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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended Commission file number
June 30, 1996 0-19339
EDMARK CORPORATION
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(Exact Name of Registrant as specified in its charter)
WASHINGTON 91-0858263
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(State of Incorporation) (I.R.S. Employer Identification No.)
6727 185TH AVENUE N.E., REDMOND, WA 98052
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 556-8400
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
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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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value as of August 15, 1996 of the voting stock held by
nonaffiliates of the Registrant was approximately $78,063,652. As of such date,
there were 6,626,672 shares outstanding of the Registrant's Common Stock, no par
value per share.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Edmark is a leading developer and publisher of multimedia educational software
and other educational products for the home and school markets. The Company's
multimedia educational software products are targeted primarily for children 2
to 14 years of age and are designed to teach basic and complex thinking skills
and to stimulate children's creativity and imagination. The Company's products
are designed to be engaging for children by utilizing open-ended, exploratory
environments that emphasize learning activities, humorous characters and
interesting settings and themes. Edmark has created multiple product families,
consisting of the Early Learning family, the Thinkin' Things family, the Mighty
Math family and the Imagination Express family. The Company also has one
product, Strategy Challenges Collection 1, in what is expected to become a new
product family, and the Company has also created KidDesk Family Edition, a
graphical front end designed to make computer use easier for young children. The
Company believes that by creating product families, it encourages brand name
recognition and repeat purchases. The Company has 16 multimedia educational
software titles. The Company's software products generally have retail prices
that range from approximately $25 to $45.
The Company's products have won over 100 industry awards since the introduction
of the Company's first multimedia educational software title in 1992. These
awards include the 1992, 1993 and 1995 MacUser Magazine Editors' Choice Award
for Best Children's Program, the Software Publishers Association's Excellence in
Software Award for Best Early Education Program (1993, 1994 and 1996) and Best
Educational Tool Program (1993 and 1994), the 1995 New Media INVISION Gold and
Silver Awards for Best Elementary Education Product and numerous other awards
from consumer and education publications and organizations. The Company believes
that it has garnered industry and customer recognition because of its commitment
to high quality, educationally innovative products that focus on teaching
children critical thinking and learning skills.
The Company also publishes and markets a special education product line that
includes the Edmark Reading Program family of products and the Company's
TouchWindow products, relatively low-cost touch screens used in special
education and early childhood programs. The Company's special education products
are sold through a dealer network, catalogs and direct mail.
Sections of this 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.
The Company was incorporated in the state of Washington in July 1970. Its
executive offices are located at 6727 185th Avenue, N.E., Redmond, Washington
98052 and its telephone number is (206) 556-8400.
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INDUSTRY BACKGROUND
The market for educational software is relatively small, but growing. It is
often described in two market segments: consumer and education. The Company
competes in both of these segments. The factors driving the growth in the market
include increasing numbers of young children, increasing penetration of personal
computers into homes, expanding distribution channels for educational software,
growth in consumer and educational publications featuring educational software,
increasing interest from parents in supplementing children's education and
increasing awareness of the potential of multimedia as an effective educational
tool. Link Resources Inc. estimates that in 1995, 45% of households with
children owned personal computers and that by 1998 the penetration of personal
computers into households with children will rise to approximately 55%.
The Company believes that success in the home educational software market
requires software companies to produce software that will appeal to both parents
and children. This requires products to incorporate a strong educational
component, which is appealing for parents, as well as engaging content that
holds the interest of children. The Company believes that the combination of
these elements is a key component for success in the home market.
The distribution channels for consumer educational software products have
expanded significantly in recent years. Traditionally, these products were sold
through specialty software stores. Today, these products are increasingly sold
through these and other distribution channels, including computer superstores,
consumer electronics stores, mass merchants, office supply, discount warehouse
stores, toy stores and bookstores, among others. While the number of
distribution outlets has increased, competition for retail shelf space and
customer awareness has also increased due to growth in the numbers of products
and publishers competing for that shelf space and awareness. The Company
believes that, with the proliferation of software titles, retailers have begun
to select products and companies with proven reputations or brand identity,
making it more difficult for other publishers to gain shelf space.
The educational software industry also has been characterized over the last few
years by a high degree of consolidation, which favors companies with greater
resources than the Company. This consolidation has provided certain of the
Company's competitors with increased financial resources, marketing power and
distribution capabilities. Larger companies that offer a wide range of products
also may find it easier to gain access to shelf space than smaller companies,
such as the Company, and they are more able to proliferate product offerings,
including bundles and suites for a single low price. This strategy is used to
dominate shelf space and may tend to reduce shelf lives and prices for
individual products. In addition, consolidation may tend to result in increased
price competition for educational software products.
The market for educational software for schools is also expanding and changing
rapidly. School sales of educational software are being driven by growth in
penetration of computers into schools, upgrades of the installed base to new
multimedia computers, increases in the number of teachers trained to incorporate
technology-based products into their curriculum and changes in state and federal
funding authorizations to encourage the use of technology-based instructional
materials. The Company believes that distributors and vendors marketing to the
educational software market in schools choose products on the basis of their
educational content and the reputation of the publisher and its products among
teachers and other educational professionals.
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PRODUCTS
MULTIMEDIA EDUCATIONAL SOFTWARE PRODUCTS
The Company's multimedia educational software products are targeted primarily
for children 2 to 14 years of age and are designed to teach basic and complex
thinking skills and to stimulate children's creativity and imagination. Edmark
has created multiple product families, consisting of the Early Learning family,
the Thinkin' Things family, the Mighty Math family and the Imagination Express
family. The Company also has one product, Strategy Challenges Collection 1, in
what is expected to become a new product family, and the Company has also
created KidDesk Family Edition, a graphical front end designed to make computer
use easier for young children. The Company believes that by creating product
families, it encourages brand name recognition and repeat purchases. The Company
has 16 multimedia educational software titles. The Company's software products
generally have retail prices that range from approximately $25 to $45.
The Company's products have won over 100 industry awards since the introduction
of the Company's first multimedia educational software title in 1992. These
awards include the 1992, 1993 and 1995 MacUser Magazine Editors' Choice Award
for Best Children's Program, the Software Publishers Association's Excellence in
Software Award for Best Early Education Program (1993, 1994 and 1996) and Best
Educational Tool Program (1993 and 1994), the 1995 New Media INVISION Gold and
Silver Awards for Best Elementary Education Product and numerous other awards
from consumer and education publications and organizations. The Company believes
that it has garnered industry and customer recognition because of its commitment
to high quality, educationally innovative products that focus on teaching
children critical thinking and learning skills. The Company's products are
designed to be engaging for children by utilizing open ended, exploratory
environments that emphasize learning activities, humorous characters and
interesting settings and themes.
Currently, the Company's products are designed for Macintosh, Windows 95 and
Windows 3.1 operating environments. The Company's line of Windows 95 products
retain the capability to run under Windows 3.1 and take advantage of several
Windows 95 features that make launching and using the programs easier and more
intuitive for consumers. For example, the products contain AutoPlay, a feature
that allows children to directly launch an application by simply inserting the
CD-ROM into the CD-ROM drive.
The Company's existing products are set forth in the table below. No single
multimedia educational software title accounted for more than 10% of net
revenues in fiscal 1996.
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<TABLE>
<CAPTION>
INITIAL
RELEASE
PRODUCTS AND PRODUCT FAMILIES DATE OPERATING ENVIRONMENT MEDIA
- ----------------------------- --------- ----------------------- -------
<S> <C> <C> <C>
KidDesk Family Edition 10/92 Mac, Windows 3.1, CD-ROM
Windows 95
Early Learning Family
Millie's Math House 10/92 Mac, Windows 95* CD-ROM
Bailey's Book House 6/93 Mac, Windows 95* CD-ROM
Sammy's Science House 6/94 Mac, Windows 95* CD-ROM
Trudy's Time & Place House 9/95 Mac, Windows 95* CD-ROM
Stanley's Sticker Stories 6/96 Mac, Windows 3.1+ CD-ROM
Thinkin' Things Family
Thinkin' Things Collection 1 9/93 Mac, Windows 95* CD-ROM
Thinkin' Things Collection 2 10/94 Mac, Windows 95* CD-ROM
Thinkin' Things Collection 3 10/95 Mac, Windows 95* CD-ROM
Strategy Games Family
Strategy Challenges Collection 1 11/95 Mac, Windows 95* CD-ROM
Mighty Math Family
Carnival Countdown 7/96 Mac, Windows 95* CD-ROM
Number Heroes 7/96 Mac, Windows 95* CD-ROM
Imagination Express Family
Destination: Neighborhood 11/94 Mac, Windows 3.1+ CD-ROM
Destination: Castle 11/94 Mac, Windows 3.1+ CD-ROM
Destination: Rain Forest 5/95 Mac, Windows 3.1+ CD-ROM
Destination: Ocean 10/95 Mac, Windows 3.1+ CD-ROM
</TABLE>
* Designed for Windows 95; compatible with Windows 3.1.
+Runs on Windows 95 and Windows 3.1.
EARLY LEARNING FAMILY. Products in this family are designed for children 2 to 6
years of age. All instructions are spoken and accompanied by visual cues so
nonreaders can explore the activities independently.
Millie's Math House, released in October 1992 and enhanced in August 1995, is an
early math program designed to introduce and reinforce math skills. Through
activities such as building bugs and creating patterns, children learn to count,
name shapes, identify numbers and sets and develop sequencing skills. Millie's
Math House has received 18 awards, including the 1993 Software Publishers
Association Excellence in Software Award for Best Early Education Program and
the 1992 MacUser Magazine Editors' Choice Award for Best Children's Program.
Bailey's Book House, released in June 1993 and enhanced in August 1995, is
designed to introduce and reinforce a variety of early childhood language
development and pre-reading curriculum skills. The program encourages children
to learn letters, words, stories and rhyming. Bailey's Book House has received
nine awards, including the 1994 Parent's Choice Award for Best Early Childhood
Software.
Sammy's Science House, released in June 1994, is designed to encourage
scientific exploration through five activities that develop observation,
classification, comparison and problem-solving skills. Sammy's Science House has
received nine awards, including the 1995 Family Channel Seal of Quality and the
1994 Parent's Choice Award for Software.
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Trudy's Time & Place House, released in September 1995, is designed to encourage
children to enjoy exploring geography and time. Children build time-telling
skills; develop mapping and direction skills; and "travel" the world learning
about continents, oceans and landmarks. Trudy's Time & Place House has received
four awards, including the 1996 Software Publishers Association Excellence in
Software Award for Best Early Education Program.
Stanley's Sticker Stories, released in June 1996, is designed to help children
strengthen reading and writing skills, improve spelling and build creativity
while they create their own animated storybooks featuring Millie, Bailey, Sammy,
Trudy and their other Edmark pals from the Early Learning family products.
THINKIN' THINGS FAMILY. Products in this family are designed to encourage the
development of essential thinking skills. This family currently consists of
three titles:
Thinkin' Things Collection 1, released in September 1993, is a program designed
to develop thinking skills essential for learning success for children four to
eight years of age. Six activities are designed to enhance problem solving,
creativity, critical thinking and memory skills. Children explore musical
patterns and build memory skills, develop predictive and investigative skills,
recognize relationships and build their understanding of rule formation.
Thinkin' Things Collection 1 has received 21 awards including the 1995 Newsweek
Editors' Choice Award, the 1994 Software Publishers Association Excellence in
Software Awards for Best Early Education Program and the 1993 MacUser Magazine
Editor's Choice Award for Best Children's Program.
Thinkin' Things Collection 2, released in October 1994, is a program with five
activities designed to develop memory, creativity, spatial awareness and other
higher thinking skills for children six to twelve years of age. The program
introduces the concept of musical notation through symbol and sound
relationships and introduces three-dimensional thinking with an activity that
allows two-dimensional images to be displayed in three-dimensional format.
Thinkin' Things Collection 2 has received nine awards, including the 1995 New
Media INVISION Gold Award for Best Elementary Education Product.
Thinkin' Things Collection 3, released in October 1995, is a powerful set of
tools and activities designed to help children seven to thirteen years of age
analyze and synthesize information, strengthen inductive and deductive reasoning
and examine and interpret information. Thinkin' Things Collection 3 has received
five awards including the 1996 Software Publishers Association Excellence in
Software Awards for Best Education Software Program.
STRATEGY CHALLENGES COLLECTION 1, released in November 1995, is the first
product in what the Company expects will become a product family. This program
is designed to develop problem-solving strategies centered around three classic
games that are fun and easy to learn--Mancala, Nine Men's Morris and Go-Moku.
The program also features interactive Strategy Coaches, Real-World Videos and
multimedia Game Guides and is for children from eight to fourteen years of age.
Strategy Challenges Collection 1 has received two awards including the 1996
FamilyPC FamilyTested Recommended Award.
MIGHTY MATH FAMILY. Edmark plans to release a comprehensive series of math
products that will consist of a total of six titles for children from five to
fourteen years of age. The programs are designed to teach both basic skills and
the conceptual underpinnings of curriculm-based math subjects from addition and
subtraction to algebra and geometry. The six titles will be broken out into
three groups comprised of two titles each. Each group covers the complete math
curriculum for that specific age range and skill level. The products will offer
a deep amount of math content, including hundreds of comprehensive problem sets.
These products are all being developed under the Harcourt strategic alliance.
See "Harcourt Relationship." The first two titles in this series were released
in July 1996, and the Company expects to release an additional three titles in
fall 1996, with the final title to be released in late fiscal year 1997.
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Mighty Math Carnival Countdown, released in July 1996, is a program designed to
develop problem solving and logic, place value, addition and subtraction,
sorting and classification and early multiplication and division skills. The
program is the first of two products for children from five to seven years of
age. The second product in this age range is expected to be released in fall
1996.
Mighty Math Number Heroes, released in July 1996, is a program designed to
develop conceptual and thinking skills required for math success. The program
features four activities that focus on the following skill areas: problem
solving, addition and subtraction, multiplication and division, fractions,
geometry and graphs and charts. The program is the first of two products for
children from eight to ten years of age. The second product in this age range is
expected to be released in fall 1996.
IMAGINATION EXPRESS FAMILY. Products in this family are designed to encourage
the development of language arts skills through a variety of interactive
story-making activities. These products utilize richly painted background scenes
in a variety of settings together with music, sound effects and numerous
stickers to allow children ages six to twelve to create their own multimedia
stories. Imagination Express also utilizes a proprietary auto-sizing technology
developed by Edmark, which enables children to manipulate characters within an
environment and maintain true-to-life perspective. Imagination Express titles
are available for personal computers on CD-ROM. Imagination Express has received
18 awards, including the 1995 Newsweek Editors' Choice Award and the 1995 New
Media INVISION Silver Award for Best Elementary Education Product.
Destination: Neighborhood, released in November 1994, has photo-realistic
characters and provides children with numerous tolls to create interactive
stories, poems and journals describing their real and make-believe experiences.
Destination: Castle, released in November 1994, features a rich watercolor art
style, and utilizes a medieval kingdom where knights, jesters and wild boars
become actors and props in interactive stories. Also included is the Castle Fact
Book, which is replete with information about the many colorful characters,
objects and scenes found in this destination.
Destination: Rain Forest, released in May 1995, is based on a real Panamanian
rain forest that features exotic plants, trees, waterfalls and native dwellings.
This product also includes the Rain Forest Fact Book, which contains information
about rain forest ecology, the indigenous Kuna Indian people and exotic animals
native to the region.
Destination: Ocean, released in October 1995, features a marine learning
destination. This product also includes the Ocean Fact Book, which contains
information about marine life and the ocean environment.
KIDDESK FAMILY EDITION. KidDesk Family Edition, released in November 1993, is
the successor to KidDesk, originally released in October 1992. KidDesk Family
Edition is a graphical user interface designed to make computer use easier for
young children. In addition, KidDesk Family Edition is a utility that allows
parents and teachers to prevent young children from accessing areas of the hard
disk that contain valuable programs or data. KidDesk Family Edition contains
nine desk accessories for young children, including a calendar, a calculator, an
analog and digital clock, a voice messaging system and other accessories.
KidDesk was originally released for MS-DOS and Macintosh computers, although the
MS-DOS version has been discontinued. KidDesk Family Edition was released for
the Windows operating environment and incorporates several enhanced features,
including voice mail and e-mail for family members as well as an electronic card
file. KidDesk and KidDesk Family Edition have received 14 industry awards,
including the Software Publishers Association Excellence in Software Awards for
Best Educational Tool Program (1993 and 1994) and Best User Interface in a New
Program (1993).
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SCHOOL VERSIONS
All of the Company's multimedia educational software products are also available
in school versions. The school versions, which are packaged in three-ring
binders, include teacher guides with lesson plan ideas designed to integrate the
software into the classroom activities. The school versions also include
enhanced customer support and an extended guarantee. School versions are
generally priced 20-30% above the consumer versions, but are available with
volume discounts for site licenses and lab packs.
SPECIAL EDUCATION PRODUCTS
The Company also publishes and markets a special education product line, which
includes the Edmark Reading Program family of products and the Company's
TouchWindow products, relatively low-cost touch screens used in special
education and early childhood programs. The Company's special education products
are sold through a dealer network, catalogs and direct mail.
The Edmark Reading Program family of products is the largest and most
established of the Company's special education print and software products. It
is a beginning reading and language development program used with
low-functioning special education students and in a variety of programs with
learning disabled, English as a second language and other special needs
populations. The program is available in both print and Apple II software
versions. The various levels and versions of the Edmark Reading Program have
suggested list prices from $350 to $500, and discounts are available on
combination packages.
The TouchWindow product is a resistive membrane touch screen that attaches to
computer monitors with velcro and plugs into standard computer ports, allowing
the monitor to be used as a touch-sensitive input device. Touch access is one of
the most direct ways to interact with the computer and is especially effective
for some developmentally delayed, learning disabled and physically handicapped
students. The TouchWindow product is available for Macintosh, Windows, MS-DOS
and Apple II computers. All of the Company's software products and many of its
distributed software products are TouchWindow-compatible. The TouchWindow
products have suggested list prices from $275 to $335, and is primarily sold
through a dealer network and the Company's catalog. The Company provides a one
year warranty on its TouchWindow products.
DISTRIBUTED PRODUCTS
The Company distributes products developed and published by other companies to
the special education market. These products include both print and software
products designed to teach basic skills or provide a variety of test, assessment
or skill-building activities.
PRODUCT DEVELOPMENT
The Company's products are purchased primarily by adults but are used by
children. To appeal to the child, the product must be engaging and easy to use.
The Company's research and development process involves substantial input at
various stages of development from parents, teachers, other professional
educators and children. Each product is tested for educational and developmental
appropriateness, technical quality, compliance with product specifications,
adherence to user interface standards and operability on a broad variety of
hardware configurations.
The Company develops products using teams of Company employees experienced in
education, programming, music, digitized speech, sound, graphics, quality
assurance, marketing, finance and project management. The Company employs
several educators with advanced degrees and several other employees with
teaching credentials and teaching experience. Millie's Math House and Bailey's
Book House were designed by an outside contract developer and developed using a
com-
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bination of both internal and contract resources with project management,
educational content, design control and other involvement and ownership by the
Company. KidDesk Family Edition was designed internally and developed using both
internal and contract resources. Except for these early products, all of the
Company's multimedia software products have been designed and developed
internally by the Company. The Company's internal development teams are often
supplemented by outside technical and education professionals, designers,
artists, engineers, authors and others on a contract basis.
The Company utilizes sophisticated technological tools and develops proprietary
technologies to create interfaces and environments that enhance the educational
experience. For example, the Company has developed a proprietary
three-dimensional technology in the Thinkin' Things family to help children
develop spatial awareness thinking skills, and a proprietary "auto-sizing"
technology in the Imagination Express family to help children learn about visual
perspective.
The Company's success is largely dependent on its ability to develop new
products. The Company also depends on product upgrades and enhancements to
lengthen the life cycle of its products. The development of new products and the
incorporation of new technologies into its existing products may require greater
development time and expense in the future than the Company has experienced to
date. The Company has increased, and anticipates that it will continue to
increase, the resources devoted to new product development. Also, the emergence
of new technologies and increasing competition are expected to cause the Company
to invest significantly more time and resources in establishing technological
and market feasibility of its products.
In the past, the Company has experienced delays in the introduction of its
products, and may experience such delays in the future. A significant delay in
the introduction of a new product could adversely affect the success of the
product and the Company's operating results. There can be no assurance that the
Company will be able to introduce successful new products in the future, nor any
assurance that products will be introduced on schedule.
The Company must manage its software development efforts to anticipate and adapt
to changes in popular computer operating environments and other evolving
technologies. The Company's multimedia educational software products are
designed for use on Macintosh and Microsoft Windows operating environments. The
Company will continue to evaluate other computer platforms and operating
environments for its products as they may become available. There can be no
assurance that the Company will be able to anticipate and adapt to changes in
computer platforms and other evolving technologies in a timely manner.
Technological advances are providing opportunities for improvement in the
sophistication, technical capability and performance of educational and other
software products. The Company expects that these trends will result in
increased demand for consumer software utilizing the sound, graphics and data
capabilities of the latest hardware technology, and may also result in increased
development costs, shorter life cycles and the need for increasingly
sophisticated development teams and tools. There can be no assurance that the
Company will be able to meet these demands in a competitive or cost-effective
manner.
HARCOURT RELATIONSHIP
On December 15, 1994, the Company entered into a strategic alliance (the
"Agreement") with Harcourt Brace School Publishers, a publisher in the
educational market and a division of Harcourt Brace & Company, to develop new
multimedia educational software products. Pursuant to the Agreement, Harcourt
has agreed to co-fund the development of products in the Imagination Express
family and in the Mighty Math family. However, Harcourt has the right to
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terminate the Agreement or to terminate its commitment to co-fund these products
at any time, subject to payment of certain fees. If Harcourt chooses to exercise
its termination rights, the Company's operating results would be adversely
affected. Harcourt also has certain rights to distribute co-developed products
to the school channel.
SALES AND MARKETING
The Company sells its software products in both the consumer and school markets
and uses multiple channels of distribution, including distributors, specialty
software stores, retail chains, computer superstores, mass merchants, discount
warehouse stores, educational dealers, catalogs and direct mail. The Company has
distribution relationships with several major independent software distributors,
including ABCO, GT Interactive Software, Ingram, Navarre and Merisel. The
Company also has direct selling relationships with several of the major computer
and software retailing and dealer organizations in the United States, including
Egghead Software. Sales are generally based on individual purchase orders
submitted by customers or pursuant to distribution agreements that are generally
terminable by the Company or the distributor on 30 days notice. Sales to the top
customers represented 61%, 72% and 61% of the Company's net sales of its
multimedia software products in the consumer market for fiscal 1994, 1995 and
1996, respectively. Sales to distribution accounts represented 80%, 72% and 69%
of the Company's net sales of its multimedia software products in the consumer
market for fiscal 1994, 1995 and 1996, respectively. Sales of the Company's
products to Ingram accounted for 40% and 27% of the Company's consumer channel
net sales in fiscal 1995 and 1996, respectively. 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.
The Company maintains a stock balancing policy that allows distributors and
retailers to return products according to negotiated terms or pursuant to any
promotional terms that may be in effect. The Company attempts to monitor and
manage the volume of its sales to distributors and retailers to avoid their
overstocking of the Company's products, but is not able to exercise significant
control over such entities. The Company also accepts returns of defective,
shelf-worn and damaged products at any time in accordance with negotiated terms.
At the time of product shipment, the Company establishes allowances, including
allowances for stock balancing, price protection and returns of defective,
shelf-worn and damaged products, and for estimated potential future returns of
products. Product returns that exceed the Company's allowances could materially
adversely affect the Company's business and operating results. Furthermore, it
may be difficult for the Company to accurately estimate allowances for products
sold through new distribution channels, such as general mass merchandisers, with
which the Company has limited past sales history or from which the Company
receives little or no infomation regarding sales to end users.
The Company uses various marketing techniques designed to promote brand
awareness and to support the sales efforts of its distributors and direct
accounts. The Company promotes its products directly to teachers and consumers
through public relations activities; presentations and exhibits at major trade
shows, conferences and users group meetings; direct mailing of catalogs,
brochures and product offerings and advertising in targeted publications. The
Company supports the sales efforts of its distributors and direct accounts
through sales support programs, the provision of market development and
cooperative advertising funds, specific promotional efforts and in-store
displays. The Company also licenses a limited number of its products to be
bundled with products sold by hardware vendors.
The Company has an agreement with an Ireland-based company for manufacture and
distribution of localized versions of the Company's multimedia educational
software products for sales in
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western Europe and Japan. The agreement is renewable biannually. The Company
also has an exclusive relationship for the distribution of its software products
in Australia and New Zealand.
Products are generally shipped within three days of the time orders are
received, and, accordingly, the Company has historically operated with little or
no backlog. Because of the generally short cycle between order and shipment, the
Company does not believe that its backlog as of any particular date is
meaningful.
CUSTOMER AND TECHNICAL SUPPORT
The Company provides a variety of customer and technical support services to
purchasers of its software products. End users are able to consult with support
personnel regarding software use, hardware problems and peripheral needs.
Support services are available via telephone, facsimile response and a variety
of voice mail and online service options. The Company offers a 30-day
unconditional guarantee for its consumer software products.
For all of its products sold to the school market, the Company provides a
toll-free customer support service and access to trained educational
professionals. The Company provides a variety of preview, sample and
demonstration options and allows a teacher to preview a product and return it
within 30 days if the product does not meet the teacher's needs. The Company's
education products are sold with a variety of lesson plans, recordkeeping tools
and other materials to support teachers.
COMPETITION
The educational software industry in which the Company operates is very
competitive. Many competitors have substantially greater financial, technical,
marketing and distribution resources than the Company. In the consumer market,
the Company competes against a large number of companies of varying sizes and
resources, including, but not limited to, Broderbund Software, Inc., Davidson &
Associates, The Walt Disney Company, Maxis, Inc., GT Interactive Software, Inc.,
Microsoft Corporation, Sierra On-Line, Inc., and Softkey, as well as a number of
other privately and publicly held companies. There is an increasing number of
competitive products offered by a growing number of companies. Increased
competition in the consumer market for educational software may result in a loss
of retail shelf space, reduction in sell-through of the Company's products at
retail stores, or additional price competition, any of which could have a
material adverse effect on the Company's operating results. In the school
market, the Company competes against many of these same companies and against
other companies specializing in supplemental software and print products for the
special education and early childhood market segments. Existing competitors may
continue to broaden their product lines and potential competitors, including
large computer or software manufacturers, entertainment companies and
educational publishers, may enter or increase their focus on the educational
market, resulting in greater competition for the Company.
The Company's TouchWindow product line competes with other touch-sensitive
computer monitors and screens and other types of alternative input devices in
the school market. Many of these products are offered by companies with greater
resources than the Company. Management believes that companies with greater
resources and economies of scale may seek to enter this market and provide
substantial competition.
INTELLECTUAL PROPERTY
The Company regards its software and other education products as proprietary and
relies primarily on a combination of copyright, trademark and trade secret laws,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. The Company does
11
<PAGE> 12
not have any patents or patent applications pending with respect to any of its
products. The Company does not include any mechanisms to prevent or inhibit
unauthorized copying, nor does the Company currently rely on "shrink-wrap"
licenses that restrict copying and use of its software products. The Company is
aware that unauthorized copying occurs within the software industry, and if a
significant amount of unauthorized copying of the Company's products were to
occur, the Company's business, financial condition and operating results could
be adversely affected. As the number of software products in the industry
increases and the functionality of these products further overlaps, software
developers may increasingly become subject to infringement claims. Although
there are currently no infringement claims against the Company, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products or that any
such assertion will not require the Company to enter into royalty arrangements
or costly litigation.
As the Company continues to introduce new products and to incorporate new
technologies, it anticipates that some of its products may be subject to
licenses of proprietary rights from third parties, which may include royalty
arrangements.
PRODUCTION
For each software product, the Company prepares master software disks, user
manuals and packaging. Disks are acquired in large quantities from various
sources. User manuals are printed and related materials are manufactured to the
Company's specifications by third parties. Completed packages are assembled by
the Company or third parties. The Company utilizes the services of third party
manufacturers for disk duplication and product assembly. To date, the Company
has not experienced any material difficulties or delays in the manufacture or
assembly of its products or any material number of returns due to product
defects.
The Company contracts with a range of suppliers to print and supply components
for software and print products. The Company utilizes a competitive bid process
to purchase these product parts and orders components of its special education
print products in quantities that minimize per unit costs. The Company orders
sufficient quantities of distributed products to maintain between a 30-day and
60-day inventory of each product.
The Company assembles the TouchWindow on its premises. Most of the components
are available from several suppliers and are sourced through a competitive bid
process. The acrylic membrane panel for the TouchWindow is obtained from one
supplier. Several alternative suppliers are available to supply the membrane
panel, but the lead time to add suppliers for this component is four to six
months. The Company generally maintains higher inventory levels of this
component to minimize the supply risk.
EMPLOYEES
As of June 30, 1996, the Company had 209 full-time employees. Of these, 116 were
primarily engaged in product development, 64 in sales and marketing and customer
support, 13 in manufacturing and shipping, and 16 in finance and administration.
None of the Company's employees are represented by a labor union. The Company
believes its relationships with its employees are good.
The Company's future success greatly depends on the continued services of its
key product development, technical, marketing, sales and management personnel,
and its ability to continue to attract, motivate and retain highly qualified
employees. In particular, the Company is highly dependent upon the management
services of Sally G. Narodick, Chairman and Chief Executive Officer, and upon
the product development services of Donna G. Stanger, Vice President -- Product
Development. The Company does not have key person life insurance covering any of
its
12
<PAGE> 13
personnel. The Company's key personnel may voluntarily terminate their
employment with the Company at any time. Competition for such employees is
intense and the process of locating key technical, product development and
management personnel with the combination of skills and attributes required to
execute the Company's strategy is often lengthy. Accordingly, the loss of
services of key personnel or an inabiltiy to attract additional personnel as
needed could have a material adverse effect upon the Company. For example, in
May 1996, the Company's Vice President -- Marketing resigned and this position
is currently unfilled. A key position within the Company's senior management
team, the Vice President -- Marketing is responsible for the overall market
positioning and distribution strategies for the Company's multimedia products in
the consumer channel. There can be no assurance that the Company will be able to
recruit a qualified individual for this position in a timely manner.
ITEM 2. PROPERTIES
The Company's facilities in Redmond, Washington, include 92,600 square feet
consisting of approximately 70,100 square feet of office space and 17,500 square
feet of manufacturing and warehouse space. The leases for these facilities,
representing four locations, expire at various dates from May 1998 to November
1998, and the Company has options to renew each of the leases for three years at
the then-prevailing market rates.
ITEM 3. LEGAL PROCEEDINGS
Power Industries, Inc., v. Edmark Corporation, described in Part II of Item 1 of
the Company's Forms 10-Q for the quarters ended December 31, 1995, and March 31,
1996, was settled on August 9, 1996, for an insignificant amount. The complaint
in that lawsuit alleged that the Company's use of Imagination Express as a
product name infringed a trademark of Power Industries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated herein by reference to the
information contained in the "Corporate Information" section of the Company's
1996 Annual Report to Shareholders, a portion of which section is included in
Exhibit 13.1 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference to the
information contained in the "Selected Financial Data" section of the Company's
1996 Annual Report to Shareholders, which section is included in Exhibit 13.1
hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated herein by reference to the
information contained in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of the Company's 1996 Annual Report
to Shareholders, which section is included in Exhibit 13.1 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by this Item is incorporated herein by reference to the
"Financial Statements" section of the Company's 1996 Annual Report to
Shareholders, which section is included in Exhibit 13.1 hereto.
13
<PAGE> 14
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
information contained in the "Executive Officers of the Company" and "Election
of Directors" section of the Company's Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information contained in the "Executive Compensation" section of the Company's
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days after the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
information contained in "Security Ownership of Certain Beneficial Owners and
Management" section of the Company's Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The Company's Annual Report to Shareholders for the year ended June 30, 1996 and
the 1996 definitive proxy materials, which will be filed supplementally to this
report, are not being filed as part of this report.
A. Financial Statements and Financial Statement Schedules:
1. Financial Statements (The financial statements listed below are
incorporated herein by reference to the Company's 1996 Annual
Report to Shareholders, which statements are included in Exhibit
13.1 hereto.):
Independent Auditors' Report
Balance Sheets as of June 30, 1996, and 1995
Statements of Operations for the years ended June 30, 1996, 1995
and 1994
Statements of Shareholders' Equity for the years ended June 30,
1996, 1995 and 1994
Statements of Cash Flows for the years ended June 30, 1996, 1995
and 1994
Notes to Financial Statements
2. Financial Statement Schedules:
Independent Auditors' Report
Schedule VIII -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not required or because the
information is presented in the financial statements or notes thereto.
B. Reports on Form 8-K:
There were no reports on Form 8-K filed during the fourth quarter ended
June 30, 1996.
14
<PAGE> 15
C. Exhibits:
Exhibits required by Item 601 of Regulation S-L.
<TABLE>
<CAPTION>
Exhibit Number Description
- ------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation (incorporated by reference to Form
10-Q for the quarter ended December 31, 1996)
3.2 Bylaws (as amended November 29, 1995)(incorporated by reference to
Form 10-Q for the quarter ended December 31, 1995)
4.1 Specimen of Common Stock Certificate (incorporated by reference to
Form 10-K for the year ended June 30, 1993)
4.2 Shareholder Rights Agreement (incorporated by reference to Form 10-Q
for the quarter ended December 31, 1995)
10.1 Edmark Corporation Stock Option Plan (restated as of July 14, 1995)
(incorporated by reference to Form S-8, Registration No. 33-64825)
10.2 Lease between Therriault-Fleck and Edmark Corporation dated
March 21, 1991 (incorporated by reference to Form 10 filed June 7, 1991)
10.3 Redmond East Business Campus Lease (incorporated by reference to
Form 10-K for the year ended June 30, 1993)
10.4 Narrative Description of the Management Incentive Awards Programs
of Edmark Corporation (incorporated by reference to Form 10-K for
the year ended June 30, 1993)
10.5 Directors' Stock Option Agreement for each of Allan Epstein,
Harvey N. Gillis, Allen Glenn, R. Alex Polson and W. Hunter Simpson
(incorporated by reference to Form 10-K for the year ended
June 30, 1992)
10.6 1995 Non-Employee Directors' Stock Option Plan (incorporated by
reference to Form S-8, Registration No. 33-64823)
13.1 Portions of Edmark Corporation Annual Report to Security-Holders
for the year ended June 30, 1996 incorporated by reference herein
filed herewith
23.1 Consent and Report of KPMG Peat Marwick LLP filed herewith
27.1 Financial Data Schedule
</TABLE>
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
August 30, 1996 By: /s/ SALLY G.NARODICK
---------------------------------
Sally G. Narodick
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ SALLY G.NARODICK Chairman, Chief Executive August 30, 1996
- ------------------------------ Officer and Director
Sally G. Narodick
/s/ PAUL N. BIALEK Vice President -- Finance and August 30, 1996
- ------------------------------ Administration, Chief Financial
Paul N. Bialek Officer, Treasurer and Secretary
(Principal Accounting and Financial Officer)
/s/ FRANCES M. CONLEY Director August 30, 1996
- ------------------------------
Frances M. Conley
/s/ ALLAN EPSTEIN Director August 30, 1996
- ------------------------------
Allan Epstein
/s/ HARVEY N.GILLIS Director August 30, 1996
- ------------------------------
Harvey N. Gillis
Director August 30, 1996
- ------------------------------
Allen Glenn
/s/ DOUGLAS J. MACKENZIE Director August 30, 1996
- ------------------------------
Douglas J. Mackenzie
/s/ TIMOTHY MOTT Director August 30, 1996
- ------------------------------
Timothy Mott
/s/ W. HUNTER SIMPSON Director August 30, 1996
- ------------------------------
W. Hunter Simpson
/s/ RICHARD S. THORP Director August 30, 1996
- ------------------------------
Richard S. Thorp
</TABLE>
16
<PAGE> 1
EXHIBIT 13.1
Portions of Edmark Corporation Annual Report to Security-Holders
for the Year Ended June 30, 1996 Incorporated by Reference.
<PAGE> 2
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> 3
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> 4
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> 5
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> 6
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 $1,825,000 in fiscal 1994, but decreased as a percentage
<PAGE> 7
of net revenues to 9.1% in fiscal 1995 from 15.6% in fiscal 1994. The expense
increase was primarily due to higher salaries and costs associated with the
Company's expanded operations. However, these costs increased at a rate less
than the increase in sales due to greater economies of scale.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
($ 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> 8
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> 9
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> 10
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> 11
<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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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.
<PAGE> 1
Exhibit 23.1
The Board of Directors and Shareholders
Edmark Corporation:
The audits referred to in our report dated July 19, 1996, included the related
financial statement schedule for each of the years in the three-year period
ended June 30, 1996. This financial statement schedule is the responsibility of
the Company's management. Our reponsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to incorporation by reference in the registration statements (Nos.
33-88208, 33-64825 and 33-64823) on Form S-8 of Edmark Corporation of our report
dated July 19, 1996, relating to the 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, which report is incorporated by reference in the June 30, 1996 annual
report on Form 10-K of Edmark Corporation.
KPMG PEAT MARWICK LLP
Seattle, Washington
August 30, 1996
17
<PAGE> 2
Schedule VIII
EDMARK CORPORATION
Valuation and Qualifying Accounts
Years Ended June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------------------------- ----------- -------------------------- --------------- -------------
Additions
--------------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End
Description of Period Expenses Accounts Deductions(1) of Period
- -------------------------- ----------- ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Allowances for Doubtful
Accounts and Sales Returns:
Year Ended June 30, 1994 $ 178,019 523,880 -- 330,147 371,752
Year Ended June 30, 1995 371,752 3,175,974 -- 2,443,955 1,103,771
Year Ended June 30, 1996 1,103,771 4,092,165 -- 3,671,877 1,524,059
</TABLE>
(1) Accounts written off and product returned.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
COMPANY'S FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K FOR THE FISCAL YEAR
ENDED JUNE 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 25,838,795
<SECURITIES> 0
<RECEIVABLES> 5,352,847
<ALLOWANCES> 1,524,059
<INVENTORY> 1,663,402
<CURRENT-ASSETS> 33,413,270
<PP&E> 5,479,361
<DEPRECIATION> 2,442,204
<TOTAL-ASSETS> 43,408,225
<CURRENT-LIABILITIES> 2,917,215
<BONDS> 0
0
0
<COMMON> 37,752,801
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,491,010
<SALES> 32,187,944
<TOTAL-REVENUES> 32,187,944
<CGS> 7,628,924
<TOTAL-COSTS> 7,628,924
<OTHER-EXPENSES> 23,137,132
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,485,083
<INCOME-TAX> 471,925
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,013,158
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
