000 in fiscal
1994. This increase was primarily due to the Company's new product releases as
well as from increased penetration into the school market.
SPECIAL EDUCATION PRODUCTS. Sales of special education products were
$7,104,000 in fiscal 1995, a decrease of 5% from $7,443,000 in fiscal 1994. The
decline was primarily due to decreased sales of software products developed and
published by other companies.
OTHER. Under the Harcourt Agreement, the Company recognized a one-time fee
of $1.0 million for the licensing of certain software technology and as a
non-refundable advance on royalties from future Harcourt sales during the
Company's 1995 third fiscal quarter. The Company also recognized $348,000 of
research and development co-funding revenue during the Company's 1995 fourth
fiscal quarter.
COST OF REVENUES
<TABLE>
<CAPTION>
($ 000s) 1996 Change 1995 Change 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost of sales $7,574 15% $ 6,608 57% $4,200
Royalties 55 (65%) 159 (27%) 220
Amortization of capitalized
software costs - na - na 1,046
------ ------- ------
Total $7,629 13% $ 6,767 24 $5,466
====== ======= ======
As a percentage of net
revenues 23.7% 29.8% 46.9%
====== ======= ======
- -----------------------------------------------------------------------------------------------------
</TABLE>
Cost of revenues was $7,629,000 in fiscal 1996, an increase of 13% from
$6,767,000 in fiscal 1995, but decreased as a percentage of net revenues to
23.7% in fiscal 1996 from 29.8% in fiscal 1995. Excluding revenues under the
Harcourt Agreement, cost of revenues was 25.5% in fiscal 1996 compared to 31.7%
in fiscal 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.
<PAGE> 14
Cost of revenues was $6,767,000 in fiscal 1995, an increase of 24% from
$5,466,000 in fiscal 1994, but decreased as a percentage of net revenues to
29.8% in fiscal 1995 from 46.9% in fiscal 1994. Excluding revenues under the
Harcourt Agreement, cost of revenues was 31.7% in fiscal 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 and to the absence of
capitalized software cost amortization expense.
Effective January 1, 1994, the Company reduced the remaining time period
over which previously capitalized software costs were amortized. This change was
made in recognition of the fact that the software market in general, and the
education software market in particular, had become increasingly more
competitive and subject to technological change. The effect of this change was
to increase expense by $456,000 in fiscal 1994. At June 30, 1994, all
capitalized software costs were fully amortized.
SALES AND MARKETING
<TABLE>
<CAPTION>
($ 000s) 1996 Change 1995 Change 1994
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $12,232 64% $7,467 61% $4,640
======= ====== ======
As a percentage
of net revenues 38.0% 32.9% 39.8%
======= ====== ======
- -------------------------------------------------------------
</TABLE>
Sales and marketing expenses were $12,232,000 in fiscal 1996, an increase of 64%
from $7,467,000 in fiscal 1995, and increased as a percentage of net revenues to
38.0% in fiscal 1996 from 32.9% in fiscal 1995. The expense increase is related
primarily to increased sales of the Company's line of multimedia educational
software products in the consumer channel.
Sales and marketing expenses were $7,467,000 in fiscal 1995, an increase
of 61% from $4,640,000 in fiscal 1994, but decreased as a percentage of net
revenues to 32.9% in fiscal 1995 from 39.8% in fiscal 1994. The expense increase
is related primarily to increased sales of the Company's line of multimedia
educational software products.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
($ 000s) 1996 Change 1995 Change 1994
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $2,783 34% $2,070 13% $1,825
====== ====== ======
As a percentage
of net revenues 8.6% 9.1% 15.6%
====== ====== ======
- -------------------------------------------------------------
</TABLE>
General and administrative expenses were $2,783,000 in fiscal 1996, an increase
of 34% from $2,070,000 in fiscal 1995, but decreased as a percentage of net
revenues to 8.6% in fiscal 1996 from 9.1% in fiscal 1995. The expense increase
was 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.
General and administrative expenses were $2,070,000 in fiscal 1995, an
increase of 13% from $1,825,000 in fiscal 1994, but decreased as a percentage
<PAGE> 15
of net revenues to 9.1% in fiscal 1995 from 15.6% in fiscal 1994. The expense
increase was primarily due to higher salaries and costs associated with the
Company's expanded operations. However, these costs increased at a rate less
than the increase in sales due to greater economies of scale.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
($ 000s) 1996 Change 1995 Change 1994
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expense $8,122 76% $4,615 115% $2,146
====== ====== ======
As a percentage
of net revenues 25.2% 20.3% 18.4%
====== ====== ======
- --------------------------------------------------------------
</TABLE>
Research and development expenses were $8,122,000 in fiscal 1996, an increase of
76% from $4,615,000 in fiscal 1995, and increased as a percentage of net
revenues to 25.2% in fiscal 1996 from 20.3% in fiscal 1995. 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 represented a substantial portion
of this expense increase.
Research and development expenses were $4,615,000 in fiscal 1995, an
increase of 115% from $2,146,000 in fiscal 1994, and increased as a percentage
of net revenues to 20.3% in fiscal 1995 from 18.4% in fiscal 1994. The increase
in research and development expenses was primarily attributable to costs
associated with continued expansion of the Company's line of multimedia
educational software products. Salaries and related costs represented a
substantial portion of this expense increase.
INCOME TAXES
<TABLE>
<CAPTION>
($ 000s) 1996 1995 1994
- ------------------------------------------------------
<S> <C> <C> <C>
Expense (benefit) $ 472 $163 $ (283)
===== ==== ======
Effective tax rate 19.0% 7.5% (12.7)%
===== ==== ======
- ------------------------------------------------------
</TABLE>
Income tax expense in fiscal 1996 amounted to $472,000, or 19.0% of earnings
before income taxes. The Company's 1996 effective tax rate differed from the
statutory rate due to tax exempt interest income and partial recognition of
deferred tax assets, which were reserved at June 30, 1995.
Income tax expense in fiscal 1995 amounted to $163,000, or 7.5% of
earnings before income taxes. The Company's effective tax rate differed from the
statutory rate due to utilization of tax credit carryforwards and partial
recognition of deferred tax assets, which were fully reserved at June 30, 1994.
The Company's effective tax rate was (12.7%) in fiscal 1994. The fiscal
1994 rate is less than the statutory rate because the Company provided an
allowance against its deferred tax assets.
The Company expects that its effective tax rate in fiscal 1997 will
increase to more closely approximate the Federal statutory rate, as reduced by
the impact of research and experimentation tax credits, if any, and tax exempt
interest income.
<PAGE> 16
FUTURE OPERATING RESULTS
The Company's business has been highly seasonal, and its quarterly operating
results have fluctuated substantially. Sales of the Company's multimedia
educational software products in the consumer channel exhibit a strong seasonal
trend, with sales higher during the second quarter, which includes the holiday
selling season. Sales of multimedia educational products and special education
products in the education channel tend to be higher during the spring and
summer, the Company's fourth and first fiscal quarters, which encompass peak
buying periods under school budget cycles.
The Company's quarterly operating results are also affected by the number,
amount and timing of new product introductions, product shipments, acceptance by
consumers of new products, product mix, product returns, marketing expenditures,
promotional programs and product development expenditures.
The Company uses multiple channels of distribution to sell its software
products, including distributors, specialty software stores, retail chains,
computer superstores, mass merchants, discount warehouse stores, educational
dealers, catalogs and direct mail. The loss of, or significant reduction in
sales volume attributable to, any of the Company's principal distributors or
accounts sold through distributors or retailers could have a material adverse
effect on the Company's business, operating results and financial condition.
A significant portion of the Company's operating expenses is relatively
fixed, and planned expenditures in any given quarter are based on sales
forecasts. If net revenues do not meet the Company's expectations in any given
quarter, operating results would be adversely affected. In addition, if planned
product introductions are delayed beyond their peak selling seasons, the
Company's business, financial condition and operating results could be adversely
affected in any particular quarter.
Sections of the Report either contained herein or incorporated by
reference contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Actual results could differ materially from those projected in any
forward-looking statement as a result of either the risk factors interspersed,
where applicable, in the underlying discussion or by other factors, including
anticipation of growth of the educational software market, the competitive
environment in the consumer software industry, consumer confidence levels and
dependence on other products such as Windows 95. Additional information on these
and other factors that could affect the Company's financial results are included
in the Company's 1996 Annual Report on Form 10-K and its Form 10-Qs for the
fiscal quarters ended September 30, 1995, December 31, 1995, and March 31, 1996,
on file with the Securities and Exchange Commission.
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
On August 9, 1995, the Company sold 638,873 shares of its common stock, which
raised net proceeds of approximately $22.3 million. As of June 30, 1996, the
Company had cash and short-term investments of $25.8 million, long-term
investments of $7.0 million, and working capital of $30.7 million. The Company
has no long-term debt obligations.
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 fiscal 1996, the Company's operating activities provided cash
of $3.0 million, and the Company invested $1.9 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.
STOCK PRICE FLUCTUATION
There is currently only a limited trading market for the Company's common stock.
The trading price of the Company's common stock has been and in the future could
be subject to wide fluctuations in response to quarterly variations in operating
results; announcements of technological innovations or new products by the
Company or its competitors; changes in earnings estimates by securities
analysts; general conditions in the software, computer and educational
industries; the limited trading market in the Company's common stock and other
events or factors. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations that have particularly
affected the market price of many high technology companies and that often have
been unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations may adversely affect the market price
of the Company's common stock.
<PAGE> 18
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues (Note 5) $32,187,944 22,718,705 11,663,352
Cost of revenues (Note 7) 7,628,924 6,766,832 5,465,975
-----------------------------------------------
Gross profit 24,559,020 15,951,873 6,197,377
===============================================
Operating expenses:
Sales and marketing 12,232,139 7,467,261 4,639,931
General and administrative 2,782,816 2,070,043 1,824,950
Research and development 8,122,177 4,615,062 2,145,907
-----------------------------------------------
Total operating expenses 23,767,132 14,152,366 8,610,788
===============================================
Operating income (loss) 1,421,888 1,799,507 (2,413,411)
Interest Income 1,063,196 387,448 192,916
-----------------------------------------------
Earnings (loss) before income taxes 2,485,084 2,186,955 (2,220,495)
Income tax expense (benefit) (Note 6) 471,926 163,278 (283,091)
-----------------------------------------------
Net earnings (loss) $ 2,013,158 2,023,677 (1,937,404)
===============================================
Net earnings (loss) per share $ 0.28 0.32 (0.40)
-----------------------------------------------
Weighted average number of shares outstanding 7,297,962 6,326,097 4,864,101
===============================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 19
<TABLE>
<CAPTION>
BALANCE SHEETS
June 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and short term investments (Note 2) $25,838,795 8,204,275
Trade accounts receivable, net of allowances for doubtful accounts and
sales returns of $1,524,059 in 1996 and $1,103,771 in 1995 (Note 5) 3,828,788 3,570,732
Inventories 1,663,402 1,685,757
Refundable Federal income taxes 475,403 59,677
Deferred Federal income taxes (Note 6) 1,057,491 629,601
Prepaid expenses and other assets 549,391 308,407
-----------------------------
Total current assets 33,413,270 14,458,449
-----------------------------
Equipment and leasehold improvements, at cost:
Equipment 4,573,041 3,143,915
Leasehold Improvements 906,320 476,800
-----------------------------
Total equipment and leasehold improvements 5,479,361 3,620,715
Less accumulated depreciation and amortization 2,442,204 1,388,720
-----------------------------
Net equipment and leasehold improvements 3,037,157 2,231,995
-----------------------------
Long-term marketable securities (Note 2) 6,957,798 -
-----------------------------
Total assets $43,408,225 16,690,444
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 720,621 916,165
Accrued liabilities (Note 3) 2,196,594 2,087,046
-----------------------------
Total current liabilities 2,917,215 3,003,211
-----------------------------
Shareholders' equity (Note 4):
Common stock, no par value. Authorized 30,000,000 shares;
issued and outstanding 6,626,672 in 1996 and 5,477,970 shares in 1995 37,752,801 12,962,182
Retained earnings 2,738,209 725,051
-----------------------------
Total shareholders' equity 40,491,010 13,687,233
-----------------------------
Commitments (Note 7)
Total liabilities and shareholders' equity $43,408,225 16,690,444
=============================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 20
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained Total
---------------------------- Earnings Shareholders'
Shares Amount (Deficit) Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at June 30, 1993 4,509,475 $ 7,036,917 638,778 $ 7,675,695
Sales of common stock for cash,
net of issuance costs of $106,215 825,000 5,393,785 - 5,393,785
Exercise of stock options 27,000 43,900 - 43,900
Net loss - - (1,937,404) (1,937,404)
--------------------------------------------------------------------
Balances at June 30, 1994 5,361,475 12,474,602 (1,298,626) 11,175,976
Common stock sold pursuant to
employee stock purchase plan 7,557 62,094 - 62,094
Exercise of stock options 108,938 299,780 - 299,780
Tax benefit realized upon exercise
of stock options - 125,706 - 125,706
Net earnings - - 2,023,677 2,023,677
--------------------------------------------------------------------
Balances at June 30, 1995 5,477,970 12,962,182 725,051 13,687,233
Sale of common stock for cash,
net of issuance costs of $389,952 638,873 22,341,149 - 22,341,149
Common stock sold pursuant to
employee stock purchase plan 7,117 138,969 - 138,969
Exercise of stock warrants 346,274 250,000 - 250,000
Exercise of stock options 156,534 686,512 - 686,512
Tax benefit realized upon exercise
of stock options - 1,377,229 - 1,377,229
Fractional shares from stock split (96) (3,240) - (3,240)
Net earnings - - 2,013,158 2,013,158
--------------------------------------------------------------------
Balances at June 30, 1996 6,626,672 $37,752,801 2,738,209 $40,491,010
====================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 21
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30, 1996 1995 1994
- -------------------- ---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 2,013,158 2,023,677 (1,937,404)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 1,053,484 555,528 1,349,224
Deferred income tax expense (benefit) (427,890) (629,601) 93,832
Change in operating assets and liabilities:
Increase in trade accounts receivable (258,056) (1,979,716) (272,182)
Decrease (increase) in inventories 22,355 (425,161) (248,022)
Decrease (increase) in refundable Federal income taxes 59,677 397,086 (321,342)
Decrease (increase) in prepaid expenses and other assets (240,984) 35,626 (34,377)
Increase (decrease) in trade accounts payable (195,544) 288,925 71,761
Increase in accrued liabilities 1,011,374 1,458,582 399,784
------------ --------- ----------
Net cash provided (used) by operating activities 3,037,574 1,724,946 (898,726)
------------ --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in marketable securities (19,762,246) 2,782,990 (4,986,021)
Purchase of equipment and leasehold improvements (1,858,646) (1,318,872) (905,817)
Increase in capitalized software costs -- -- (200,566)
------------ --------- ----------
Net cash provided (used) by investing activities (21,620,892) 1,464,118 (6,092,404)
------------ --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stock 23,413,390 361,874 5,437,685
------------ --------- ----------
Net increase (decrease) in cash and
cash equivalents 4,830,072 3,550,938 (1,553,445)
Cash and cash equivalents at beginning of year 4,028,632 477,694 2,031,139
------------ --------- ----------
Cash and cash equivalents at end of year 8,858,704 4,028,632 477,694
Short term investments 16,980,091 4,175,643 6,958,633
------------ --------- ----------
Cash and short-term investments at end of year $ 25,838,795 8,204,275 7,436,327
============ ========= =========
Supplemental disclosure of cash flow information --
cash paid during the year for income taxes $ 64,899 726,850 --
============ ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
Years Ended June 30, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. DESCRIPTION OF BUSINESS
Edmark Corporation (Company) develops and publishes educational software
and other products for the consumer and education markets. The Company's
customer base is geographically diverse and consists primarily of software
distributors and retailers and educational institutions.
b. CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, all short-term investments
with original maturities of three months or less are considered to be cash
equivalents.
c. INVESTMENTS
The Company accounts for investments under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The Company's investment securities are classified
as held-to-maturity, and as such, are carried at amortized cost.
d. ACCOUNTS RECEIVABLE
Accounts receivable are principally from distributors and retailers of the
Company's products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses and returns.
The Company generally extends credit on open account without requiring
collateral.
e. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value) and consist of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Work in Process $ 821,977 976,722
Finished Goods 841,425 709,035
---------- ---------
$1,663,402 1,685,757
========== =========
</TABLE>
f. DEPRECIATION AND AMORTIZATION
Depreciation and amortization of equipment and leasehold improvements are
provided on the straight-line method over the estimated useful lives of the
assets, which range from three to seven years, or the lease term, if
shorter.
g. REVENUE RECOGNITION
The Company recognizes revenue upon product shipment, net of an allowance
for returns and exchanges, provided that the Company has no remaining
obligations and collection of the resulting receivable is deemed probable
by management. Subject to certain limitations, the Company permits
customers to obtain exchanges or return products within certain specified
periods of time. Revenues from non-refundable license fees are recognized
as income when earned. Warranty costs and post-sale support, which have
been immaterial, are accrued at the time of sale.
<PAGE> 23
h. ADVERTISING
The Company expenses the production cost of advertising the first time the
advertising takes place, except for direct response advertising, which is
capitalized and amortized over its expected period of future benefit.
Direct response advertising consists of an annual product catalog, the
costs of which are amortized using the straight-line method over a 12-month
period.
The net book value of capitalized costs at June 30, 1996, and 1995, was
$152,791 and $106,341 respectively. Advertising expense amounted to
$6,030,954 in 1996, $3,448,582 in 1995 and $1,948,386 in 1994.
i. RESEARCH AND DEVELOPMENT
Research and development costs related to designing, developing and testing
new software products are charged to expense as incurred. Generally
accepted accounting principles provide for the capitalization of certain
software development costs once technological feasibility is established.
The cost so capitalized is then amortized over the estimated product life
or the ratio of current to projected product revenues, whichever is
greater. The Company has not capitalized any such costs since January 1,
1994, as technological feasibility is generally not established until
substantially all development is complete.
Effective January 1, 1994, the Company reduced to six months the remaining
time period over which previously capitalized software costs were
amortized. This change was made because the software market in general, and
education software in particular, has become increasingly more competitive
and subject to technological change. The effect of this change was to
increase expense by $456,000, or $0.09 per share, in 1994.
j. INCOME TAXES
The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Deferred tax assets and liabilities are
measured using currently enacted tax rates that are expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
k. NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed using the weighted average number
of common and dilutive common share equivalents outstanding during the
year. Common equivalent shares consist of options and warrants to purchase
common stock using the treasury stock method. Fully diluted earnings per
share for all periods presented were not materially different from primary
earnings per share.
l. RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." SFAS No.
123 permits a company to choose either a new fair value-based method or the
current Accounting Principles Board Opinion No. 25 (APB No. 25) intrinsic
value-based method of accounting for its stock-based compensation
arrangements. The Company intends to continue to account for employee stock
options under APB No. 25. SFAS No. 123 is effective for fiscal years
beginning after December 15, 1995, and will require certain additional
disclosures in the Company's fiscal 1997 financial statements.
<PAGE> 24
m. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
n. RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform to the 1996 presentation.
NOTE 2 CASH AND INVESTMENTS
A summary of cash and investments at June 30 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash and equivalents:
Cash $ 2,642,374 729,833
Municipal securities -- 1,400,544
Money market funds 6,216,330 1,300,163
Commercial paper -- 598,092
----------- ---------
Cash and equivalents 8,858,704 4,028,632
----------- ---------
Short-term investments:
Commercial paper 10,717,375 4,175,643
Money market preferreds 6,262,816 --
----------- ---------
Short-term investments 16,980,091 4,175,643
----------- ---------
Cash and short-term investments $25,838,795 8,204,275
=========== =========
Long-term marketable securities $ 6,957,798 --
=========== =========
</TABLE>
The current value of the Company's investments approximated fair value at June
30, 1996, and 1995. Long-term marketable securities are in the form of municipal
securities with maturities of not more than two years.
NOTE 3 ACCRUED LIABILITIES
A summary of accrued liabilities at June 30 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrued compensation $ 430,117 520,168
Customer prepayments -- 626,581
Other 1,766,477 940,297
---------- ---------
$2,196,594 2,087,046
========== =========
</TABLE>
<PAGE> 25
NOTE 4 SHAREHOLDERS' EQUITY
a. STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN
The Company has a stock option plan (Plan) to compensate key employees for
past and future services and has reserved 1,950,000 shares of common stock
for option grants under the Plan. Generally, options vest, based on
continued employment, over a four-year period in equal cumulative yearly
increments beginning one year from the date of grant. The options expire
ten years from the date of grant and are exercisable at the fair market
value of the common stock at the grant date.
A summary of stock options under the Plan follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------
AVAILABLE NUMBER PRICE
FOR GRANT OF SHARES PER SHARE
--------- --------- ---------
<S> <C> <C> <C>
Balances at June 30, 1993 315,000 510,000 $ 1.17 - 7.17
Authorization of additional shares 750,000 -- --
Options granted (507,000) 507,000 6.33 - 8.50
Options relinquished 58,875 (58,875) 1.17 - 8.00
Options exercised -- (27,000) 1.17 - 2.00
------- --------- --------------
Balances at June 30, 1994 616,875 931,125 1.17 - 8.50
Options granted (482,250) 482,250 6.33 - 24.33
Options relinquished 237,975 (237,975) 6.50 - 6.83
Options exercised -- (107,438) 1.17 - 8.50
------- --------- --------------
Balances at June 30, 1995 372,600 1,067,962 1.83 - 24.33
Authorization of additional shares 375,000 -- --
Options granted (471,675) 471,675 20.25 - 41.00
Options relinquished 292,469 (292,469) 6.50 - 41.00
Options exercised -- (137,784) 1.83 - 19.33
------- --------- --------------
Balances at June 30, 1996 568,394 1,109,384 $ 1.83 - 41.00
======= ========= ==============
</TABLE>
At June 30, 1996, 450,497 shares were exercisable at an average price of
$12.80 per share.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In October 1995, the Company adopted a non-employee Director Stock Option
Plan to compensate non-employee directors of the Company for past and
future services and has reserved 120,000 shares of common stock for option
grants. On the third business day following the day of each Annual Meeting
of Shareholders, each non-employee director will be granted an option to
purchase 2,000 shares of the Company's common stock. The options are fully
vested on the date of grant, expire ten years from the date of grant, and
are exercisable at the fair market value of the common stock at the grant
date. At June 30, 1996, 16,000 shares have been granted under the plan at
an exercise price of $44.00 per share.
<PAGE> 26
During fiscal 1992, options to purchase 67,500 shares of the Company's
common stock at prices ranging from $2.50 to $3.50 were granted to certain
Directors of the Company. The options vest over a four-year period and
expire ten years from the date of grant. During fiscal 1996, 18,750 shares
were exercised at $3.50 and $2.50 per share and, during fiscal year 1995,
1,500 options were exercised at $2.50 per share. At June 30, 1996, 49,250
shares were outstanding, all of which were fully vested at an average price
of $3.21 per share.
b. STOCK WARRANTS
In connection with the sale of 825,000 shares of common stock in February
1994, warrants to purchase 412,500 shares of common stock were issued with
an exercise price of $6.67 per share. The warrants were exercised in August
1995.
c. EMPLOYEE STOCK PURCHASE PLAN
In November 1994, the Company adopted an Employee Stock Purchase Plan
(Purchase Plan) and reserved 150,000 shares of common stock for issuance
under the Purchase Plan. Under the Purchase Plan, an eligible employee may
purchase shares of common stock, based on certain limitations, at a price
equal to the lesser of 85% of the fair market value of the common stock at
the beginning or end of the respective semi-annual periods.
NOTE 5 SIGNIFICANT CUSTOMER
One customer accounted for approximately 17% and 20% of net revenues in fiscal
1996 and 1995, respectively, and had an accounts receivable balance of $958,000
and $1,055,000 at June 30, 1996, and 1995, respectively. No customer accounted
for more than 10% of net revenues in fiscal 1994.
NOTE 6 INCOME TAXES
Components of income tax expense (benefit) are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ 899,816 792,879 (376,923)
Deferred (427,890) (629,601) 93,832
--------- ------- --------
$ 471,926 163,278 (283,091)
========= ======= ========
</TABLE>
Income tax expense (benefit) differs from "expected" income tax (benefit)
(computed by applying the U.S. Federal income tax rate of 34%) in 1996 due to
the exempt interest income and a reduction in the valuation allowance on net
deferred tax assets. The 1995 effective tax rate differed from the statutory
rate due to utilization of research and experimentation tax credits and a
reduction in the valuation allowance on net deferred tax assets and the 1994
effective tax rate differed principally due to the change in the valuation
allowance related to deferred tax assets.
<PAGE> 27
The tax effects of temporary differences that give rise to significant portions
of net deferred tax assets are comprised of the following at June 30, 1996, and
1995:
<TABLE>
<CAPTION>
DESCRIPTION 1996 1995
----------- ---- ----
<S> <C> <C>
Deferred tax assets:
Inventory $ 350,870 113,983
Accounts receivable 526,680 375,282
Capitalized software costs 143,745 191,659
Accrued liabilities 155,720 229,796
Gross deferred tax assets 1,177,015 910,720
---------- -------
Less valuation allowance 100,000 213,460
---------- -------
Total deferred tax assets 1,077,015 697,260
Deferred tax liabilities - depreciation 19,524 67,659
---------- -------
Net deferred tax assets $1,057,491 629,601
========== =======
</TABLE>
The valuation allowances for deferred tax assets was $604,474 at July 1, 1994.
The net change in the total valuation allowance was decreases of $113,460 in
1996 and $391,014 in 1995 and an increase of $604,474 in 1994.
NOTE 7 COMMITMENTS
a. LEASE COMMITMENTS
The Company occupies its current facilities under terms of noncancelable
operating leases that expire at various dates through August 1998, subject
to extension at the Company's option. The terms of the leases provide for
annual payments of approximately $775,000.
Rent expense under noncancelable operating leases amounted to $693,541 in
1996, $386,823 in 1995 and $310,388 in 1994.
b. PROFIT SHARING AND SALARY DEFERRAL PLAN
The Company has a profit sharing and salary deferral plan (Plan) that
covers substantially all employees. The Company, at its discretion, may
make contributions to the Plan, although it has not made any such
contributions to date. Although the Company has no present intent to do so,
it may terminate this Plan and the benefits provided at any time. The
Company has no other post-employment or post-retirement benefit plans.
c. ROYALTIES
The Company has development agreements with independent developers, which
provide for royalties on product sales. Royalty expense (included in cost
of revenues) under these agreements amounted to $54,932 in 1996, $159,327
in 1995 and $173,802 in 1994.
d. DEVELOPMENT AGREEMENT
On December 15, 1994, the Company entered into a strategic alliance with
Harcourt Brace School Publishers (Harcourt), a division of Harcourt Brace &
Company, a publisher in the education market. Pursuant to the Master
Development and Distribution Agreement (Agreement), the Company and
Harcourt agreed to collaborate in the
<PAGE> 28
development of certain new educational software products. The Company
recognized $2,248,245 and $347,513 of research and development co-funding
revenue during fiscal 1996 and 1995, respectively, under this agreement.
Under the Agreement, the Company also received $1.0 million, which was
recognized as revenue in 1995, for the licensing of certain software
technology to Harcourt and as a non-refundable advance on royalties from
future Harcourt sales.
NOTE 8 SUPPLEMENTARY UNAUDITED FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTERS
--------
1996 FIRST SECOND THIRD FOURTH TOTAL
---- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Net revenues $6,931,826 12,706,247 6,109,706 6,440,165 $32,187,944
Gross profit 5,266,125 9,638,943 4,804,564 4,849,388 24,559,020
Operating expenses 5,152,059 6,608,764 5,351,129 6,025,180 23,167,132
Operating income (loss) 114,066 3,030,179 (546,565) (1,175,792) 1,421,888
Net earnings (loss) 241,639 2,407,390 (139,617) (496,254) 2,013,158
Net earnings (loss) per share 0.03 0.33 (0.02) (0.07) 0.28
<CAPTION>
1995
----
<S> <C> <C> <C> <C> <C>
Net revenues $4,136,863 6,696,211 5,563,075 6,322,556 $22,718,705
Gross profit 2,863,372 4,508,913 4,116,414 4,463,174 15,951,873
Operating expenses 3,097,293 3,460,513 3,325,814 4,268,746 14,152,366
Operating income (loss) (233,922) 1,048,400 790,600 194,429 1,799,507
Net earnings (loss) (154,068) 1,064,266 843,896 269,583 2,023,677
Net earnings (loss) per share (0.03) 0.17 0.13 0.04 0.32
</TABLE>
Quarterly per share amounts do not add to the total due to changes in the number
of weighted average shares outstanding throughout the year.
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
EDMARK CORPORATION:
We have audited the accompanying balance sheets of Edmark Corporation as of June
30, 1996 and 1995, and the related statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Edmark Corporation as of
June 30, 1996 and 1995, and the results of its operations and its cash flows for
each of the years in the three-year period ended June 30, 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Seattle, Washington
July 19, 1996
27
<PAGE> 30
CORPORATE INFORMATION
OFFICERS
SALLY G. NARODICK
Chairman and Chief Executive Officer
PAUL N. BIALEK
Vice President - Finance and Administration
and Chief Financial Officer
JOHN R. MOORE
Vice President - Operations
DONNA G. STANGER
Vice President - Product Development
DANIEL P. VETRAS
Vice President - Consumer Sales
BOARD OF DIRECTORS
SALLY G. NARODICK
Chairman and Chief Executive Officer
Edmark Corporation
FRANCES M. CONLEY
Principal
Roanoke Capital, Ltd.
ALLAN EPSTEIN
President and Chief Executive Officer
Orthopedic Systems, Inc.
HARVEY N. GILLIS
Senior Vice President of Finance
and Administration and Chief
Financial Officer
Advanced Technology Laboratories, Inc.
ALLEN D. GLENN, PH.D.
Dean of College of Education
University of Washington
DOUGLAS J. MACKENZIE
Partner
Kleiner Perkins Caufield & Byers
TIMOTHY MOTT
Partner
Ironwood Capital
W. HUNTER SIMPSON
Private Investor
RICHARD S. THORP
President
Supertronix, Inc.
CORPORATE OFFICES
Edmark Corporation
6727 185th Avenue NE
Redmond, WA 98052
(206) 556-8400
LEGAL COUNSEL
Lane Powell Spears Lubersky LLP
Seattle, WA
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Seattle, WA
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services, Inc., LLC
Ridgefield Park, NJ
Inquiries regarding change of address,
stock transfer or your shareholder account
should be directed to ChaseMellon
Shareholder Services.
Telephone no. 1-800-522-6645
ANNUAL MEETING
The 1996 annual meeting of shareholders
will be held at 2:00 p.m. on Wednesday,
October 23, 1996, at:
Woodmark Hotel
1200 Carillon Point
Kirkland, WA 98033
FORM 10-K
Copies of the Company's annual report on Form 10-K filed with the SEC are
available, without charge, upon written request to the Company, attention
investor relations.
COMMON STOCK
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "EDMK". There is currently only a limited trading market for shares of
the Company's common stock and accordingly there is no assurance that any
quantity of the common stock could be sold at or near reported trading prices.
The following table sets forth for the periods indicated the high and low
closing prices for the Company's common stock. These quotations represent prices
between dealers and do not include retail markups, markdowns or commissions, and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
Fiscal Year Ended June 30, 1996: ----------------------------
<S> <C> <C>
First Quarter $49.00 27.42
Second Quarter 49.13 29.25
Third Quarter 40.25 20.75
Fourth Quarter 32.00 18.25
Fiscal Year Ended June 30, 1995:
First Quarter 7.17 6.50
Second Quarter 10.33 6.50
Third Quarter 17.08 9.67
Fourth Quarter 27.50 16.17
</TABLE>
The Company has not paid any cash dividends and does not intend to pay any cash
dividends in the foreseeable future.
As of August 15, 1996, there were approximately 582 holders of record of the
Company's common stock. Most of such shares are held by brokers and other
institutions on behalf of shareholders.
Edmark, the Edmark logo, Millie's Math House, Bailey's Book House, Thinkin'
Things and TouchWindow are registered trademarks and KidDesk Family Edition;
Sammy's Science House; Trudy's Time & Place House; Stanley's Sticker Stories;
Strategy Challenges; Imagination Express; Destination: Time Trip, USA; Mighty
Math; Carnival Countdown and Number Heroes are trademarks of Edmark Corporation.
Windows is a registered trademark of Microsoft Corporation. Macintosh is a
registered trademark of Apple Computer, Inc.
28
<PAGE> 31
In a horizontal line in the middle of the page, eight characters or symbols
from the Company's educational software products appear.
At the bottom of the page a character and a symbol from the Company's Trudy's
Time and Place House product appear.
