-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WCXNI5xB/MfJQ0bfxA5qRPXNg/ZVgWjTbHu/GNr2Dhr7RA1xT1zPL31PcGwdrrMB roHY1YHMhxZCONlNoWfRZA== 0000912057-96-028704.txt : 19961225 0000912057-96-028704.hdr.sgml : 19961225 ACCESSION NUMBER: 0000912057-96-028704 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19961118 DATE AS OF CHANGE: 19961224 SROS: NASD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: EDMARK CORP CENTRAL INDEX KEY: 0000777249 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 910858263 STATE OF INCORPORATION: WA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: 1934 Act SEC FILE NUMBER: 005-45537 FILM NUMBER: 96677658 BUSINESS ADDRESS: STREET 1: 6727 185TH AVE NE STREET 2: PO BOX 97021 CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 2065568400 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: EDMARK CORP CENTRAL INDEX KEY: 0000777249 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 910858263 STATE OF INCORPORATION: WA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 6727 185TH AVE NE STREET 2: PO BOX 97021 CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 2065568400 SC 14D9 1 SC 14D9 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ EDMARK CORPORATION (Name of Subject Company) EDMARK CORPORATION (Name of Person Filing Statement) ------------------------------ COMMON STOCK, NO PAR VALUE (INCLUDING THE ASSOCIATED RIGHTS TO PURCHASE COMMON STOCK) (Title of Class of Securities) ------------------------------ 281094 20 1 (CUSIP Number of Class of Securities) ------------------------------ PAUL N. BIALEK VICE PRESIDENT--FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER, SECRETARY AND TREASURER EDMARK CORPORATION 6727 185TH AVENUE NE REDMOND, WASHINGTON 98052 (206) 556-8400 (Name, address and telephone number of person authorized to receive notices and communications on behalf of the person filing this Statement) ------------------------------ COPIES TO: MICHAEL E. MORGAN, ESQ. LAWRENCE J. STEELE, ESQ. LANE POWELL SPEARS LUBERSKY 1420 FIFTH AVENUE, SUITE 4100 SEATTLE, WASHINGTON 98101 (206) 223-7000 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- INTRODUCTION This Solicitation/Recommendation Statement on Schedule 14D-9 (this "Statement") relates to an offer by Indigo Acquisition Corp., a Washington corporation (the "Purchaser") which is a wholly owned subsidiary of International Business Machines Corporation, a New York corporation ("IBM"), to purchase all of the Shares (as defined below) of Edmark Corporation, a Washington corporation (the "Company"). Capitalized terms used herein and not otherwise defined herein shall have the meaning assigned to them in the Offer to Purchase dated November 18, 1996, a copy of which is filed as Exhibit (a)(1) hereto (the "Offer to Purchase"). ITEM 1. SECURITY AND SUBJECT COMPANY. The name of the subject company is Edmark Corporation, a Washington corporation. The address of the principal executive office of the Company is 6727 185th Avenue N.E., Redmond, Washington 98052. The title of the class of equity securities to which this Statement relates is the Common Stock, no par value (the "Shares"), of the Company, together with the associated rights (the "Rights") to purchase Shares issued pursuant to the Shareholder Rights Agreement dated as of November 29, 1995 between the Company and ChaseMellon Shareholder Services, L.L.C. (as successor to First Interstate Bank of Washington, N.A.), as rights agent (as amended, the "Rights Agreement"). Unless the context otherwise requires, all references to Shares include the associated Rights. ITEM 2. TENDER OFFER OF THE BIDDER. This Statement relates to an offer (the "Offer") by the Purchaser to purchase all outstanding Shares at a price of $15.50 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase and the related Letter of Transmittal, copies of which are filed as Exhibits (a)(1) and (a)(2) hereto, respectively. Certain additional information with respect to the Offer is contained in the Schedule 14D-1 dated November 18, 1996 (as amended or supplemented, the "Schedule 14D-1") filed with the Securities and Exchange Commission (the "Commission") by IBM and the Purchaser. The principal executive offices of each of the Purchaser and IBM are located at Old Orchard Road, Armonk, New York 10504. The Offer is being made pursuant to the Agreement and Plan of Merger dated as of November 12, 1996 (the "Merger Agreement"), among IBM, the Purchaser and the Company. A copy of the Merger Agreement is filed as Exhibit (c)(1) hereto and is incorporated herein by reference in its entirety. Pursuant to the Merger Agreement, following the consummation of the Offer and the satisfaction or waiver of certain conditions, the Purchaser will be merged with and into the Company, or, at the election of IBM, the Company may be merged with and into the Purchaser (the "Merger"). In the Merger, each outstanding Share (other than Shares owned by IBM, the Purchaser or any other subsidiary of IBM or by shareholders, if any, who are entitled to and who properly exercise dissenters' rights under Washington law) will be converted into the right to receive an amount in cash equal to the price per Share paid pursuant to the Offer, without interest thereon. The Merger Agreement is summarized in Item 3 of this Statement. ITEM 3. IDENTITY AND BACKGROUND (a) The name and business address of the Company, which is the person filing this Statement, are set forth in Item 1 above. (b)(l) Certain contracts, agreements, arrangements or understandings between the Company or its affiliates and its executive officers, directors or affiliates are described in the Company's Proxy Statement dated September 11, 1996 relating to its October 23, 1996 Annual Meeting of Shareholders (the "Proxy Statement") under the headings "Security Ownership of Certain Beneficial Owners and Management", "Executive Compensation", and "Compensation of Directors" and in the Information Statement attached 1 as Annex A hereto. A copy of the pertinent pages of the Proxy Statement is filed as Exhibit (c)(2) hereto and incorporated herein by reference. Certain contracts, agreements, arrangements or understandings entered into between the Company and its executive officers and directors since June 30, 1996 are described below. Since June 30, 1996 the Company has granted options to purchase an aggregate of 70,000 Shares to its executive officers and options to purchase an aggregate of 16,000 Shares to its directors. On September 9, 1996 the Board of Directors approved an undated letter from the Compensation Committee of the Board of Directors to Sally G. Narodick, the Company's former Chairman and Chief Executive Officer and a director of the Company, providing her with a six month salary continuation and certain other benefits. Commencing July 1, 1996 the base salaries of two of the Company's executive officers, Daniel P. Vetras, the Company's Vice President -- Consumer Sales, and Paul N. Bialek, the Company's Vice President -- Finance and Administration, Chief Financial Officer, Secretary and Treasurer, were increased to $140,625 and $120,000, respectively. In September 1996 two of the Company's executive officers, Donna G. Stanger, the Company's Vice President -- Product Development and Acting Chief Executive Officer, and Mr. Bialek, received bonuses of $60,000 and $40,000, respectively. Since June 30, 1996 the Company has agreed that Mr. Vetras will receive a $50,000 moving allowance if he leaves the employment of the Company between December 31, 1996 and July 1, 1997. Frances M. Conley, the Company's Chairman and a director of the Company, and Douglas J. Mackenzie, a director of the Company, are affiliated with greater than five percent shareholders of the Company, Roanoke Investors' Limited Partnership and Kleiner Perkins Caufield & Byers, respectively, which shareholders each have ongoing demand and piggyback registration rights with respect to certain of the Shares held by such shareholders. Certain contracts, agreements, arrangements, or understandings between IBM and its executive officers, directors and affiliates and the Company and its affiliates are described in the Offer to Purchase under the headings "Introduction", "Section 11 -- Contacts and Transactions with the Company; Background of the Offer" and "Section 12 -- Purpose of the Offer; the Merger Agreement; the Shareholder Agreement; etc." Such sections of the Offer to Purchase are incorporated herein by reference. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation Act (the "WBCA") authorize a court to award, or a corporation to grant, indemnification to directors and officers on terms sufficiently broad to permit indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Article XII of the Company's Bylaws, as amended and restated, provides for indemnification of the Company's directors, officers, employees and agents to the fullest extent permitted by the WBCA. Certain of the Company's directors who are affiliated with principal shareholders of the Company also may be indemnified by such shareholders against liability they may incur in their capacity as a director of the Company, including pursuant to a liability insurance policy for such purpose. A copy of Article XII of the Company's Bylaws, as amended and restated, is filed as Exhibit (c)(3) hereto and incorporated herein by reference. Section 23B.08.320 of the WBCA authorizes the articles of incorporation of a corporation to limit a director's liability to the corporation or its shareholders for monetary damages for conduct as a director, except in certain circumstances involving intentional misconduct, knowing violations of law or unlawful corporate distributions, or any transaction from which the director personally received a benefit in money, property or services to which the director is not legally entitled. Article XIII of the Company's Amended and Restated Articles of Incorporation contains provisions implementing, to the fullest extent permitted by the WBCA, such limitations on a director's liability to the Company and its shareholders. A copy of 2 Article XIII of the Company's Amended and Restated Articles of Incorporation is filed as Exhibit (c)(4) hereto and is incorporated herein by reference. THE MERGER AGREEMENT The following summary of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit (c)(1) hereto. The Merger Agreement should be read in its entirety for a more complete description of the matters summarized below. The Merger Agreement provides that following the satisfaction or waiver of the conditions described below under "Conditions to the Merger", the Purchaser will be merged with and into the Company, and each then outstanding Share (other than Shares owned by IBM, the Purchaser, any other subsidiary of IBM or by shareholders, if any, who are entitled to and who properly exercise dissenters' rights under Washington law) will be converted into the right to receive an amount in cash equal to the price per Share paid pursuant to the Offer. The Merger Agreement further provides that, at the election of IBM, the Company may be merged with and into the Purchaser, with the Purchaser continuing as the surviving corporation. VOTE REQUIRED TO APPROVE MERGER. The WBCA requires, among other things, that any plan of merger or consolidation of the Company must be adopted by the Board of Directors and, if the "short-form" merger procedure described below is not available, approved by the holders of the Company's outstanding voting securities. The Board of Directors of the Company has adopted the Merger Agreement and approved the Offer and the Merger; consequently, the only additional action of the Company that may be necessary to effect the Merger is approval by the Company's shareholders, if such "short-form" merger procedure is not available. Under the WBCA, if shareholder approval of the Merger is required, the vote required is the affirmative vote of the holders of two-thirds of the outstanding Shares. If the Purchaser acquires, through the Offer, the Shareholder Agreement dated as of November 12, 1996 (the "Shareholder Agreement") among IBM, the Purchaser and all of the directors and executive officers of the Company and certain other persons (collectively, the "Selling Shareholders"), or otherwise, voting power with respect to two-thirds of the outstanding Shares (which would be the case if the Minimum Condition (as defined under "Conditions to the Offer" below) were satisfied and the Purchaser were to accept for payment Shares tendered pursuant to the Offer), it would have sufficient voting power to effect the Merger without the vote of any other shareholder of the Company. The WBCA also provides that if a parent company owns at least 90% of the outstanding shares of each class of stock of a subsidiary, the parent company may merge that subsidiary into itself without the approval of the shareholders of the parent or the subsidiary. Accordingly, if, as a result of the Offer, the Shareholder Agreement or otherwise, the Purchaser owns at least 90% of the outstanding Shares and IBM elects, as described above, to merge the Company into the Purchaser, the Purchaser could effect the Merger without prior notice to, or any action by, any shareholder of the Company. CONDITIONS TO THE MERGER. The Merger Agreement provides that the respective obligations of each party to effect the Merger is subject to the satisfaction or waiver of the following conditions: (a) if required by applicable law, the Merger having been approved by the affirmative vote of the holders of two-thirds of the Shares; (b) no statute, rule, regulation, executive order, decree, temporary restraining order, preliminary or permanent injunction or other order issued by any federal, state or local government or any court, tribunal, administrative agency or commission or other governmental or other regulatory authority or agency, domestic, foreign or supranational (a "Governmental Entity"), or other legal restraint or prohibition preventing the consummation of the Merger being in effect; PROVIDED, HOWEVER, that each of the Company, the Purchaser and IBM has used reasonable efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may have been entered; and (c) the Purchaser having previously accepted for payment and paid for Shares pursuant to the Offer. 3 TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated at any time prior to the effective time of the Merger, whether before or after approval of the terms of the Merger Agreement by the shareholders of the Company: (1) by mutual written consent of the Company and IBM; (2) by either the Company or IBM (a) if (i) as a result of the failure of any of the conditions to the Offer, the Offer has terminated or expired in accordance with its terms without the Purchaser having accepted for payment any Shares pursuant to the Offer or (ii) the Purchaser has not accepted for payment any Shares pursuant to the Offer prior to February 28, 1997, PROVIDED, HOWEVER, that the right to terminate the Merger Agreement described in this clause (2) is not available to any party whose failure to perform any of its obligations under the Merger Agreement results in the failure of any such condition or if the failure of such condition results from facts or circumstances that constitute a breach of a representation or warranty under the Merger Agreement by such party; or (b) if any Governmental Entity has issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the acceptance for payment of, or payment for, Shares pursuant to the Offer or the Merger and such order, decree or ruling or other action has become final and nonappealable; (3) by the Purchaser or IBM (a) prior to the purchase of Shares pursuant to the Offer in the event of a breach by the Company of any representation, warranty, covenant or other agreement contained in the Merger Agreement which (i) would give rise to the failure of a condition set forth in paragraph (e) or (f) of Section 14 and (ii) cannot be or has not been cured within 20 days after the giving of written notice to the Company; or (b) if either the Purchaser or IBM is entitled to terminate the Offer as a result of (i) the Board of Directors of the Company or any committee thereof having withdrawn or modified in a manner adverse to the Purchaser or IBM its approval or recommendation of the Offer or the Merger or its adoption of the Merger Agreement, or approved or recommended any Takeover Proposal (as defined below), (ii) the Company having entered into any agreement with respect to any Superior Proposal (as defined below) in accordance with the provisions described below under "Takeover Proposals" or (iii) the Board of Directors of the Company or any committee thereof having resolved to take any of the actions described in clauses (3)(b)(i) or (3)(b)(ii); or (4) by the Company (i) in accordance with the terms of the Merger Agreement described below under "Takeover Proposals", provided it has complied with all provisions thereof, including the notice provisions therein, and that it complies with the applicable requirements relating to the payment (including the timing of any payment) of Expenses and the Termination Fee (as such terms are defined below under "Fees and Expenses") or (ii) if the Purchaser or IBM has breached or failed to perform in any material respect any of their respective representations, warranties, covenants or other agreements contained in the Merger Agreement, which breach or failure to perform is incapable of being cured or has not been cured within 20 days after the giving of written notice to the Purchaser or IBM, as applicable, except, in any case, such breaches and failures which are not reasonably likely to affect adversely the Purchaser's or IBM's ability to consummate the Offer or the Merger. TAKEOVER PROPOSALS. The Merger Agreement provides that the Company will not, nor will it authorize or permit any of its directors, officers or employees or any investment banker, financial advisor, attorney, accountant or other representative or agent retained by it to, directly or indirectly, (1) solicit, initiate or encourage (including by way of furnishing information), or take any other action designed or reasonably likely to facilitate, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead to, any Takeover Proposal or (2) participate in any discussions or negotiations regarding any Takeover Proposal; PROVIDED, HOWEVER, that if, at any time prior to the acceptance for payment of Shares pursuant to the Offer, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, the Company may, in response to a Takeover Proposal 4 which was not solicited subsequent to the date of the Merger Agreement, and subject to compliance with the notification provisions described below, (i) furnish information with respect to the Company to any person pursuant to a confidentiality agreement in a form approved by IBM (such approval not to be unreasonably withheld) and (ii) participate in negotiations regarding such Takeover Proposal. The Merger Agreement defines "Takeover Proposal" as any inquiry, proposal or offer, or any expression of interest by any third party relating to the Company's willingness or ability to receive or discuss a proposal or offer, other than a proposal or offer by IBM or any of its subsidiaries, for a merger, consolidation or other business combination involving the Company, or any purchase of, all or substantially all of its assets or more than 30% of the Shares. The Merger Agreement provides further that, except as described below, neither the Board of Directors of the Company nor any committee thereof may (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to IBM, the approval or recommendation by such Board of Directors or such committee of the Offer, the Merger Agreement or the Merger, (ii) approve or recommend, or propose to approve or recommend, any Takeover Proposal or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (each, an "Acquisition Agreement") related to any Takeover Proposal. Notwithstanding the foregoing, in the event that prior to the acceptance for payment of Shares pursuant to the Offer the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, such Board of Directors may, in response to a Takeover Proposal which was not solicited subsequent to the date of the Merger Agreement (subject to the provisions described in this and the following sentences), (x) withdraw or modify its approval or recommendation of the Offer, the Merger Agreement or the Merger or (y) approve or recommend a Superior Proposal or terminate the Merger Agreement (and concurrently with or after such termination, if it so chooses, cause the Company to enter into any Acquisition Agreement with respect to a Superior Proposal), but in each of the cases described in this clause (y) only at a time that is after the second business day following IBM's receipt of written notice advising IBM that the Board of Directors of the Company has received a Superior Proposal, specifying the material terms and conditions of such Superior Proposal and identifying the person making such Superior Proposal. The Merger Agreement defines "Superior Proposal" as any bona fide Takeover Proposal made by a third party on terms which the Board of Directors of the Company determines in its good faith judgment (based on the advice of a financial advisor of nationally recognized reputation) to be more favorable to the Company's shareholders than the Offer and the Merger and for which financing, to the extent required, is then committed or which, in the good faith judgment of the Board of Directors of the Company, is reasonably capable of being financed by such third party. In addition to the obligations of the Company described in the preceding two paragraphs, the Merger Agreement provides that the Company will immediately advise IBM orally and in writing of any request for information or of any Takeover Proposal, the material terms and conditions of such request or Takeover Proposal and the identity of the person making any such request or Takeover Proposal. The Company is further required under the terms of the Merger Agreement to immediately inform IBM of any material change in the details (including amendments or proposed amendments) of any such request or Takeover Proposal. The Merger Agreement provides that nothing contained therein will prohibit the Company from taking and disclosing to its shareholders a position contemplated by Rule 14e-2(a) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or from making any disclosure to the Company's shareholders if, in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, failure so to disclose would be inconsistent with applicable law; PROVIDED, HOWEVER, that neither the Company nor its Board of Directors nor any committee thereof may, except as permitted by the Merger Agreement and as described above, withdraw or modify, or propose to withdraw or modify, its position with respect to the Offer, the Merger or this Agreement or approve or recommend, or propose to approve or recommend, a Takeover Proposal. 5 FEES AND EXPENSES. The Merger Agreement provides that, except as provided below, all fees and expenses incurred in connection with the Offer, the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement will be paid by the party incurring such fees or expenses, whether or not the Offer or the Merger is consummated. The Merger Agreement further provides that the Company will pay, or cause to be paid, in same day funds to IBM the sum of (x) the Expenses and (y) $4,000,000 (the "Termination Fee") under the circumstances and at the times set forth as follows: (a) if the Company terminates the Merger Agreement in accordance with the provisions described above in clause (4)(i) under "Termination of the Merger Agreement", the Company will pay the Expenses and the Termination Fee upon demand; (b) if the Purchaser or IBM terminates the Merger Agreement in accordance with the provisions described above in clause (3)(b) under "Termination of the Merger Agreement", the Company will pay the Expenses upon demand; in addition, if within 12 months after such termination (or concurrently therewith), the Company enters into an Acquisition Agreement providing for a Takeover Proposal or a transaction resulting from a Takeover Proposal is consummated, the Company will pay the Termination Fee concurrently with the earlier of the entering into of such Acquisition Agreement or the consummation of such transaction; and (c) if, at the time of any other termination of the Merger Agreement (other than in accordance with the provisions described above in clause (1) or clause (2)(b) under "Termination of the Merger Agreement" or by the Company in accordance with the provisions described above in clause (4)(ii) under "Termination of the Merger Agreement"), a Takeover Proposal has been made (other than a Takeover Proposal made prior to the date hereof), the Company will pay the Expenses, if terminated by the Company, concurrently therewith or, if terminated by IBM, upon demand; in addition, if within 12 months of such termination (or concurrently therewith), the Company enters into an Acquisition Agreement providing for a Takeover Proposal or a transaction resulting from a Takeover Proposal is consummated, the Company will pay the Termination Fee concurrently with the earlier of the entering into of such Acquisition Agreement or the consummation of such transaction. The Merger Agreement defines "Expenses" as reasonable documented out-of-pocket fees and expenses incurred or paid by or on behalf of IBM in connection with the Offer, the Merger or the consummation of any of the transactions contemplated by the Merger Agreement, including all fees and expenses of law firms, accountants, experts and consultants to IBM, but excluding all fees and expenses of commercial banks and investment banking firms. CONDUCT OF BUSINESS BY THE COMPANY. The Merger Agreement provides that, except as expressly contemplated or permitted by the Merger Agreement or to the extent that IBM shall otherwise consent in writing, until such time as IBM's designees constitute a majority of the Board of Directors of the Company, (a) the Company will carry on its business in the usual, regular and ordinary course in substantially the same manner as conducted prior to the execution of the Merger Agreement (it being understood that the foregoing does not cover future events resulting from public announcement of the Offer and the Merger) and in compliance in all material respects with all applicable laws and regulations and shall use all reasonable efforts to preserve intact its present business organizations, keep available the services of its present officers and employees and preserve its relationships with customers, suppliers and others having business dealings with the Company; (b) the Company will not (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) repurchase, redeem or otherwise acquire any shares of its capital stock or any of its other securities or any rights, warrants or options to acquire any such shares or other securities; (c) the Company will not issue, deliver, sell, pledge or encumber, or authorize or propose the issuance, delivery, sale, pledge or encumbrance of, any shares of its capital stock of any class or any securities convertible into, or rights, warrants, calls, subscriptions or options to acquire, any such shares or convertible securities, or any other ownership interest (including stock appreciation rights or phantom stock) other than the issuance of Shares (i) upon the exercise of options to purchase Shares ("Stock Options") outstanding on the date of the Merger Agreement in accordance with their terms and (ii) in accordance with the terms of the Edmark Corporation 1994 Employee Stock Purchase Plan as in effect on 6 the date of the Merger Agreement (the "Share Purchase Plan"); (d) the Company will not amend or propose to amend its Amended and Restated Articles of Incorporation or its Bylaws, as amended and restated; (e) the Company will not acquire or agree to acquire (i) any business or any corporation, partnership, joint venture, association or other business organization or division thereof or (ii) any assets that are material, individually or in the aggregate, to the Company, except purchases of inventory in the ordinary course of business consistent with past practice; (f) the Company will not sell, lease, license, encumber or otherwise dispose of, or agree to sell, lease, license, encumber or otherwise dispose of, any of its assets, other than sales or licenses of its products in the ordinary course of business consistent with past practice; (g) the Company will confer on a regular and frequent basis with IBM, as reasonably requested by IBM, report on operational matters and promptly advise IBM orally and in writing of any material adverse change with respect to the Company and will promptly provide to IBM (or its counsel) copies of all filings made by the Company with any Governmental Entity in connection with the Merger Agreement and the transactions contemplated thereby; (h) the Company will not make any tax election that would have a material adverse effect on the tax liability or tax attributes of the Company or settle or compromise any tax liability of the Company and the Company will, before filing or causing to be filed any tax return of the Company, consult with IBM and its advisors as to the positions and elections that may be taken or made with respect to such return, and take such positions or make such elections as the Company and IBM shall jointly agree; (i) the Company will not make or agree to make any new capital expenditure or expenditures other than in accordance with the Company's fiscal year 1997 budget approved by the Company's Board of Directors, which capital expenditures do not exceed $250,000 in the aggregate; (j) the Company will not pay, discharge, settle or satisfy any claims, liabilities or obligations other than the payment, discharge, settlement or satisfaction of certain claims, liabilities and obligations in the ordinary course of business consistent with past practice or in accordance with their terms; (k) except in the ordinary course of business the Company will not (i) modify, amend or terminate any material contract or agreement to which the Company is a party, (ii) waive, release or assign any material rights or claims or (iii) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company is a party; and (l) the Company will not authorize any of, or commit or agree to take any of, the foregoing actions. In addition to the foregoing, in the Merger Agreement the Company has agreed that it will not take any action that would, or that could reasonably be expected to, result in (a) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified as to materiality becoming untrue, (b) any of such representations and warranties that are not so qualified becoming untrue in any material respect or (c) any of the conditions to the Offer described below not being satisfied. BOARD OF DIRECTORS. The Merger Agreement provides that promptly upon the acceptance for payment of, and payment for, Shares by the Purchaser pursuant to the Offer, the Purchaser will be entitled to designate, subject to compliance with Section 14(f) of the Exchange Act, a majority of the directors on the Company's Board of Directors, and the Company will, at such time, cause the Purchaser's designees to be so elected by its existing Board of Directors. Subject to applicable law, the Company has agreed to take all action requested by IBM necessary to effect any such election, including mailing to its shareholders the Information Statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, which Information Statement is attached as Appendix A hereto. The Merger Agreement further provides that in the event that the Purchaser's designees are elected to the Board of Directors of the Company, until the effective time of the Merger the Board of Directors of the Company will have at least two directors who are directors on the date of the Merger Agreement and who are not officers of the Company. STOCK OPTIONS. Each director or former director of the Company who held any Stock Options on the date of the Merger Agreement has agreed in writing that all unexercised Stock Options (other than Stock Options granted under the Edmark Corporation Stock Option Plan (Restated as of July 14, 1995) (the "Plan")) which remain outstanding at the time the Purchaser accepts Shares for payment in the Offer will 7 be cancelled. In the Merger Agreement, the parties acknowledged and agreed that all Stock Options granted under the Plan will terminate in accordance with their terms prior to the effective time of the Merger. INDEMNIFICATION AND INSURANCE. In the Merger Agreement, the Purchaser and IBM have agreed that all rights to indemnification for acts or omissions occurring prior to the effective time of the Merger that are in existence as of the date of the Merger Agreement in favor of the current or former directors or officers of the Company as provided in its Amended and Restated Articles of Incorporation or its Bylaws, as amended and restated, will survive the Merger and will continue in full force and effect in accordance with their terms. Pursuant to the Merger Agreement, IBM will, for a period of six years from the effective time of the Merger, unless IBM agrees in writing to guarantee the indemnification obligations described above, maintain in effect the Company's current directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy except that, to the extent that such coverage is not obtainable at less than or equal to 200% of the current annual premiums, IBM will be obligated to purchase only so much coverage as may then be obtained for such amount. REASONABLE EFFORTS. The Merger Agreement provides that each of the parties will use its reasonable efforts to take, or cause to be taken, all actions necessary to comply promptly with all legal requirements that may be imposed on itself with respect to the Offer and the Merger and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their subsidiaries in connection with the Offer and the Merger and will use its reasonable efforts to take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party required to be obtained or made by any of them or any of their subsidiaries in connection with the Offer and the Merger or the taking of any action contemplated thereby or by the Merger Agreement, except that no party need waive any substantial rights or agree to any substantial limitation on its operations or to dispose of any assets. REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various customary representations and warranties. PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. The Merger Agreement provides that in the event the Purchaser's designees are appointed or elected to the Board of Directors of the Company as described above under "Board of Directors", after the acceptance for payment of Shares pursuant to the Offer and prior to the effective time of the Merger, the affirmative vote of the directors of the Company not designated by the Purchaser or IBM is required for the Company to amend or terminate the Merger Agreement, exercise or waive any of its rights or remedies under the Merger Agreement or extend the time for performance of IBM's and the Purchaser's respective obligations under the Merger Agreement. CONDITIONS TO THE OFFER. Notwithstanding any other term of the Offer or the Merger Agreement, the Purchaser will not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act (relating to the Purchaser's obligation to pay for or return tendered Shares after the termination or withdrawal of the Offer), to pay for any Shares tendered pursuant to the Offer unless (i) there has been validly tendered and not withdrawn prior to the Expiration Date (as defined in the Offer to Purchase) that number of Shares that would constitute two-thirds of all outstanding Shares on a fully diluted basis on the date of purchase (the "Minimum Condition") and (ii) any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (the "HSR Act") applicable to the purchase of Shares pursuant to the Offer has expired or been terminated. Furthermore, notwithstanding any other term of the Offer or the Merger Agreement, the Purchaser will not be required to accept for payment or, subject as aforesaid, to pay for any Shares not theretofore accepted for payment or paid for, and may terminate the Offer if, at any time on or after the date of the Merger Agreement and before the acceptance of such 8 Shares for payment or the payment therefor, any of the following conditions exists (other than as a result of any action or inaction of IBM or any of its subsidiaries that constitutes a breach of the Merger Agreement): (a) there has been threatened, instituted or pending by any Governmental Entity any suit, action or proceeding (i) challenging the acquisition by IBM or the Purchaser of any Shares under the Offer, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or the performance of any of the other transactions contemplated by the Merger Agreement or the Shareholder Agreement, (ii) seeking to prohibit or materially limit the ownership or operation by the Company, IBM or any of IBM's subsidiaries of a material portion of the business or assets of the Company or IBM and its subsidiaries, taken as a whole, or to compel the Company or IBM to dispose of or hold separate any material portion of the business or assets of the Company or IBM and its subsidiaries, taken as a whole, in each case as a result of the Offer or any of the other transactions contemplated by the Merger Agreement, (iii) seeking to impose material limitations on the ability of IBM or the Purchaser to acquire or hold, or exercise full rights of ownership of, any Shares to be accepted for payment pursuant to the Offer, including, without limitation, the right to vote such Shares on all matters properly presented to the shareholders of the Company, (iv) seeking to prohibit IBM or any of its subsidiaries from effectively controlling in any material respect any material portion of the business or operations of the Company or (v) which otherwise is reasonably likely to have any effect (or any development that, insofar as can reasonably be foreseen, is likely to result in any effect) that, individually or in the aggregate with any such other effects, is materially adverse to the business, properties, financial condition or results of operations of the Company. (b) any statute, rule, regulation, judgment, order or injunction has been enacted, entered, enforced, promulgated or deemed applicable to the Offer or the Merger, by any Governmental Entity, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that is reasonably likely to result, directly or indirectly, in any of the consequences described in clauses (i) through (v) of paragraph (a) above; (c) any change (or any development that, insofar as reasonably can be foreseen, is reasonably likely to result in any change) has occurred that, individually or in the aggregate with any other such changes, is materially adverse to the business, properties, financial condition or results of operations of the Company; (d) (i) the Board of Directors of the Company or any committee thereof has withdrawn or modified in a manner adverse to IBM or the Purchaser its approval or recommendation of the Offer or the Merger or its adoption of the Merger Agreement, or approved or recommended any Takeover Proposal, (ii) the Company has entered into any agreement with respect to any Superior Proposal in accordance with the Merger Agreement or (iii) the Board of Directors of the Company or any committee thereof has resolved to take any of the foregoing actions (see "Takeover Proposals" above); (e) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified as to materiality shall not be true and correct or any such representations and warranties that are not so qualified shall not be true and correct in any material respect, in each case at the date of the Merger Agreement and at the scheduled or extended expiration of the Offer; (f) the Company has failed to perform in any material respect any material obligation or to comply in any material respect with any material agreement or covenant of the Company to be performed or complied with by it under the Merger Agreement, which failure to perform or comply has not been cured within five business days after the giving of written notice to the Company; or (g) the Merger Agreement has been terminated in accordance with its terms. 9 RIGHTS AGREEMENT. The Rights Agreement has been amended to (i) render the Rights Agreement inapplicable to the Offer, the Merger, the Merger Agreement, the Shareholder Agreement, the acquisition of Shares by the Purchaser pursuant to the Offer and the Shareholder Agreement and the other transactions contemplated by the Merger Agreement and the Shareholder Agreement and (ii) ensure that (y) none of the Purchaser, IBM or any of their respective affiliates is an Acquiring Person (as defined in the Rights Agreement) pursuant to the Rights Agreement and (z) a Distribution Date (as defined in the Rights Agreement) does not occur by reason of the Offer, the Merger, the execution of the Merger Agreement or the Shareholder Agreement, the acquisition of Shares by the Purchaser pursuant to the Offer or the Shareholder Agreement or the other transactions contemplated by the Merger Agreement or the Shareholder Agreement. THE SHAREHOLDER AGREEMENT The following summary of the Shareholder Agreement is qualified in its entirety by reference to the Shareholder Agreement, a copy of which is filed as Exhibit (c)(5) hereto. The Shareholder Agreement should be read in its entirety for a more complete description of the matters summarized below. Pursuant to the Shareholder Agreement, the Selling Shareholders have unconditionally agreed to tender into the Offer, and not to withdraw therefrom, the 1,325,946 Shares that they owned on November 12, 1996, together with any Shares they acquire after such time, including upon the exercise of Stock Options. In addition, the Selling Shareholders have agreed to sell to the Purchaser, and the Purchaser has agreed to purchase, the foregoing number of Shares at a price per Share of $15.50, or such higher price per Share as may be offered by the Purchaser in the Offer, provided that (i) such obligation to purchase is subject to the Purchaser having accepted Shares for payment under the Offer and the Minimum Condition having been satisfied, which conditions to such obligation may be waived by the Purchaser in its sole discretion, and (ii) such obligation to sell is subject to the Minimum Condition having been satisfied or a Takeover Proposal having been made. Each of the Selling Shareholders has agreed not to: (i) sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option or other arrangement (including any profit sharing arrangement) or understanding with respect to the sale, transfer, pledge, assignment or other disposition of, Shares to any person other than the Purchaser or the Purchaser's designee, (ii) enter into any voting arrangement, whether by proxy, voting agreement, voting trust, power-of-attorney or otherwise, with respect to Shares or (iii) take any other action that would in any way restrict, limit or interfere with the performance of its obligations hereunder or the transactions contemplated hereby. Each of the Selling Shareholders has also agreed not to solicit, initiate or encourage (including by way of furnishing information) and not to participate in any discussions or negotiations regarding any Takeover Proposal. Under the Shareholder Agreement, each Selling Shareholder has granted an irrevocable proxy with respect to the Shares subject to the Shareholder Agreement to IBM to vote such Shares against (i) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantial assets, reorganization, joint venture, recapitalization, dissolution, liquidation or winding up of or by the Company and (ii) any amendment of the Company's Amended and Restated Articles of Incorporation or its Bylaws, as amended and restated, or other proposal or transaction (including any consent solicitation to remove or elect any directors of the Company) involving the Company, which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify, or result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under or with respect to, the Offer, the Merger, the Merger Agreement or any of the other transactions contemplated by the Merger Agreement. NONCOMPETITION AGREEMENTS Donna G. Stanger, the Company's Vice President--Product Development and Acting Chief Executive Officer, Paul N. Bialek, the Company's Vice President--Finance and Administration, Chief Financial 10 Officer, Secretary and Treasurer, Daniel P. Vetras, the Company's Vice President--Consumer Sales, and Sally G. Narodick, the Company's former Chairman and Chief Executive Officer, who is one of the Company's directors, have entered into noncompetition agreements with IBM. The noncompetition agreement between IBM and Ms. Stanger provides that in the event that her employment with IBM or any of its subsidiaries terminates during the period of time for which she has agreed not to compete (the "Noncompetition Period"), other than as a result of a voluntary termination by her or a termination for cause by IBM or any of its subsidiaries (collectively, an "IBM Termination"), IBM will continue to pay and to provide her during the Noncompetition Period the salary (which will not be less than the salary she is paid at the effective time of the Merger, but not including bonus) and medical benefits (but not other benefits) that she is being paid and provided with at the date of her termination (or, with respect to salary, any higher salary that she had been paid in the preceeding 12 months). The noncompetition agreement between IBM and Ms. Narodick contains a provision which provides that, upon an IBM Termination, IBM will pay to her $10,000 per month for the duration of the Noncompetition Period. ITEM 4. THE SOLICITATION OR RECOMMENDATION. (A) RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of the Company has unanimously approved the Offer and the Merger and determined that the terms of the Offer and the Merger are fair to, and in the best interests of, the shareholders of the Company and unanimously recommends that shareholders of the Company accept the Offer and tender their Shares. A copy of a letter dated November 18, 1996, from Frances M. Conley, the Company's Chairman, to the Company's shareholders is filed as Exhibit (a)(5) hereto and is incorporated herein by reference. (B) BACKGROUND OF THE OFFER; REASONS FOR THE RECOMMENDATION. BACKGROUND OF THE OFFER During February 1996 representatives of IBM and Ms. Narodick, at that time the Company's Chairman and Chief Executive Officer, discussed IBM's strategic focus on the enhanced learning area and possible cooperative relationships between IBM and the Company. Following such discussions, on March 28, 1996, IBM and the Company entered into a license agreement providing IBM with the right to market the Company's STRATEGY GAMES OF THE WORLD product with IBM's Aptiva personal computers. Amounts payable to the Company under this agreement have aggregated less than $500,000 to date. On May 16, 1996 James A. Firestone, General Manager of IBM's Consumer Division, and James B. Rice, Director of Consumer Software Marketing of IBM's Consumer Division, and Ms. Narodick met and had a general discussion about business trends. On August 13, 1996 Ms. Narodick called Mr. Firestone to arrange a meeting to discuss possible business relationships between IBM and the Company, including development activities and licensing by IBM of Company products, and inquiring as to IBM's interest in a possible acquisition of the Company. On August 29, 1996 Mr. Firestone and Ms. Narodick, along with other representatives of IBM and the Company, met and discussed the Company's interest in a possible acquisition by IBM. On such date IBM and the Company executed a bi-lateral Non-Disclosure Agreement and the Company presented IBM with certain financial and business information. On September 6, 1996, Ms. Narodick called Mr. Firestone to advise him that she intended to resign the following week and that Ms. Conley would serve as Chairman of the Board and Ms. Stanger would serve as acting Chief Executive Officer while the Company searched for a permanent Chief Executive Officer. 11 At various times during September and October 1996 representatives of IBM met with representatives of the Company and its financial advisor, Alex. Brown & Sons Incorporated ("Alex. Brown") to discuss, among other things, personnel matters, sales and marketing plans and strategy, possible synergies, the Company's operating performance, financial projections and long-term objectives and IBM's interest in making an offer to acquire the Company. In addition, during this period and through the date hereof the Company and IBM have discussed potential development and marketing relationships. On November 1, 1996 IBM submitted an indication of interest in a possible acquisition of the Company. On November 2 and 3, 1996 a number of conversations were held among representatives of IBM and representatives of the Company, including Ms. Conley, as well as Alex. Brown, regarding the possible price that IBM would be willing to offer for the Shares. During the period from November 5 to November 8, 1996 representatives of IBM met with representatives of the Company to continue IBM's due diligence review of the Company and to discuss, among other things, the state of the Company's business, its prospects and personnel matters. During the period from November 7 to November 12, 1996 representatives of IBM, including Mr. Firestone, and IBM's legal counsel, on the one hand, and representatives of the Company, including Ms. Conley and Ms. Stanger, and the Company's legal counsel, on the other hand, negotiated documentation for the contemplated transactions. On November 12, 1996 the Boards of Directors of the Company and the Purchaser each approved the transactions and the purchase price. Following such approvals the Merger Agreement and other related agreements were executed and delivered, and the transaction was publicly announced before financial markets in the United States opened on November 13, 1996. REASONS FOR THE RECOMMENDATION At a meeting on November 12, 1996 the Board of Directors of the Company unanimously (i) approved the Offer and the Merger (the "Transactions"), (ii) determined that the Transactions are fair to, and in the best interests of, the shareholders of the Company and (iii) resolved to recommend that shareholders accept the Offer and tender their Shares. At the meeting, the Board of Directors of the Company also unanimously approved the Shareholder Agreement. Prior to reaching its decision to approve the Transactions and to recommend acceptance of the Offer, the Board of Directors received presentations from, and reviewed the Offer, the Merger Agreement and the Shareholder Agreement with, management of the Company as well as its financial advisor and legal counsel. In reaching its decision, the Board considered a number of factors, including, but not limited to, the following: (i) the terms and conditions of the Merger Agreement, including the amount and form of the consideration; (ii) the fact that the $15.50 per Share price represents a premium of approximately 35.5% over the closing sale price of $11.4375 per Share as reported on the Nasdaq National Market on November 12, 1996, the date the Board of Directors authorized and approved the Transactions; (iii) the recent historical market prices of the Shares; (iv) the Board of Directors' knowledge of the business (including market share trends), operations, prospects, properties, assets and earnings of the Company; (v) the Company's current financial condition and future prospects, and current and anticipated developments in both the home and school educational software markets; (vi) the effect of the Transactions on the Company's relationships with its employees and customers; (vii) the likelihood that the proposed Merger would be consummated, including the experience, reputation and financial condition of IBM; (viii) the Company's need for a new Chief Executive Officer and a new marketing officer; (ix) the advantages in a competitive environment of strategically aligning with a company like IBM; (x) the Company's recent financial performance; (xi) a review of possible values realizable by the Company's shareholders through other alternatives and of the results of the process undertaken to identify and solicit proposals from other potential investors in or purchasers of the Company; (xii) the fact that pursuant to the Merger Agreement, the Company is not prohibited from responding to any unsolicited Takeover Proposal to the extent that the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under the 12 WBCA; (xiii) the requirement by IBM, as a condition to the Transactions, that the Selling Shareholders enter into and the Board of Directors approve the Shareholder Agreement and the possible effect of the Shareholder Agreement on any other Takeover Proposal; and (xiv) the presentation of Alex. Brown at the November 12, 1996 meeting of the Board of Directors and the written opinion (the "Alex. Brown Opinion") of Alex. Brown dated November 12, 1996 to the effect that, as of such date, the consideration to be received by the holders of Shares in the Transactions is fair, from a financial point of view, to such holders. The full text of the Alex. Brown Opinion, which sets forth, among other things, the assumptions made, matters considered and limitations on the review undertaken, is filed as Exhibit (a)(4) hereto, is attached as Annex B hereto and is incorporated herein by reference. Shareholders are urged to read the Alex. Brown Opinion in its entirety. The Board of Directors recognized that consummation of the Offer and the Merger will deprive current shareholders of the Company of the opportunity to participate in the future growth prospects of the Company and, therefore, in reaching its conclusion to approve the Transactions, determined that the historical results of the operations and future prospects of the Company are adequately reflected in the $15.50 price per Share. The Board of Directors also noted that although the Company has for some period of time been identified as a potential acquisition candidate, and Alex. Brown has assisted the Company in identifying and contacting potential investors in or purchasers of the Company, no buyer other than IBM had indicated an intention to make a proposal to purchase all of the Shares for cash on terms as favorable to the Company and its shareholders as those in the Transactions. In addition, the Board of Directors considered the possibility that, in the event the Offer but not the Merger is consummated, the number of shareholders could be reduced, which could adversely affect the liquidity and market value of the Shares. In light of all the factors set forth above, the Board of Directors approved the Transactions. In view of the variety of factors considered in connection with its evaluation of the Transactions, the Board of Directors did not assign relative weights to the specific factors considered in reaching its decision. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The Company retained Alex. Brown to provide investment banking services in connection with a possible strategic partnership for the Company. Pursuant to a letter agreement dated September 11, 1996 between the Company and Alex. Brown, the Company has agreed to pay Alex. Brown a fee of approximately $1.3 million for acting as financial advisor in connection with the Transactions in the event that a majority of the outstanding shares of the Company are acquired pursuant to the Offer. In addition, the Company has agreed to pay Alex. Brown a fee of $400,000 for rendering the Alex. Brown Opinion, which fee will be credited against the fee described above. The Company has also agreed to reimburse Alex. Brown for its reasonable out-of-pocket expenses incurred in connection with rendering financial advisory services, including fees and disbursements of its legal counsel. The Company has agreed to indemnify Alex. Brown and its directors, officers, employees and controlling persons for certain costs, expenses and liabilities to which it may be subjected arising out of or related to its engagement as financial advisor. Except as set forth above, neither the Company nor any person acting on its behalf has or currently intends to employ, retain or compensate any person to make solicitations or recommendations to the shareholders of the Company on its behalf with respect to the Offer. ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES. (a) During the past 60 days, no transactions in Shares have been effected by the Company or, to the best of the Company's knowledge, by any of its executive officers, directors or affiliates. (b) All of the Selling Shareholders have agreed pursuant to the Shareholder Agreement to tender in the Offer all Shares that they now own or may hereafter acquire. 13 ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY. (a) Except as set forth in this Statement, no negotiation is being undertaken or is underway by the Company in response to the Offer that relates to or would result in (i) an extraordinary transaction, such as a merger or reorganization involving the Company; (ii) a purchase, sale or transfer of a material amount of assets by the Company; (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. (b) Except as set forth in this Statement, there is no transaction, board resolution, agreement in principle or signed contract in response to the Offer that relate to or would result in one or more of the events referred to in Item 7(a) above. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED. The information contained in Exhibits (a)(1), (a)(2), (a)(4), (c)(1), (c)(2), (c)(3), (c)(4) and (c)(5) referred to in Item 9 below is incorporated herein by reference. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Offer to Purchase dated November 18, 1996.* (a)(2) Letter of Transmittal.* (a)(3) Press release issued by the Company and IBM on November 13, 1996. (a)(4) Opinion of Alex. Brown & Sons Incorporated dated November 12, 1996.* (a)(5) Letter to Shareholders dated November 18, 1996 from Frances M. Conley, Chairman of the Board of the Company.* (c)(1) Agreement and Plan of Merger dated as of November 12, 1996, among IBM, the Purchaser and the Company. (c)(2) Pages 3, 4, 6-8 and 14 of the Company's Proxy Statement dated September 11, 1996 relating to its Annual Meeting of Shareholders held on October 23, 1996. (c)(3) Article XII of the Company's Bylaws, as amended and restated. (c)(4) Article XIII of the Company's Amended and Restated Articles of Incorporation. (c)(5) Shareholder Agreement dated November 12, 1996, among IBM, the Purchaser and the Selling Shareholders identified therein.
- - ------------------------ * Included in copies mailed to shareholders. 14 After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and accurate. EDMARK CORPORATION By: /s/_PAUL N. BIALEK________________ Paul N. Bialek VICE PRESIDENT--FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER, SECRETARY AND TREASURER Dated: November 18, 1996 ANNEX A EDMARK CORPORATION 6727 185TH AVENUE N.E. REDMOND, WASHINGTON 98052 INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND RULE 14F-1 THEREUNDER This Information Statement is being mailed on or about November 18, 1996 as part of Edmark Corporation's (the "Company") Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") to the holders of record of shares of Common Stock, no par value (the "Shares"), of the Company at the close of business on or about November 10, 1996. You are receiving this Information Statement in connection with the possible election of persons designated by the Purchaser (as defined below) to a majority of the seats on the Board of Directors of the Company. Unless the context otherwise requires, all references to Shares include the associated rights to purchase Shares issued pursuant to the Shareholder Rights Agreement dated as of November 29, 1995 between the Company and ChaseMellon Shareholder Services, L.L.C. (as successor to First Interstate Bank of Washington, N.A.), as rights agent. On November 12, 1996 International Business Machines Corporation, a New York corporation ("IBM"), Indigo Acquisition Corp., a Washington corporation (the "Purchaser") which is a wholly owned subsidiary of IBM, and the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") in accordance with the terms and subject to the conditions of which (i) the Purchaser is commencing a tender offer (the "Offer") for all outstanding Shares at a price of $15.50 per Share, net to the seller in cash, without interest thereon, and (ii) the Purchaser will be merged with and into the Company, or, at the election of IBM, the Company may be merged with and into the Purchaser (the "Merger"). In the Merger, each outstanding Share (other than Shares owned by IBM, the Purchaser or any other subsidiary of IBM or by shareholders, if any, who are entitled to and who properly exercise dissenters' rights under Washington law) will be converted into the right to receive an amount in cash equal to the price paid in the Offer, without interest thereon. The Merger Agreement requires the Company to take all action necessary to cause the Purchaser Designees (as defined below) to be elected to the Board of Directors under the circumstances described therein. See "Board of Directors and Executive Officers of the Company." This Information Statement is required by Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 thereunder. You are urged to read this Information Statement carefully. You are not, however, required to take any action. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Schedule 14D-9. Pursuant to the Merger Agreement, the Purchaser commenced the Offer on November 18, 1996. The Offer is scheduled to expire at 12:00 midnight, New York City time, on Monday, December 16, 1996 unless the Offer is extended. The information contained in this Information Statement concerning the Purchaser and the Purchaser Designees has been furnished to the Company by the Purchaser, and the Company assumes no responsibility for the accuracy or completeness of such information. BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY GENERAL The Shares are the only class of voting securities of the Company outstanding. Each Share has one vote. As of November 12, 1996, there were 6,632,111 Shares outstanding. The Board of Directors currently consists of one class with nine members. At each annual meeting of shareholders, all nine directors are elected for one-year terms. The officers serve at the discretion of the Board. PURCHASER DESIGNEES Pursuant to the Merger Agreement, upon the Purchaser having paid for Shares pursuant to the Offer, the Purchaser will be entitled to designate such number of directors to the Board of Directors of the Company as will give the Purchaser, subject to compliance with Section 14(f) of the Exchange Act, a majority of such directors (the "Purchaser Designees"), and the Company will, at such time, cause the Purchaser Designees to be so elected by its existing Board; PROVIDED, HOWEVER, that in the event that the Purchaser Designees are elected to the Board, until the effective time of the Merger such Board will have at least two directors who are directors on the date of the Merger Agreement and who are not officers of the Company (the "Independent Directors"); and PROVIDED, FURTHER that, in such event, if the number of Independent Directors is reduced below two for any reason whatsoever the remaining Independent Director will designate a person to fill such vacancy who will be deemed to be an Independent Director for purposes of the Merger Agreement or, if no Independent Directors then remain, the other directors are required to designate two persons to fill such vacancies who are not officers or affiliates of the Company, or officers or affiliates of IBM or any of its subsidiaries, and such persons will be deemed to be Independent Directors for purposes of the Merger Agreement. Pursuant to the Merger Agreement, subject to applicable law, the Company agreed to take all action requested by IBM that is necessary to effect any such election, including mailing to its shareholders an information statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, and the Company agreed to make such mailing with the mailing of the Schedule 14D-9. In connection with the foregoing, the Company agreed to promptly, at the option of IBM, either increase the size of the Board and/or obtain the resignation of such number of its current directors as is necessary to enable the Purchaser Designees to be elected or appointed to, and to constitute a majority of the directors on, the Board. Pursuant to the provisions of the Merger Agreement described in the foregoing paragraph, the Purchaser has informed the Company that it will require the Company to obtain resignations from all directors of the Company other than two persons who qualify as Independent Directors and will designate Lee A. Dayton, James A. Firestone and Donald D. Westfall as the Purchaser Designees. The Purchaser has informed the Company that each of the Purchaser Designees has consented to act as a director. None of the Purchaser Designees (i) is currently the director of, or holds any position with, the Company, (ii) has a familial relationship with any of the directors or executive officers of the Company or (iii), to the best knowledge of the Purchaser, beneficially owns any securities (or rights to acquire any securities) of the Company. The Company has been advised by the Purchaser that, to the best of the Purchaser's knowledge, none of the Purchaser Designees has been involved in any transaction with the Company or any of its directors, executive officers or affiliates which are required to be disclosed pursuant to the rules and regulations of the Securities and Exchange Commission. It is expected that the Purchaser Designees may assume office at any time following the purchase by the Purchaser of Shares pursuant to the Offer, and that, upon assuming office, the Purchaser Designees will thereafter constitute at least a majority of the Board of Directors. Biographical information concerning each of the Purchaser Designees is presented below. A-2 Lee A. Dayton, 53, is a director and the President of the Purchaser and has been Vice President, Corporate Development and Real Estate of IBM since 1996. Mr. Dayton was General Manager, Real Estate and Business Development of IBM from 1994 to 1996; General Manager, Real Estate and Procurement Services, General Manager, Real Estate Services, and IBM Director, Real Estate and Construction Staff, from 1990 to 1994; and Senior Managing Director, Asia Pacific, from 1988 to 1990. Donald D. Westfall, 58, is a director, Vice President and Secretary of the Purchaser and has been Associate General Counsel of IBM since 1988. James A. Firestone, 42, has been General Manager of the Consumer Division of IBM since September 1995. Mr. Firestone served as President, Consumer Services of Ameritech Company from 1993 until August 1995. During 1993 he also served as President, Travelers Cheques of American Express Company. From 1989 to 1993, Mr. Firestone served as Executive Vice President, Small Business and Corporate Service of American Express Company. CURRENT DIRECTORS AND EXECUTIVE OFFICERS Biographical information concerning each of the Company's current directors and executive officers follows:
YEAR FIRST ELECTED OR NAME AGE APPOINTED POSITION - - ------------------------------------ --- ----------- ---------------------------------------------------------- DIRECTORS: Frances M. Conley................... 53 1992 Chairman of the Board of Directors Allan Epstein....................... 45 1992 Director Harvey N. Gillis.................... 50 1990 Director Dr. Allen D. Glenn.................. 54 1990 Director Douglas J. Mackenzie................ 37 1994 Director Timothy Mott........................ 47 1994 Director Sally G. Narodick................... 51 1989 Director W. Hunter Simpson................... 69 1989 Director Richard S. Thorp.................... 62 1988 Director OFFICERS: Paul N. Bialek...................... 36 1993 Vice President--Finance and Administration, Chief Financial Officer, Treasurer and Secretary John R. Moore....................... 46 1991 Vice President--Operations Donna G. Stanger.................... 53 1991 Vice President--Product Development and Acting Chief Executive Officer Daniel P. Vetras.................... 37 1993 Vice President--Consumer Sales
DIRECTORS Frances M. Conley is a shareholder, director and principal of Roanoke Capital, Ltd., the general partner of Roanoke Investors' Limited Partnership, a venture capital limited partnership. She has a master's degree in business administration from the Harvard Graduate School of Business Administration and a bachelor's degree in music from Emmanuel College. Ms. Conley serves as a director of Cutter & Buck Inc., and Data I/O Corporation. Allan Epstein is President and Chief Executive Officer of Orthopedic Systems, Inc., a developer and manufacturer of orthopedic soft goods, operating room equipment and diagnostic instruments. From 1988 to 1991, he was President and Chief Executive Officer of Accolade, Inc., a developer and publisher of A-3 entertainment software for computers and video games. He has a bachelor's degree in industrial engineering from Cornell University. Harvey N. Gillis is Senior Vice President of Finance and Administration and Chief Financial Officer for Advanced Technology Laboratories, Inc., a developer, manufacturer and distributor of diagnostic medical ultrasound systems. From 1991 to 1992, he served as Senior Vice President of Finance and Administration and Chief Financial Officer for NeoPath, Inc., a medical technology company. Prior to 1991, he served as Chief Operating Manager for Samuel Stroum Enterprises, a private investment firm. He has a master's degree in business administration, and a master's degree in engineering from Stanford University and a bachelor's degree in engineering from Carnegie-Mellon University. Mr. Gillis serves as a director of Digital Systems International, Inc. Dr. Allen D. Glenn has been Dean of the College of Education and Professor of Curriculum and Instruction at the University of Washington since 1989. Prior to that, he served for 18 years on the faculty and administration of the University of Minnesota. He has a Ph.D and a master's degree in education from the University of Michigan, a master's degree in political science from Kansas State Teachers College and a bachelor's degree in political science and history from Ottawa University. Douglas J. Mackenzie has been with Kleiner Perkins Caufield & Byers, a venture capital partnership, for over seven years, most recently as a general partner. He has a master's degree in business administration from the Harvard Graduate School of Business Administration and a bachelor's degree in economics and a master's degree in industrial engineering from Stanford University. Mr. Mackenzie serves as a director of Visio Corporation in addition to several private technology-based companies. Timothy Mott is a general partner of Ironwood Capital, a venture capital partnership. Mr. Mott was Chairman of the Board of Directors of Macromedia, Inc., from 1992 to 1995 and was Chief Executive Officer of Macromedia, Inc., (and its predecessor corporations, MacroMind and MacroMind/Paracomp) from 1990 to 1992. Mr. Mott was a co-founder of Electronic Arts, Inc., an entertainment software company, where he was employed from 1982 to 1990 in a variety of capacities, including Senior Vice President of Business Development and Managing Director of Electronic Arts (UK) Limited. He has a bachelor's degree in computer science from Manchester University. Mr. Mott serves as a director of Electronic Arts, Inc. Sally G. Narodick was Chairman and Chief Executive Officer of the Company from November 1989 until September 1996, and remains an employee of the Company. Immediately prior to joining the Company, she was co-founder of Narodick, Ross & Associates, a financial and marketing consulting company specializing in emerging businesses. Prior to 1987, she was a Senior Vice President with Seafirst Corporation, a commercial banking institution, serving as Corporate Controller and as District Manager in charge of business and personal banking. She has a master's degree in teaching from Columbia University, a master's degree in business administration from New York University and a bachelor's degree from Boston University. Mrs. Narodick serves as a director of Fluke Corporation, Penwest Corporation and Washington Energy Corporation. W. Hunter Simpson is the former President and Chief Executive Officer of Physio Control Corporation, where he was employed from 1966 to 1986. He has a bachelor's degree in business administration from the University of Washington. Mr. Simpson serves as a director of Data I/O Corporation, the Washington Research Foundation and KCTS public television. He has also served on the Board of Regents of the University of Washington. Richard S. Thorp has been Chairman and Chief Executive Officer of Shannon, Ltd., a Washington-based distributor of electronic components, since 1972, and President of Supertronix, Inc., an electronics parts retailer, since 1985. Mr. Thorp has been involved in various capacities with Edmark since its inception more than twenty-five years ago. A-4 INFORMATION ON COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS Directors hold office until the next Annual Meeting of Shareholders of the Company or until their successors have been elected and qualified. The Board of Directors of the Company held a total of eight meetings during the fiscal year ended June 30, 1996. The Board has an Audit Committee, a Compensation Committee and a Nominating Committee. The Audit Committee met two times, the Compensation Committee met six times and the Nominating Committee met one time during the fiscal year ended June 30, 1996. During the last fiscal year, each director attended at least 75% of the aggregate of all meetings of the Board of Directors and all meetings of committees to which he or she was assigned. The Audit Committee generally selects the Company's independent auditors, subject to ratification by shareholders, and considers related scope and fee arrangements. Current members of the Audit Committee are Harvey N. Gillis (Chair), Allan Epstein, Dr. Allen D. Glenn and Richard S. Thorp. The Compensation Committee generally recommends the framework for establishing officer compensation and reviews and recommends officer salary levels and variable compensation awards. That committee also administers the Edmark Corporation Stock Option Plan (Restated as of July 14, 1995) (the "Stock Option Plan"). Current members of the Compensation Committee are W. Hunter Simpson (Chair), Frances M. Conley, Harvey N. Gillis and Douglas J. Mackenzie. The Nominating Committee is primarily responsible for recommending candidates for the Board of Directors to be elected by shareholders of the Company. Current members of the Nominating Committee are Harvey N. Gillis (Chair), Allan Epstein, Sally G. Narodick, W. Hunter Simpson and Timothy Mott. The Nominating Committee will consider nominees recommended by the shareholders. Suggestions may be submitted to the Secretary of the Company. COMPENSATION OF DIRECTORS Beginning in the 1996 fiscal year, non-employee directors are paid a fee of $500 for each Board meeting attended and for each Committee meeting attended when those meetings are held on days different from Board meetings. Employee directors are not paid any fees for those services. All directors are entitled to reimbursement for expenses incurred in traveling to and from Board and Committee meetings. In addition, each non-employee director also participates in the 1995 Non-Employee Directors' Stock Option Plan. Upon reelection to the Board of Directors, each non-employee director receives an option to purchase 2,000 Shares on the third day following the day of each Annual Meeting of Shareholders. The option is granted at the then current fair market value of the Shares, has a ten-year term and is vested upon grant. In fiscal year 1996, options to purchase 2,000 Shares were granted to each of the Company's eight non-employee directors at an exercise price of $44.00 per share. EXECUTIVE OFFICERS Mr. Bialek has been Vice President--Finance and Administration and Chief Financial Officer since March 1995. From September 1993 to March 1995, he served as the Company's Director of Finance and Administration. Mr. Bialek also has been the Company's Treasurer since September 1993, and Secretary since March 1994. For the eleven years prior to joining the Company in September 1993, he was with KPMG Peat Marwick LLP, an international public accounting firm. He has a bachelor's degree in business administration from Seattle University and is a Certified Public Accountant. Mr. Moore has been Vice President--Operations of the Company since June 1991. He has been with the Company since 1978 and has worked in all phases of the production, assembly and shipping segments of the Company's business. Ms. Stanger has been Vice President--Product Development of the Company since November 1991 and Acting Chief Executive Officer since September 1996. Prior to that she spent eight years at Sunburst Communications, an educational software publisher, where she managed product development focusing on A-5 the kindergarten through eighth grade market. She has a master's degree in education from the University of Minnesota, a bachelor's degree in education from Florida State University and 20 years of teaching experience. Mr. Vetras has been Vice President--Consumer Sales of the Company since October 1993. From 1992 to July 1993, he was director for North American sales at Traveling Software, Inc., and from 1985 to 1992, he was with Lotus Development Corporation in a variety of sales management positions. He has a bachelor's degree in political science from American International College. There are no family relationships among the directors and executive officers of the Company. The executive officers serve at the discretion the Board of Directors. CERTAIN TRANSACTIONS SINCE JUNE 30, 1996 Certain contracts, agreements, arrangements or understandings entered into between the Company and its executive officers and directors since June 30, 1996 are described below. Since June 30, 1996 the Company has granted options to purchase an aggregate of 70,000 Shares to its executive officers and options to purchase an aggregate of 16,000 Shares to its directors. On September 9, 1996 the Board of Directors approved an undated letter from the Compensation Committee of the Board of Directors to Ms. Narodick providing her with a six month salary continuation and certain other benefits. Commencing July 1, 1996 the base salaries of two of the Company's executive officers, Mr. Vetras and Mr. Bialek, were increased to $140,625 and $120,000, respectively. In September 1996 two of the Company's executive officers, Ms. Stanger and Mr. Bialek, received bonuses of $60,000 and $40,000, respectively. Since June 30, 1996 the Company has agreed that Mr. Vetras will receive a $50,000 moving allowance if he leaves the employment of the Company between December 31, 1996 and July 1, 1997. Ms. Conley and Mr. Mackenzie are affiliated with greater than five percent shareholders of the Company, Roanoke Investors' Limited Partnership and Kleiner Perkins Caufield & Byers, respectively, which shareholders each have ongoing demand and piggyback registration rights with respect to certain of the Shares held by such shareholders. A-6 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following table sets forth certain information concerning the compensation paid or accrued for the fiscal years ended June 30, 1996, 1995 and 1994, to the Company's former Chairman and Chief Executive Officer and the other executive officers of the Company who received compensation of at least $100,000 for services rendered to the Company in all capacities during the 1996 fiscal year (the "Named Executive Officers").
LONG-TERM COMPENSATION AWARDS ------------- ALL OTHER ANNUAL COMPENSATION SHARES COMPENSATION FISCAL ------------------------ UNDERLYING ------------- NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) OPTIONS (#) ($) - - ------------------------------------------------- ----------- ---------- ------------ ------------- ------------- Sally G. Narodick(2)............................. 1996 $220,000 -0- -0- $4,800 Former Chairman and Chief Executive Officer 1995 $200,000 $100,000 37,500 $4,800 1994 $135,000 -0- 15,000 $4,800 Paul N. Bialek(3)................................ 1996 $100,000 -0- 30,000 -0- Vice President--Finance and Administration, 1995 $86,875 $43,438 30,000 -0- Chief Financial Officer, Treasurer and 1994 $51,917 $7,500 37,500 -0- Secretary Judith G. Meleliat(4)............................ 1996 $102,405 -0- 160,000 $112,500 Vice President--Marketing Donna G. Stanger................................. 1996 $175,000 -0- -0- -0- Vice President--Product Development and Acting 1995 $150,000 $75,000 52,500 -0- Chief Executive Officer 1994 $110,000 $30,000 67,500 -0- Daniel P. Vetras(5).............................. 1996 $125,000 $62,593 30,000 -0- Vice President--Consumer Sales 1995 $94,167 $47,084 -0- -0- 1994 $55,487 $16,385 67,500 -0-
- - ------------------------ (1) The Compensation Committee of the Company's Board of Directors adopts a Management Incentive Award Program for certain key employees each year. That program establishes several performance targets and a cash bonus pool based on a percentage of the aggregate officer base salaries. All of the Named Executive Officers were eligible for bonuses under that program. (2) All Other Compensation represents an automobile allowance. (3) Mr. Bialek joined the Company in September 1993. (4) Ms. Meleliat joined the Company in August 1995, and resigned from the Company in May 1996. All Other Compensation represents severance. (5) Mr. Vetras joined the Company in October 1993. A-7 OPTION GRANTS IN FISCAL YEAR 1996. The following table sets forth certain information with respect to stock options granted during the 1996 fiscal year to the Named Executive Officers.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES INDIVIDUAL GRANTS OF STOCK ---------------------------------------------------- PRICE NUMBER OF APPRECIATION SECURITIES PERCENT OF FOR UNDERLYING TOTAL OPTIONS OPTION OPTIONS GRANTED TO EXERCISE TERM(2) GRANTED EMPLOYEES IN PRICE EXPIRATION ------------ NAME (#)(1) FISCAL YEAR ($/SH) DATE 0%($) 5%($) - - -------------------------------------- ----------- ------------- ----------- ----------- ----------- ------------ Sally G. Narodick..................... -0- N/A N/A N/A N/A N/A Paul N. Bialek........................ 30,000 6.4% $ 25.75 3/11/06 -0- $485,821 Judith G. Meleliat(3)................. 90,000 19.1% $ 39.50 8/17/05 -0- $2,235,720 30,000 6.4% $ 29.50 12/19/05 -0- $556,572 40,000 8.5% $ 22.50 3/22/06 -0- $566,005 Donna G. Stanger...................... -0- N/A N/A N/A N/A N/A Daniel P. Vetras...................... 30,000 6.4% $ 29.50 12/19/05 -0- $556,572 NAME 10%($) - - -------------------------------------- ------------ Sally G. Narodick..................... N/A Paul N. Bialek........................ $ 1,231,166 Judith G. Meleliat(3)................. $ 5,665.754 $ 1,410,462 $ 1,434,368 Donna G. Stanger...................... N/A Daniel P. Vetras...................... $ 1,410,462
- - ------------------------ (1) The options listed were granted under the Company's Stock Option Plan. The exercise price of each option is equal to the fair market value of the underlying Shares on the date of grant as determined by the Compensation Committee of the Company's Board of Directors and vest ratably over four years from the date of grant. To the extent not already vested, the options generally become fully vested and exercisable upon a change in control of the Company. The options have ten year terms. (2) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5% and 10% rate of stock price appreciation are mandated by the rules of the Securities and Exchange Commission. None of the assumed rates of stock price appreciation represent the Company's estimate or projection of the future price of the Shares. (3) The options listed were not vested and expired on May 22, 1996, the date of Ms. Meleliat's termination of employment with the Company. OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR END OPTION VALUES. The following table sets forth certain information concerning option exercises by the Named Executive Officers during the 1996 fiscal year. In addition, the table includes the number of shares covered by both exercisable and unexercisable stock options as of June 30, 1996. Also reported are the values for "in-the-money" options, which values represent the positive spread between the exercise prices of those existing stock options and the fair market value of the Company's Common Stock as of June 30, 1996.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY NUMBER OF UNEXERCISED OPTIONS AT OPTIONS AT SHARES FISCAL YEAR END(#) FISCAL YEAR END($)(1) ACQUIRED ON DOLLAR VALUE -------------------------- --------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - -------------------------------------- ----------- ------------ ----------- ------------- ------------ ------------- Sally G. Narodick..................... -0- N/A 226,875 35,625 $3,876,994 $105,094 Paul N. Bialek........................ 9,000 $261,720 17,250 71,250 $186,300 $417,150 Judith G. Meleliat.................... -0- N/A -0- -0- -0- -0- Donna G. Stanger...................... 37,500 $1,254,863 76,875 73,125 $1,114,088 $950,400 Daniel P. Vetras...................... 10,500 $279,885 14,250 63,750 $194,798 $461,363
- - ------------------------ (1) These values represent the number of Shares subject to in-the-money options multiplied by the difference between the closing bid price of the Shares on June 30, 1996 ($20.00 per share), and the exercise price. A-8 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee is comprised of four nonemployee directors. The Committee is responsible for recommending to the Board of Directors compensation levels for the Chairman and Chief Executive Officer and for reviewing and approving compensation recommendations made by the Chief Executive Officer for all other officers, including the Vice Presidents named in the Summary Compensation Table. COMPENSATION POLICY. The Company's overall compensation policy is to provide competitive and incentive based compensation keyed to both individual and Company performance. In carrying out this policy, the Committee considers current corporate performance, the potential for future performance gains, whether Shareholder value has been or will be enhanced, and competitive market conditions for executives. Those factors are evaluated and considered for each officer on an annual basis, including consideration of the contribution made by each officer over the prior fiscal year. The Company's compensation package for its officers includes both short-term and long-term features in the form of base salary, variable compensation keyed to Company performance and stock options which are granted at the discretion of the Committee. Base salary and variable compensation award targets for executive officers are determined at the beginning of the fiscal year, and individual variable compensation awards are made after the fiscal year based on performance for the prior year. Base Salary is targeted within the competitive range for executives in similar positions at local, regional and national software companies having similar revenues and numbers of employees. The Committee also considers the compensation levels paid by direct competitors in the early childhood and educational software fields, including some of the companies listed in Hambrecht & Quist's Technology Index referenced in the Performance Graph below. Salaries for all officers are reviewed by the Committee at least annually and, for officers other than the Chief Executive Officer, may be increased or decreased at that time based on recommendations made by the Chief Executive Officer and on the Committee's assessment of how the respective individual contributes to the Company, as well as increases in competitive pay levels reflected in local, regional and national salary survey information reviewed by the Committee. In determining how the officer contributes to the Company, the Committee considers current corporate performance, including timely development of quality software products, market reception to new products, sales growth, market position and brand identity for quality educational products. The Committee also considers the potential for future performance gains. The Committee has neither set targets related to these factors nor has it attributed any specific weight to them for purposes of determining base salaries. Variable compensation keyed to Company performance for officers is intended to reflect the Company's belief that management's contribution to short- and long-term Company performance comes, in part, from providing a form of "at-risk" cash incentive award based on the achievement of pre-established financial targets relative to the Company's budget. Accordingly, a Management Incentive Award Program is adopted each year by the Committee. That Program establishes several performance targets and a cash bonus pool based on a percentage of the aggregate base salaries for all of the Company's officers. The Committee believes that the Management Incentive Award Program provides an appropriate link between Company performance and compensation incentives paid to officers. Since the performance targets are based on budgeted financial performance, the Program also serves to measure the achievement of corporate goals, such as the Company's progress on its strategic plan, timely development and market reception of new products, sales growth and profitability. The Committee has not attributed any specific weight to these factors. Generally, awards are made under the Program only if the Company's performance targets are achieved. The specific amount of an individual award is dependent upon the officer's relative performance during the prior fiscal year. The Committee does not independently measure performance of officers, but relies on allocation recommendations from the Chief Executive Officer, including her assessment of the respective officer's individual contribution toward meeting the performance targets. For the past fiscal year, the performance targets were not met and no bonuses were paid under the Program. A bonus in the A-9 amount of $62,593 was paid to the Vice President--Consumer Sales under a special incentive compensation arrangement dependent on actual sales in relation to pre-established quarterly sales goals. STOCK OPTIONS. Under the Company's Stock Option Plan, the Company has reserved for issuance a maximum of 1,950,000 shares of Common Stock. Committee members are not eligible to receive options under the Plan. Subject to the terms of the Plan, the Committee determines the terms and conditions of options granted under the Plan, including the exercise price. The exercise price of nonqualified stock options may not be less than the fair market value per share of common stock on the date of grant, as determined by the Committee. It has been the practice of the Committee to grant options with an exercise price equal to the closing bid price of the Company's Common Stock as reported on the Nasdaq National Market as of the date of grant. Therefore, stock options will only have value to recipients if value is created for Shareholders through increases in the Company's stock price. It has been the practice of the Committee to grant stock options which vest ratably over a four-year period from the date of grant. Option awards for officers other than the Chief Executive Officer are based on recommendations made by the Chief Executive Officer and on the Committee's assessment of how the respective individual contributes to the Company. The factors considered in this assessment are identical to those set forth in the base salary paragraph above. The Committee has not attributed any specific weight to these factors. The Committee also reviews prior option grants in determining current awards under the Plan. The Committee believes that stock options provide an incentive for officers and allow the Company to attract and retain management. As of July 17, 1996, the Company had outstanding options to purchase an aggregate of 1,109,385 shares of Common Stock under the Plan at a weighted average exercise price of $12.80 per share, 493,153 of which were exercisable within 60 days of July 17, 1995. Options to purchase 163,097 shares under the Plan had been exercised as of July 17, 1996. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The increase in Mrs. Narodick's base salary for the 1996 fiscal year was due to her significant contributions during the prior year to the Company's progress on its strategic plan, including timely and continued development of quality software products, market reception to new products, sales growth, establishment of market position and brand identity for quality educational products, and improvement in corporate administration. The foregoing factors, which reflect both individual performance and the overall performance of the Company, are not specifically weighted, but are considered as a whole and applied to the Chief Executive Officer along with consideration of the competitive mean for direct competitors in the early childhood and educational software fields. Mrs. Narodick's total cash compensation for fiscal year 1996 decreased by 27% from fiscal year 1995 due to the fact that no management incentive compensation award was paid for fiscal year 1996. The Committee believes the Company has an appropriate mix of short-term and long-term incentives to attract high quality executive officers and to reward them for continued, loyal service to the Company. July 17, 1996 COMPENSATION COMMITTEE W. Hunter Simpson (Chair) Frances M. Conley Harvey N. Gillis Douglas J. Mackenzie COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Based solely on its review of copies of reports made pursuant to Section 16(a) of the Exchange Act and written representations that no other reports were required, the Company believes that during the fiscal year ended June 30, 1996, all Section 16(a) filing requirements applicable to its officers, directors and 10 percent shareholders were satisfied except that one report was filed late by Douglas J. Mackenzie, a director of the Company. A-10 STOCK PRICE PERFORMANCE GRAPH The graph below compares the cumulative total return on the Shares with the cumulative total return of the H & Q Technology Index and the Nasdaq Stock Market--U.S. Index during the last five years ended June 30, 1996 (1). EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EDMARK CORP H&Q TECHNOLOGY NASDAQ STOCK MARKET - U.S. 1991 100 100 100 1992 219.06 113.63 120.13 1993 561.93 138.83 151.08 1994 409.54 140.86 152.52 1995 1538.17 235.88 203.59 1996 1142.86 279.83 261.37
- - ------------------------ (1) Assumes $100 invested on June 30, 1991, in the Shares, the H & Q Technology Index and the Nasdaq Stock Market--U.S. Index, with all dividends reinvested. Stock price performance shown above for the Shares is historical and not necessarily indicative of future price performance. Information before November 1991, when the Shares were accepted for listing on Nasdaq, is based on quotations from the National Quotation Bureau's Pink Sheets as published in the Journal American, Bellevue, Washington. A-11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 10, 1996, certain information with respect to the beneficial ownership of the Shares by (i) each person known by the Company to own beneficially more than 5% of the Shares, (ii) each of the Company's directors, (iii) certain of the Company's executive officers and (iv) all directors and executive officers as a group. Except as otherwise noted, the named beneficial owner has sole voting and investment power.
SHARES PERCENTAGE BENEFICIALLY OF NAME OWNED CLASS - - ---------------------------------------------------------------------------------- ----------------- ------------- Douglas J. Mackenzie(1)........................................................... 452,852 6.8% Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025 Frances M. Conley(2).............................................................. 411,500 6.2% Roanoke Investors' Limited Partnership c/o Roanoke Capital, Ltd. 1111 Third Avenue, Suite 2220 Seattle, WA 98101 Richard S. Thorp(3)............................................................... 385,987 5.8% c/o Supertronix, Inc. 14624--4th South Seattle, WA 98168 Keystone Investment Management Company(4)......................................... 375,000 5.7% 200 Berkeley Street Boston, MA 02116 Sally G. Narodick(5).............................................................. 272,221 3.9% Donna G. Stanger(6)............................................................... 183,000 2.7% Paul N. Bialek(7)................................................................. 123,500 1.8% Daniel P. Vetras(8)............................................................... 78,000 1.2% W. Hunter Simpson(9).............................................................. 43,360 * Timothy Mott(10).................................................................. 42,377 * Harvey N. Gillis(11).............................................................. 19,000 * Allen D. Glenn(12)................................................................ 11,900 * Allan Epstein(13)................................................................. 11,500 * All directors and executive officers as a group (13 persons)(14).................. 2,103,446 28.4%
- - ------------------------ * Less than 1%. (1) Includes 387,566 Shares held by Kleiner Perkins Caufield & Byers VI, L.P. ("KPCB") and 59,454 Shares held by KPCB VI Founders Fund, L.P. ("Founders"). The general partner of both KPCB and Founders is KPCB VI Associates, L.P. ("Associates"). Mr. Mackenzie, a director of the Company, has dispositive and voting power over the Shares held by KPCB and Founders pursuant to consent resolutions adopted by Associates on November 13, 1995. Mr. Mackenzie disclaims beneficial ownership of the Shares that exceed his pro rata interest in KPCB and Founders. Also includes 4,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (2) Includes 396,000 Shares held of record by Roanoke Investors' Limited Partnership ("Roanoke"). Ms. Conley, a director of the Company, is a shareholder, director and principal of Roanoke Capital, Ltd. ("Roanoke Capital"), the general partner of Roanoke. The only other shareholder, director and A-12 principal of Roanoke Capital is Gerald R. Conley, Ms. Conley's husband. Ms. Conley disclaims beneficial ownership of these shares that exceed Roanoke Capital's interest in Roanoke. Also includes 4,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (3) Includes 500 Shares held by Mr. Thorp's wife. Mr. Thorp disclaims beneficial ownership of those Shares. Also includes 4,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (4) Based on Schedule 13G filed by Keystone Investment Management Company ("Keystone") with the SEC and dated February 14, 1996, certain Keystone investment managers are considered beneficial owners in the aggregate of 375,000 Shares. (5) Includes 262,500 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (6) Includes 180,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (7) Represents 123,500 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (8) Represents 78,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (9) Includes 3,000 Shares held by Mr. Simpson's wife. Mr. Simpson disclaims beneficial ownership of those Shares. Also includes 19,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (10) All of these Shares are held of record by Ironwood Capital ("Ironwood"). Mr. Mott, a director of the Company, is a general partner of Ironwood. Mr. Mott disclaims beneficial ownership of the Shares that exceed his pro rata interest in Ironwood. Also includes 4,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (11) Includes 7,750 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (12) Includes 10,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (13) Represents 11,500 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. (14) Includes 774,000 Shares issuable upon exercise of options exercisable within 60 days of November 10, 1996. A-13 ANNEX B ALEX BROWN & SONS LOGO November 12, 1996 Board of Directors Edmark Corporation 6727 185th Avenue NE Redmond, WA 98073 Dear Members of the Board of Directors: Edmark Corporation ("Edmark" or the "Company"), International Business Machines Corporation ("IBM") and Indigo Acquisition Corp., a Washington Corporation and a wholly-owned subsidiary of IBM (the "Merger Sub"), propose to enter into an Agreement and Plan of Merger dated as of November 12, 1996 (the "Agreement"). Pursuant to the Agreement, the Merger Sub will commence a tender offer (the "Tender Offer") to purchase all outstanding shares of the common stock, no par value per share (the "Common Stock"), of Edmark at a price of $15.50 per share, net to the seller in cash. The Agreement also provides that following such tender offer, Merger Sub will be merged with and into Edmark (the "Merger"), and that each then outstanding share of Common Stock, other than shares held by IBM or the Company, will be converted into the right to receive $15.50 in cash. You have requested our opinion as to whether the cash consideration to be received by the holders of the Common Stock in the Tender Offer and Merger is fair, from a financial point of view, to such shareholders. Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. We have acted as financial advisor to the Board of Directors of Edmark in connection with the transaction described above and will receive a fee for our services, a portion of which is contingent upon the consummation of the Tender Offer and a portion of which becomes payable upon the delivery of this opinion. Alex. Brown served as the lead-managing underwriter to Edmark in its follow-on offering of Common Stock in August 1995. Alex. Brown maintains a market in the Common Stock of Edmark and regularly publishes research reports regarding the consumer software industry and the businesses and securities of Edmark and other publicly traded companies in the consumer software industry. In the ordinary course of business, Alex. Brown may actively trade the securities of Edmark for our own account and the account of our customers and, accordingly, may at any time hold a long or short position in such securities. B-1 ALEX BROWN LOGO Board of Directors Edmark Corporation November 12, 1996 Page Two In connection with this opinion, we have reviewed certain publicly available financial information and other information concerning Edmark and certain internal analyses and other information furnished to us by Edmark. We have also held discussions with the members of the senior management of Edmark regarding the businesses and prospects of the Company. In addition, we have (i) reviewed the reported price and trading activity for the Common Stock of Edmark, (ii) compared certain financial and stock market information for Edmark with similar information for certain companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which we deemed comparable in whole or in part, (iv) reviewed the terms of the Agreement and certain related documents and (v) performed such other studies and analyses and considered such other factors as we deemed appropriate. We have not independently verified the information described above and for purposes of this opinion have assumed the accuracy, completeness and fairness thereof. With respect to the information relating to the prospects of Edmark, we have assumed that such information reflects the best currently available judgments and estimates of the management of Edmark as to the likely future financial performance of Edmark. In addition, we have not made nor been provided with an independent evaluation or appraisal of the assets or liabilities of Edmark, nor have we been furnished with any such evaluations or appraisals, nor have we made any physical inspection of the properties or assets of Edmark. Our opinion is based on market, economic and other conditions as they exist and can be evaluated as of the date of this letter. Our opinion expressed herein was prepared for the use of the Board of Directors of the Company and does not constitute a recommendation to any shareholder as to whether such shareholder should tender its Common Stock pursuant to the Tender Offer. We hereby consent to the inclusion of this opinion in its entirety as an exhibit to any filing made with the Securities and Exchange Commission with respect to the Tender Offer and the Merger. Based upon, and subject to the foregoing, it is our opinion that, as of the date of this letter, the cash consideration to be received by the holders of the Common Stock in the Tender Offer and Merger is fair, from a financial point of view, to such shareholders. Very truly yours, /s/ Alex. Brown & Sons, Incorporated ------------------------------------ Alex. Brown & Sons, Incorporated B-2 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - - --------- ------------------------------------------------------------------------------------------------------ (a)(1) Offer to Purchase dated November 18, 1996.* (a)(2) Letter of Transmittal.* (a)(3) Press release issued by the Company and IBM on November 13, 1996. (a)(4) Opinion of Alex. Brown & Sons Incorporated dated November 12, 1996.* (a)(5) Letter to Shareholders dated November 18, 1996 from Frances M. Conley, Chairman of the Board of the Company.* (c)(1) Agreement and Plan of Merger dated as of November 12, 1996, among IBM, the Purchaser and the Company. (c)(2) Pages 3, 4, 6-8 and 14 of the Company's Proxy Statement dated September 11, 1996 relating to its Annual Meeting of Shareholders held on October 23, 1996. (c)(3) Article XII of the Company's Bylaws, as amended and restated. (c)(4) Article XIII of the Company's Amended and Restated Articles of Incorporation. (c)(5) Shareholder Agreement dated November 12, 1996, among IBM, the Purchaser and the Selling Shareholders identified therein.
- - ------------------------ * Included in copies mailed to shareholders. EX-99.(A)(1) 2 EXHIBIT 99(A)(1)-OFFER TO PURCHASE OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK (INCLUDING THE ASSOCIATED RIGHTS TO PURCHASE COMMON STOCK) OF EDMARK CORPORATION AT $15.50 NET PER SHARE BY INDIGO ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF INTERNATIONAL BUSINESS MACHINES CORPORATION ------------ THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, DECEMBER 16, 1996, UNLESS THE OFFER IS EXTENDED. ------------------------ THE BOARD OF DIRECTORS OF EDMARK CORPORATION (THE "COMPANY") HAS UNANIMOUSLY APPROVED THE OFFER AND THE MERGER REFERRED TO HEREIN AND DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES. ------------------------ THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER THAT NUMBER OF SHARES THAT WOULD CONSTITUTE TWO-THIRDS OF ALL OUTSTANDING SHARES ON A FULLY DILUTED BASIS ON THE DATE OF PURCHASE AND (2) ANY WAITING PERIOD UNDER THE HART- SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, AND THE REGULATIONS THEREUNDER APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED. ------------------------ IMPORTANT ANY SHAREHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH SHAREHOLDER'S SHARES (AS DEFINED HEREIN) SHOULD EITHER (1) COMPLETE AND SIGN THE LETTER OF TRANSMITTAL OR A FACSIMILE COPY THEREOF IN ACCORDANCE WITH THE INSTRUCTIONS IN THE LETTER OF TRANSMITTAL, HAVE SUCH SHAREHOLDER'S SIGNATURE THEREON GUARANTEED IF REQUIRED BY INSTRUCTION 1 TO THE LETTER OF TRANSMITTAL, MAIL OR DELIVER THE LETTER OF TRANSMITTAL (OR SUCH FACSIMILE), OR, IN THE CASE OF A BOOK-ENTRY TRANSFER EFFECTED PURSUANT TO THE PROCEDURE SET FORTH IN SECTION 2, AN AGENT'S MESSAGE (AS DEFINED HEREIN), AND ANY OTHER REQUIRED DOCUMENTS TO THE DEPOSITARY AND EITHER DELIVER THE CERTIFICATES FOR SUCH SHARES TO THE DEPOSITARY ALONG WITH THE LETTER OF TRANSMITTAL (OR FACSIMILE) OR DELIVER SUCH SHARES PURSUANT TO THE PROCEDURE FOR BOOK-ENTRY TRANSFER SET FORTH IN SECTION 2 PRIOR TO THE EXPIRATION OF THE OFFER OR (2) REQUEST SUCH SHAREHOLDER'S BROKER, DEALER, BANK, TRUST COMPANY OR OTHER NOMINEE TO EFFECT THE TRANSACTION FOR SUCH SHAREHOLDER. A SHAREHOLDER HAVING SHARES REGISTERED IN THE NAME OF A BROKER, DEALER, BANK, TRUST COMPANY OR OTHER NOMINEE MUST CONTACT SUCH BROKER, DEALER, BANK, TRUST COMPANY OR OTHER NOMINEE IF SUCH SHAREHOLDER DESIRES TO TENDER SUCH SHARES. A SHAREHOLDER WHO DESIRES TO TENDER SHARES AND WHOSE CERTIFICATES FOR SUCH SHARES ARE NOT IMMEDIATELY AVAILABLE OR WHO CANNOT COMPLY IN A TIMELY MANNER WITH THE PROCEDURE FOR BOOK-ENTRY TRANSFER, OR WHO CANNOT DELIVER ALL REQUIRED DOCUMENTS TO THE DEPOSITARY PRIOR TO THE EXPIRATION OF THE OFFER, MAY TENDER SUCH SHARES BY FOLLOWING THE PROCEDURE FOR GUARANTEED DELIVERY SET FORTH IN SECTION 2. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THIS OFFER TO PURCHASE, THE LETTER OF TRANSMITTAL AND THE NOTICE OF GUARANTEED DELIVERY MAY BE DIRECTED TO THE INFORMATION AGENT AT ITS ADDRESS AND TELEPHONE NUMBERS SET FORTH ON THE BACK COVER OF THIS OFFER TO PURCHASE. NOVEMBER 18, 1996 TABLE OF CONTENTS
PAGE ----- Introduction............................................................................................... 1 The Tender Offer........................................................................................... 3 1. Terms of the Offer..................................................................................... 3 2. Procedure for Tendering Shares......................................................................... 4 3. Withdrawal Rights...................................................................................... 8 4. Acceptance for Payment and Payment..................................................................... 8 5. Certain U.S. Federal Income Tax Consequences........................................................... 9 6. Price Range of the Shares; Dividends on the Shares..................................................... 10 7. Effect of the Offer on the Market for the Shares; Share Quotation; Exchange Act Registration; Margin Regulations............................................................................................ 11 8. Certain Information Concerning the Company............................................................. 12 9. Certain Information Concerning the Purchaser and IBM................................................... 13 10. Source and Amount of Funds............................................................................. 14 11. Contacts and Transactions with the Company; Background of the Offer.................................... 14 12. Purpose of the Offer; the Merger Agreement; the Shareholder Agreement; etc............................. 15 13. Dividends and Distributions............................................................................ 23 14. Certain Conditions of the Offer........................................................................ 24 15. Certain Legal Matters.................................................................................. 25 16. Fees and Expenses...................................................................................... 27 17. Miscellaneous.......................................................................................... 27 Schedule I--Directors and Executive Officers of IBM and the Purchaser...................................... S-1
To the Holders of Common Stock of Edmark Corporation: INTRODUCTION Indigo Acquisition Corp., a Washington corporation (the "Purchaser") which is a wholly owned subsidiary of International Business Machines Corporation, a New York corporation ("IBM"), hereby offers to purchase all outstanding shares of Common Stock, no par value (the "Shares"), of Edmark Corporation, a Washington corporation (the "Company"), together with the associated rights (the "Rights") to purchase Shares issued pursuant to the Shareholder Rights Agreement dated as of November 29, 1995 between the Company and ChaseMellon Shareholder Services, L.L.C. (as successor to First Interstate Bank of Washington, N.A.), as rights agent (as amended, the "Rights Agreement"), at a price of $15.50 per Share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements hereto or thereto, collectively constitute the "Offer"). Unless the context otherwise requires, all references to Shares include the associated Rights. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, transfer taxes on the purchase of Shares pursuant to the Offer. The Purchaser will pay all fees and expenses of ChaseMellon Shareholder Services, L.L.C., which is acting as the Depositary (the "Depositary"), and Morrow & Co., Inc., which is acting as the Information Agent (the "Information Agent"), incurred in connection with the Offer. See Section 16. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE OFFER AND THE MERGER (AS DEFINED BELOW) AND DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES. THE FACTORS CONSIDERED BY THE BOARD OF DIRECTORS OF THE COMPANY IN ARRIVING AT ITS DECISION TO APPROVE THE OFFER AND THE MERGER AND TO RECOMMEND THAT SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES ARE DESCRIBED IN THE COMPANY'S SOLICITATION/ RECOMMENDATION STATEMENT ON SCHEDULE 14D-9 (THE "SCHEDULE 14D-9"), WHICH IS BEING MAILED TO SHAREHOLDERS OF THE COMPANY HEREWITH. ALEX. BROWN & SONS INCORPORATED ("ALEX. BROWN") HAS ACTED AS THE COMPANY'S FINANCIAL ADVISOR. THE OPINION OF ALEX. BROWN DATED NOVEMBER 12, 1996 THAT, AS OF SUCH DATE, THE CONSIDERATION TO BE RECEIVED BY HOLDERS OF SHARES IN THE OFFER AND THE MERGER IS FAIR, FROM A FINANCIAL POINT OF VIEW, TO SUCH HOLDERS, IS SET FORTH IN FULL AS AN ANNEX TO THE SCHEDULE 14D-9. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE (AS DEFINED IN SECTION 1) THAT NUMBER OF SHARES THAT WOULD CONSTITUTE TWO-THIRDS OF ALL OUTSTANDING SHARES ON A FULLY DILUTED BASIS ON THE DATE OF PURCHASE (THE "MINIMUM CONDITION") AND (II) ANY WAITING PERIOD UNDER THE HART-SCOTT -RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, AND THE REGULATIONS THEREUNDER (THE "HSR ACT") APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED (THE "HSR CONDITION"). The Purchaser reserves the right (subject to obtaining the consent of the Company and the applicable rules and regulations of the Securities and Exchange Commission (the "Commission")), which it presently has no intention of exercising, to waive or reduce the Minimum Condition. See Sections 1, 12 and 14. The Offer is being made pursuant to the Agreement and Plan of Merger dated as of November 12, 1996 (the "Merger Agreement"), among IBM, the Purchaser and the Company pursuant to which, following the consummation of the Offer and the satisfaction or waiver of certain conditions, the Purchaser will be merged with and into the Company, or, at the election of IBM, the Company may be merged with and into the Purchaser (the "Merger"). In the Merger, each outstanding Share (other than Shares owned by IBM, the Purchaser or any other subsidiary of IBM or by shareholders, if any, who are entitled to and who properly exercise dissenters' rights under Washington law) will be converted into the right to receive 1 an amount in cash equal to the price per Share paid pursuant to the Offer, without interest thereon. See Section 12. Consummation of the Merger is subject to a number of conditions, including approval by shareholders of the Company, if such approval is required by applicable law. If the Purchaser acquires 90% or more of the outstanding Shares pursuant to the Offer or otherwise, the Purchaser may be able to effect the Merger pursuant to the short-form merger provisions of the Washington Business Corporation Act (the "WBCA"), without prior notice to, or any action by, any shareholder of the Company. See Section 12. In connection with the execution of the Merger Agreement, the Purchaser and IBM entered into a Shareholder Agreement dated as of November 12, 1996 (the "Shareholder Agreement"), with all of the directors and executive officers of the Company and certain other persons (collectively, the "Selling Shareholders"), pursuant to which such Selling Shareholders have unconditionally agreed to tender into the Offer, and not to withdraw therefrom, the 1,325,946 Shares that they collectively owned on November 12, 1996, as well as any Shares they thereafter acquire, including upon the exercise of Stock Options (as defined below). In addition, the Selling Shareholders have agreed to sell to the Purchaser, and the Purchaser has agreed to purchase, all the Selling Shareholders' Shares (including those acquired after the execution of the Shareholder Agreement) at a price per Share of $15.50, or such higher price per Share as may be offered by the Purchaser in the Offer, provided that (i) such obligation to purchase is subject to the Purchaser having accepted Shares for payment under the Offer and the Minimum Condition having been satisfied, which conditions to such obligation may be waived by the Purchaser in its sole discretion, and (ii) such obligation to sell is subject to the Minimum Condition having been satisfied or a Takeover Proposal (as defined herein) having been made. Under the Shareholder Agreement, each Selling Shareholder has granted an irrevocable proxy for the benefit of the Purchaser with respect to the Shares subject to the Shareholder Agreement to vote such Shares under certain circumstances. The Merger Agreement and the Shareholder Agreement are more fully described in Section 12. The Company has informed the Purchaser that, as of November 10, 1996, there were 6,632,111 Shares issued and outstanding and 1,248,110 Shares reserved for issuance upon the exercise of outstanding options to purchase Shares ("Stock Options"). Based upon the foregoing and assuming that no Stock Options are exercised or Shares otherwise issued after November 10, 1996, there would be 7,880,221 Shares outstanding on a fully diluted basis and the Minimum Condition will be satisfied if at least 5,253,481 Shares (including the 1,325,946 Shares subject to the Shareholder Agreement) are validly tendered and not withdrawn prior to the Expiration Date. The actual number of Shares required to be tendered to satisfy the Minimum Condition will depend upon the actual number of Shares outstanding on the date that the Purchaser accepts Shares for payment pursuant to the Offer. If the Minimum Condition is satisfied and the Purchaser accepts for payment Shares tendered pursuant to the Offer, the Purchaser will be able to elect a majority of the members of the Company's Board of Directors and to effect the Merger without the affirmative vote of any other shareholder of the Company. See Section 12. Certain U.S. federal income tax consequences of the sale of Shares pursuant to the Offer and the conversion of Shares pursuant to the Merger are described in Section 5. THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION THAT SHOULD BE READ BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 2 THE TENDER OFFER 1. TERMS OF THE OFFER Upon the terms and subject to the conditions of the Offer, the Purchaser will accept for payment and pay for all Shares validly tendered prior to the Expiration Date and not theretofore withdrawn in accordance with Section 3. The term "Expiration Date" means 12:00 midnight, New York City time, on Monday, December 16, 1996, unless and until the Purchaser, in its sole discretion (but subject to the terms of the Merger Agreement), shall have extended the period of time during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date on which the Offer, as so extended by the Purchaser, will expire. In the Merger Agreement the Purchaser has agreed that it will not, without the consent of the Company, extend the Offer, except that, without the consent of the Company, the Purchaser may extend the Offer (a) if at the Expiration Date any of the conditions to the Purchaser's obligation to accept Shares for payment are not satisfied or waived, until such time as such conditions are satisfied or waived, (b) for any period required by any rule, regulation, interpretation or position of the Commission or the staff thereof applicable to the Offer and (c) for any reason on one or more occasions for an aggregate period of not more than 25 business days beyond the latest expiration date that would otherwise be permitted under the terms of the Merger Agreement as described in this sentence. As used in this Offer to Purchase, "business day" has the meaning set forth in Rule 14d-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, the Purchaser has agreed in the Merger Agreement that it will not, without the consent of the Company, (a) reduce the number of Shares subject to the Offer, (b) reduce the Offer Price, (c) add to the conditions set forth in Section 14, (d) change the form of consideration payable in the Offer or (e) amend any other term of the Offer in any manner adverse to the Company's shareholders. Subject to the terms of the Merger Agreement and the applicable rules and regulations of the Commission, the Purchaser reserves the right (but shall not be obligated), at any time and from time to time, and regardless of whether or not any of the events or facts set forth in Section 14 hereof shall have occurred, (a) to extend the period of time during which the Offer is open, and thereby delay acceptance for payment of and the payment for any Shares, by giving oral or written notice of such extension to the Depositary and (b) to amend the Offer in any other respect by giving oral or written notice of such amendment to the Depositary. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE FOR TENDERED SHARES, WHETHER OR NOT THE PURCHASER EXERCISES ITS RIGHT TO EXTEND THE OFFER. If by 12:00 midnight, New York City time, on Monday, December 16, 1996 (or any date or time then set as the Expiration Date), any or all of the conditions to the Offer have not been satisfied or waived, the Purchaser reserves the right (but shall not be obligated), subject to the terms and conditions contained in the Merger Agreement and to the applicable rules and regulations of the Commission, (a) to terminate the Offer and not accept for payment or pay for any Shares and return all tendered Shares to tendering shareholders, (b) to waive all the unsatisfied conditions and accept for payment and pay for all Shares validly tendered prior to the Expiration Date and not theretofore withdrawn, (c) to extend the Offer and, subject to the right of shareholders to withdraw Shares until the Expiration Date, retain the Shares that have been tendered during the period or periods for which the Offer is extended or (d) to amend the Offer. There can be no assurance that the Purchaser will exercise its right to extend the Offer. Any extension, waiver, amendment or termination will be followed as promptly as practicable by public announcement. In the case of an extension, Rule 14e-l(d) under the Exchange Act requires that the announcement be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date in accordance with the public announcement requirements of Rule 14d-4(c) under the Exchange Act. Subject to applicable law (including Rules 14d-4(c) and 14d-6(d) under the Exchange Act, 3 which require that any material change in the information published, sent or given to shareholders in connection with the Offer be promptly disseminated to shareholders in a manner reasonably designed to inform shareholders of such change) and without limiting the manner in which the Purchaser may choose to make any public announcement, the Purchaser will not have any obligation to publish, advertise or otherwise communicate any such public announcement other than by making a release to the Dow Jones News Service. If the Purchaser extends the Offer or if the Purchaser is delayed in its acceptance for payment of or payment (whether before or after its acceptance for payment of Shares) for Shares or it is unable to pay for Shares pursuant to the Offer for any reason, then, without prejudice to the Purchaser's rights under the Offer, the Depositary may retain tendered Shares on behalf of the Purchaser, and such Shares may not be withdrawn except to the extent tendering shareholders are entitled to withdrawal rights as described in Section 3. However, the ability of the Purchaser to delay the payment for Shares that the Purchaser has accepted for payment is limited by Rule 14e-1(c) under the Exchange Act, which requires that a bidder pay the consideration offered or return the securities deposited by or on behalf of holders of securities promptly after the termination or withdrawal of such bidder's offer, and by the terms of the Merger Agreement, which require that the Purchaser pay for Shares accepted for payment as soon as practicable after the Expiration Date. If the Purchaser makes a material change in the terms of the Offer or the information concerning the Offer or waives a material condition of the Offer (including, with the Company's consent, a waiver of the Minimum Condition), the Purchaser will disseminate additional tender offer materials and extend the Offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act. The minimum period during which an offer must remain open following material changes in the terms of the offer or information concerning the offer, other than a change in price or a change in the percentage of securities sought, will depend upon the facts and circumstances then existing, including the relative materiality of the changed terms or information. With respect to a change in price or a change in the percentage of securities sought, a minimum period of 10 business days is generally required to allow for adequate dissemination to shareholders. Consummation of the Offer is conditioned upon satisfaction of the Minimum Condition, the HSR Condition and the other conditions set forth in Section 14. Subject to the terms and conditions contained in the Merger Agreement, the Purchaser reserves the right (but shall not be obligated) to waive any or all such conditions. However, if the Purchaser waives or amends the Minimum Condition (which action may not be taken without the Company's consent) during the last five business days during which the Offer is open, the Purchaser will be required to extend the Expiration Date so that the Offer will remain open for at least five business days after the announcement of such waiver or amendment is first published, sent or given to holders of Shares and may also be required to extend the Offer if other conditions are waived, depending upon the materiality of the waiver. The Company has provided the Purchaser with the Company's shareholder lists and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed by the Purchaser to record holders of Shares, and will be furnished to brokers, dealers, banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder lists, or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares. 2. PROCEDURE FOR TENDERING SHARES VALID TENDER. For a shareholder validly to tender Shares pursuant to the Offer, either (a) a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, together with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message (as defined below), and any other required documents, must be received by the Depositary at one of its addresses set forth on the 4 back cover of this Offer to Purchase prior to the Expiration Date and either certificates for tendered Shares must be received by the Depositary at one of such addresses or such Shares must be delivered pursuant to the procedures for book-entry transfer set forth below (and a Book-Entry Confirmation (as defined below) received by the Depositary), in each case prior to the Expiration Date, or (b) the tendering shareholder must comply with the guaranteed delivery procedures set forth below. The Depositary will establish accounts with respect to the Shares at The Depository Trust Company, the Midwest Securities Trust Company and the Philadelphia Depository Trust Company (the "Book-Entry Transfer Facilities") for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in any of the Book-Entry Transfer Facilities' systems may make book-entry delivery of Shares by causing a Book-Entry Transfer Facility to transfer such Shares into the Depositary's account in accordance with such Book-Entry Transfer Facility's procedures for such transfer. However, although delivery of Shares may be effected through book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility, the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message, and any other required documents, must, in any case, be transmitted to, and received by, the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the tendering shareholder must comply with the guaranteed delivery procedures described below. The confirmation of a book-entry transfer of Shares into the Depositary's account at a Book-Entry Transfer Facility as described above is referred to herein as a "Book-Entry Confirmation". DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. The term "Agent's Message" means a message transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgement from the participant in such Book-Entry Transfer Facility tendering the Shares that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Purchaser may enforce such agreement against the participant. THE METHOD OF DELIVERY OF SHARES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE ELECTION AND RISK OF THE TENDERING SHAREHOLDER. SHARES WILL BE DEEMED DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE OF A BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. SIGNATURE GUARANTEES. No signature guarantee is required on the Letter of Transmittal (a) if the Letter of Transmittal is signed by the registered holder(s) (which term, for purposes of this Section, includes any participant in any of the Book-Entry Transfer Facilities' systems whose name appears on a security position listing as the owner of the Shares) of Shares tendered therewith and such registered holder has not completed either the box entitled "Special Delivery Instructions" or the box entitled "Special Payment Instructions" on the Letter of Transmittal or (b) if such Shares are tendered for the account of a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (such participant, an "Eligible Institution"). In all other cases, all signatures on the Letter of Transmittal must be guaranteed by an Eligible Institution. See Instructions 1 and 5 to the Letter of Transmittal. If the certificates for Shares are registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made or certificates for Shares not tendered or not accepted for payment are to be returned to a person other than the registered holder of the certificates surrendered, the tendered certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered holders or owners appear on the certificates, with the 5 signatures on the certificates or stock powers guaranteed as aforesaid. See Instructions 1 and 5 to the Letter of Transmittal. GUARANTEED DELIVERY. If a shareholder desires to tender Shares pursuant to the Offer and such shareholder's certificates for Shares are not immediately available or the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Depositary prior to the Expiration Date, such shareholder's tender may be effected if all the following conditions are met: (i) such tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by the Purchaser, is received by the Depositary, as provided below, prior to the Expiration Date; and (iii) the certificates for all tendered Shares, in proper form for transfer (or a Book-Entry Confirmation with respect to all such Shares), together with a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and any other required documents are received by the Depositary within three trading days after the date of execution of such Notice of Guaranteed Delivery. A "trading day" is any day on which the Nasdaq National Market (the "Nasdaq National Market") operated by the National Association of Securities Dealers, Inc. (the "NASD") is open for business. The Notice of Guaranteed Delivery may be delivered by hand to the Depositary or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in such Notice of Guaranteed Delivery. Notwithstanding any other provision hereof, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of (a) certificates for (or a timely Book-Entry Confirmation with respect to) such Shares, (b) a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and (c) any other documents required by the Letter of Transmittal. Accordingly, tendering shareholders may be paid at different times depending upon when certificates for Shares or Book-Entry Confirmations with respect to Shares are actually received by the Depositary. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES TO BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. The valid tender of Shares pursuant to one of the procedures described above will constitute a binding agreement between the tendering shareholder and the Purchaser upon the terms and subject to the conditions of the Offer. DISTRIBUTION OF RIGHTS. Holders of Shares will be required to tender one Right for each Share tendered to effect a valid tender of such Share. Unless and until the Distribution Date (as defined in the Rights Agreement) occurs, the Rights are represented by and transferred with the Shares. Accordingly, if the Distribution Date does not occur prior to the Expiration Date of the Offer (and under the terms of the Rights Agreement, a Distribution Date will not occur by reason of the Offer), a tender of Shares will constitute a tender of the associated Rights. If, however, pursuant to the Rights Agreement or otherwise, a Distribution Date does occur, certificates representing a number of Rights equal to the number of Shares being tendered must be delivered to the Depositary in order for such Shares to be validly tendered. If a Distribution Date has occurred, a tender of Shares without Rights constitutes an agreement by the tendering shareholder to deliver certificates representing a number of Rights equal to the number of Shares tendered pursuant to the Offer to the Depositary within three trading days after the date such certificates are distributed. The Purchaser reserves the right to require that it receive such certificates prior to accepting Shares for payment. Payment for Shares tendered and purchased pursuant to the Offer will be 6 made only after timely receipt by the Depositary of, among other things, such certificates, if such certificates have been distributed to holders of Shares. The Purchaser will not pay any additional consideration for the Rights tendered pursuant to the Offer. APPOINTMENT. By executing a Letter of Transmittal as set forth above, the tendering shareholder will irrevocably appoint designees of the Purchaser as such shareholder's attorneys-in-fact and proxies in the manner set forth in the Letter of Transmittal, each with full power of substitution, to the full extent of such shareholder's rights with respect to the Shares tendered by such shareholder and accepted for payment by the Purchaser and with respect to any and all other Shares or other securities or rights issued or issuable in respect of such Shares on or after November 12, 1996. All such proxies will be considered coupled with an interest in the tendered Shares. Such appointment will be effective when, and only to the extent that, the Purchaser accepts for payment Shares tendered by such shareholder as provided herein. Upon such appointment, all prior powers of attorney, proxies and consents given by such shareholder with respect to such Shares or other securities or rights will, without further action, be revoked and no subsequent powers of attorney, proxies, consents or revocations may be given (and, if given, will not be deemed effective). The designees of the Purchaser will thereby be empowered to exercise all voting and other rights with respect to such Shares and other securities or rights in respect of any annual, special or adjourned meeting of the Company's shareholders, actions by written consent in lieu of any such meeting or otherwise, as they in their sole discretion deem proper. The Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon the Purchaser's acceptance for payment of such Shares, the Purchaser must be able to exercise full voting, consent and other rights with respect to such Shares and other securities or rights, including voting at any meeting of shareholders. DETERMINATION OF VALIDITY. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any tender of Shares will be determined by the Purchaser in its sole discretion, which determination will be final and binding. The Purchaser reserves the absolute right to reject any or all tenders determined by it not to be in proper form or the acceptance for payment of or payment for which may, in the opinion of the Purchaser's counsel, be unlawful. The Purchaser also reserves the absolute right to waive any defect or irregularity in the tender of any Shares of any particular shareholder whether or not similar defects or irregularities are waived in the case of other shareholders. No tender of Shares will be deemed to have been validly made until all defects or irregularities relating thereto have been cured or waived. None of the Purchaser, IBM, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. The Purchaser's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. BACKUP WITHHOLDING. In order to avoid "backup withholding" of U.S. federal income tax on payments of cash pursuant to the Offer, a shareholder surrendering Shares in the Offer must, unless an exemption applies, provide the Depositary with such shareholder's correct taxpayer identification number ("TIN") on a Substitute Form W-9 and certify under penalties of perjury that such TIN is correct and that such shareholder is not subject to backup withholding. If a shareholder does not provide such shareholder's correct TIN or fails to provide the certifications described above, the Internal Revenue Service (the "IRS") may impose a penalty on such shareholder and payment of cash to such shareholder pursuant to the Offer may be subject to backup withholding of 31%. All shareholders surrendering Shares pursuant to the Offer should complete and sign the main signature form and the Substitute Form W-9 included as part of the Letter of Transmittal to provide the information and certification necessary to avoid backup withholding (unless an applicable exemption exists and is proved in a manner satisfactory to the Purchaser and the Depositary). Certain shareholders (including, among others, all corporations and certain foreign individuals and entities) are not subject to backup withholding. Noncorporate foreign shareholders should complete and sign the main signature form and a Form W-8, Certificate of Foreign Status, a copy of which may be obtained from the Depositary, in order to avoid backup withholding. See Instruction 9 to the Letter of Transmittal. 7 3. WITHDRAWAL RIGHTS Except as otherwise provided in this Section 3, tenders of Shares are irrevocable. Shares tendered pursuant to the Offer may be withdrawn pursuant to the procedures set forth below at any time prior to the Expiration Date and, unless theretofore accepted for payment and paid for by the Purchaser pursuant to the Offer, may also be withdrawn at any time after Thursday, January 16, 1997. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase and must specify the name of the person having tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of the Shares to be withdrawn, if different from the name of the person who tendered the Shares. If certificates for Shares have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such certificates, the serial numbers shown on such certificates must be submitted to the Depositary and, unless such Shares have been tendered by an Eligible Institution, the signatures on the notice of withdrawal must be guaranteed by an Eligible Institution. If Shares have been delivered pursuant to the procedures for book-entry transfer as set forth in Section 2, any notice of withdrawal must also specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with such Book-Entry Transfer Facility's procedures. Withdrawals of tenders of Shares may not be rescinded, and any Shares properly withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. However, withdrawn Shares may be retendered by again following one of the procedures described in Section 2 at any time prior to the Expiration Date. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Purchaser in its sole discretion, which determination will be final and binding. None of the Purchaser, IBM, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. 4. ACCEPTANCE FOR PAYMENT AND PAYMENT Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Purchaser will accept for payment and will pay for all Shares validly tendered prior to the Expiration Date and not properly withdrawn in accordance with Section 3 promptly after the Expiration Date. All determinations concerning the satisfaction of such terms and conditions will be within the Purchaser's sole discretion, which determinations will be final and binding. See Sections 1 and 14. The Purchaser expressly reserves the right to delay acceptance for payment of or payment for Shares in order to comply in whole or in part with any applicable law, including, without limitation, the HSR Act. Any such delays will be effected in compliance with Rule 14e-l(c) under the Exchange Act (relating to a bidder's obligation to pay for or return tendered securities promptly after the termination or withdrawal of such bidder's offer). IBM filed a Notification and Report Form with respect to the Offer under the HSR Act on November 15, 1996. The waiting period under the HSR Act with respect to the Offer will expire at 11:59 p.m., New York City time, on November 30, 1996, unless early termination of the waiting period is granted. However, the Antitrust Division of the Department of Justice (the "Antitrust Division") or the Federal Trade Commission (the "FTC") may extend the waiting period by requesting additional information or documentary material from IBM. If such a request is made, such waiting period will expire at 11:59 p.m., New York City time, on the 10th day after substantial compliance by IBM with such request. See Section 15 hereof for additional information concerning the HSR Act and the applicability of the antitrust laws to the Offer. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (a) certificates for (or a timely Book-Entry Confirmation with respect 8 to) such Shares, (b) a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and (c) any other documents required by the Letter of Transmittal. The per Share consideration paid to any shareholder pursuant to the Offer will be the highest per Share consideration paid to any other shareholder pursuant to the Offer. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares properly tendered to the Purchaser and not withdrawn as, if and when the Purchaser gives oral or written notice to the Depositary of the Purchaser's acceptance for payment of such Shares. Payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as an agent for tendering shareholders for the purpose of receiving payment from the Purchaser and transmitting payment to tendering shareholders. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES TO BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. If the Purchaser is delayed in its acceptance for payment of or payment for Shares or is unable to accept for payment or pay for Shares pursuant to the Offer for any reason, then, without prejudice to the Purchaser's rights under the Offer (but subject to compliance with Rule 14e-1(c) under the Exchange Act, which requires that a tender offeror pay the consideration offered or return the tendered securities promptly after termination or withdrawal of a tender offer, and to the terms of the Merger Agreement), the Depositary may, nevertheless, on behalf of the Purchaser, retain tendered Shares, and such Shares may not be withdrawn except to the extent tendering shareholders are entitled to exercise, and duly exercise, withdrawal rights as described in Section 3. If any tendered Shares are not purchased pursuant to the Offer for any reason, certificates for any such Shares will be returned, without expense to the tendering shareholder (or, in the case of Shares delivered by book-entry transfer of such Shares into the Depositary's account at a Book-Entry Transfer Facility pursuant to the procedure set forth in Section 2, such Shares will be credited to an account maintained at the appropriate Book-Entry Transfer Facility), as promptly as practicable after the expiration or termination of the Offer. The Purchaser reserves the right to transfer or assign, in whole or from time to time in part, to IBM, or to one or more direct or indirect wholly owned subsidiaries of IBM, the right to purchase Shares tendered pursuant to the Offer, but any such transfer or assignment will not relieve the Purchaser of its obligations under the Offer and will in no way prejudice the rights of tendering shareholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. 5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES The receipt of cash pursuant to the Offer or the Merger will be a taxable transaction for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and may also be a taxable transaction under applicable state, local or foreign income or other tax laws. Generally, for U.S. federal income tax purposes, a tendering shareholder will recognize gain or loss equal to the difference between the amount of cash received by the shareholder pursuant to the Offer or the Merger and the aggregate tax basis in the Shares tendered by the shareholder and purchased pursuant to the Offer or converted in the Merger, as the case may be. Gain or loss will be calculated separately for each block of Shares tendered and purchased pursuant to the Offer or converted in the Merger, as the case may be. If Shares are held by a shareholder as capital assets, gain or loss recognized by the shareholder will be capital gain or loss, which will be long-term capital gain or loss if the shareholder's holding period for the Shares exceeds one year. Under present law, long-term capital gains recognized by an individual shareholder will generally be taxed at a maximum U.S. federal marginal tax rate of 28%, and long-term capital gains recognized by a corporate shareholder will be taxed at a maximum U.S. federal marginal tax rate of 35%. In addition, under present law the ability to use capital losses to offset ordinary income is limited. 9 A shareholder that tenders Shares may be subject to 31% backup withholding unless the shareholder provides its TIN and certifies that such number is correct or properly certifies that it is awaiting a TIN, or unless an exemption applies. Exemptions are available for shareholders that are corporations and for certain foreign individuals and entities. A shareholder that does not furnish a required TIN may be subject to a penalty imposed by the IRS. See "Backup Withholding" under Section 2. If backup withholding applies to a shareholder, the Depositary is required to withhold 31% from payments to such shareholder. Backup withholding is not an additional tax. Rather, the amount of the backup withholding can be credited against the U.S. federal income tax liability of the person subject to the backup withholding, provided that the required information is given to the IRS. If backup withholding results in an overpayment of tax, a refund can be obtained by the shareholder upon filing an income tax return. THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE WITH RESPECT TO SHARES RECEIVED PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION OR WITH RESPECT TO HOLDERS OF SHARES WHO ARE SUBJECT TO SPECIAL TAX TREATMENT UNDER THE CODE, SUCH AS NON-U.S. PERSONS, LIFE INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS AND FINANCIAL INSTITUTIONS, AND MAY NOT APPLY TO A HOLDER OF SHARES IN LIGHT OF INDIVIDUAL CIRCUMSTANCES. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS) OF THE OFFER AND THE MERGER. 6. PRICE RANGE OF THE SHARES; DIVIDENDS ON THE SHARES The Shares are traded in the over-the-counter market and prices are quoted on the Nasdaq National Market under the symbol EDMK, and have been at all times since February 22, 1995. Prior to such time, the Shares were traded in the over-the-counter market and prices were quoted on the Nasdaq SmallCap Market. The following table sets forth, for each of the periods indicated, the high and low last reported sales prices per Share as reported by the Nasdaq National Market or the Nasdaq SmallCap Market, as applicable, and the Dow Jones News Retrieval Service. All amounts in the following table have been adjusted to reflect a three-for-two split of the Shares effected in the form of a 50% share dividend to shareholders of record on July 27, 1995 and payable August 3, 1995. EDMARK CORPORATION
HIGH LOW --------- --------- 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 FISCAL YEAR ENDED JUNE 30, 1996: 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 ENDING JUNE 30, 1997: First Quarter................................................................................ $ 20.25 $ 11.25 Second Quarter (through November 15, 1996)................................................... 15.38 9.50
On November 12, 1996, the last full trading day before the public announcement of the execution of the Merger Agreement, the last reported sales price of the Shares on the Nasdaq National Market was $11.44 per Share. On November 15, 1996, the last full trading day before commencement of the Offer, the 10 last reported sales price of the Shares on the Nasdaq National Market was $15.31 per Share. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES. The Company has informed the Purchaser that it has never paid any dividends on the Shares. 7. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; SHARE QUOTATION; EXCHANGE ACT REGISTRATION; MARGIN REGULATIONS MARKET FOR THE SHARES. The purchase of Shares pursuant to the Offer will reduce the number of holders of Shares and the number of Shares that might otherwise trade publicly and could adversely affect the liquidity and market value of the remaining Shares held by the public. SHARE QUOTATION. Depending upon the number of Shares purchased pursuant to the Offer, the Shares may no longer meet the requirements of the NASD for continued inclusion in the Nasdaq National Market, which require that an issuer have at least 200,000 publicly held shares, held by at least 400 shareholders or 300 shareholders of round lots, with a market value of at least $1,000,000, and have net tangible assets of at least $1,000,000, $2,000,000 or $4,000,000, depending on profitability levels during the issuer's four most recent fiscal years. If these standards are not met, the Shares might nevertheless continue to be included in the NASD's Nasdaq Stock Market (the "Nasdaq Stock Market") with quotations published in the Nasdaq "additional list" or in one of the "local lists", but if the number of holders of the Shares were to fall below 300, or if the number of publicly held Shares were to fall below 100,000 or there were not at least two registered and active market makers for the Shares, the NASD's rules provide that the Shares would no longer be "qualified" for Nasdaq Stock Market reporting and the Nasdaq Stock Market would cease to provide any quotations. Shares held directly or indirectly by directors, officers or beneficial owners of more than 10% of the Shares are not considered as being publicly held for this purpose. According to the Company, as of November 10, 1996, there were approximately 542 holders of record of Shares and there were 6,632,111 Shares outstanding. If, as a result of the purchase of Shares pursuant to the Offer or otherwise, the Shares no longer meet the requirements of the NASD for continued inclusion in the Nasdaq National Market or in any other tier of the Nasdaq Stock Market and the Shares are no longer included in the Nasdaq National Market or in any other tier of the Nasdaq Stock Market, as the case may be, the market for Shares could be adversely affected. In the event that the Shares no longer meet the requirements of the NASD for continued inclusion in any tier of the Nasdaq Stock Market, it is possible that the Shares would continue to trade in the over-the-counter market and that price quotations would be reported by other sources. The extent of the public market for the Shares and the availability of such quotations would, however, depend upon the number of holders of Shares remaining at such time, the interests in maintaining a market in Shares on the part of securities firms, the possible termination of registration of the Shares under the Exchange Act, as described below, and other factors. EXCHANGE ACT REGISTRATION. The Shares are currently registered under the Exchange Act. Registration of the Shares under the Exchange Act may be terminated upon application of the Company to the Commission if the Shares are neither listed on a national securities exchange nor held by 300 or more holders of record. Termination of registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to its shareholders and to the Commission and would make certain provisions of the Exchange Act no longer applicable to the Company, such as the short-swing profit recovery provisions of Section 16(b) of the Exchange Act, the requirement of furnishing a proxy statement pursuant to Section 14(a) of the Exchange Act in connection with shareholders' meetings and the related requirement of furnishing an annual report to shareholders and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions. Furthermore, the ability of "affiliates" of the Company and persons holding "restricted securities" of the Company to dispose of such securities pursuant to Rule 144 or 144A promulgated under the Securities Act of 1933 may be impaired or eliminated. The Purchaser intends to seek to cause the Company to apply for 11 termination of registration of the Shares under the Exchange Act as soon after the completion of the Offer as the requirements for such termination are met. If registration of the Shares is not terminated prior to the Merger, then the Shares will be delisted from all stock exchanges and the registration of the Shares under the Exchange Act will be terminated following the consummation of the Merger. MARGIN REGULATIONS. The Shares are currently "margin securities" under the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of the Shares. Depending upon factors similar to those described above regarding listing and market quotations, it is possible that, following the Offer, the Shares would no longer constitute "margin securities" for the purposes of the margin regulations of the Federal Reserve Board and therefore could no longer be used as collateral for loans made by brokers. 8. CERTAIN INFORMATION CONCERNING THE COMPANY The Company is a Washington corporation with its principal offices at 6727 185th Avenue N.E., Redmond, Washington 98052. The Company is a leading developer and publisher of multimedia educational software and other educational products for the home and for schools. Set forth below is certain selected financial information with respect to the Company excerpted from the information contained in the Company's Annual Report to Shareholders for the year ended June 30, 1996 (the "Company 1996 Annual Report") and the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 1996 (the "Company 1996 10-Q"). More comprehensive financial information is included in the Company 1996 Annual Report, the Company 1996 10-Q and other documents filed by the Company with the Commission, and the following summary is qualified in its entirety by reference to the Company 1996 Annual Report, the Company 1996 10-Q and such other documents and all the financial information (including any related notes) contained therein. The Company 1996 Annual Report, the Company 1996 10-Q and such other documents should be available for inspection and copies thereof should be obtainable in the manner set forth below under "Available Information". EDMARK CORPORATION SELECTED FINANCIAL INFORMATION (In thousands)
THREE MONTHS ENDED YEAR ENDED AND AT JUNE 30, AND AT SEPTEMBER 30, ------------------------------- -------------------- 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- (UNAUDITED) Statement of Operations Data: Net revenues............................................. $ 32,188 $ 22,719 $ 11,663 $ 6,771 $ 6,932 Operating income (loss).................................. 1,422 1,800 (2,413) (1,384) 114 Net earnings (loss)...................................... 2,013 2,024 (1,937) (685) 242 Balance Sheet Data: Working capital.......................................... $ 30,496 $ 11,455 $ 30,119 Total assets............................................. 43,408 16,690 43,373 Total shareholders' equity............................... 40,491 13,687 39,827
CERTAIN COMPANY PROJECTIONS. During the course of discussions between IBM and the Company, the Company provided IBM with certain non-public business and financial information about the Company. This information included two different sets of forecasts for the fiscal year ending June 30, 1997, each of which was prepared in the Summer of 1996. Such forecasts projected fiscal 1997 net revenues of $32.6 million and $34.7 million, fiscal 1997 operating income of $.4 million and $1.8 million and fiscal 1997 net earnings of $1.3 million and $2.3 million. At the time of furnishing such information to IBM, the Company 12 indicated that each such set of projections was likely to exceed actual fiscal 1997 results. The Company does not as a matter of course make public any projections as to future performance or earnings, and the projections set forth above are included in this Offer to Purchase only because the information was provided to IBM. The projections were not prepared with a view to public disclosure or compliance with the published guidelines of the Commission or the guidelines established by the American Institute of Certified Public Accountants regarding projections or forecasts. The projections were based on a number of assumptions that are beyond the control of the Company, the Purchaser or IBM or their respective advisors, including economic forecasting (both general and specific to the Company's business), which is inherently uncertain and subjective. None of the Company, the Purchaser or IBM or their respective advisors assumes any responsibility for the accuracy of any of the projections. The inclusion of the foregoing projections should not be regarded as an indication that the Company, the Purchaser, IBM or any other person who received such information considers it an accurate prediction of future events. Neither the Company nor IBM intends to update, revise or correct such projections if they become inaccurate (even in the short term). AVAILABLE INFORMATION. The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, is required to file reports relating to its business, financial condition and other matters. Information as of particular dates concerning the Company's directors and officers, their remuneration, stock options and other matters, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company is required to be disclosed in the Company's proxy statements distributed to the Company's shareholders and filed with the Commission. Such information should be available for inspection at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, DC 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, NY 10048 and Citicorp Center, 500 West Madison Street (Suite 1400), Chicago, IL 60661. Copies of such information should be obtainable, by mail, upon payment of the Commission's customary charges, by writing to the Commission's principal office at 450 Fifth Street, N.W., Washington, DC 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Such reports, proxy and information statements and other information may be found on the Commission's Web site address, http://www.sec.gov. Such material should also be available for inspection at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, DC 20006. Except as otherwise stated in this Offer to Purchase, the information concerning the Company contained herein has been taken from or based upon publicly available documents on file with the Commission and other publicly available information. Although the Purchaser and IBM do not have any knowledge that any such information is untrue, neither the Purchaser nor IBM takes any responsibility for the accuracy or completeness of such information or for any failure by the Company to disclose events that may have occurred and may affect the significance or accuracy of any such information. 9. CERTAIN INFORMATION CONCERNING THE PURCHASER AND IBM The Purchaser, a Washington corporation which is a wholly owned subsidiary of IBM, was organized to acquire the Company and has not conducted any unrelated activities since its organization. The principal office of the Purchaser is located at the principal office of IBM. All outstanding shares of capital stock of the Purchaser are owned by IBM. IBM is a New York corporation with its principal office located at Old Orchard Road, Armonk, NY 10504. IBM has two fundamental missions. First, IBM strives to lead in the creation, development and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems and microelectronics. Second, IBM translates these advanced technologies into value for its customers worldwide through its sales and professional services units in North America, Europe/Middle East/Africa, Asia Pacific and Latin America. 13 AVAILABLE INFORMATION. IBM is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports relating to its business, financial condition and other matters. Information, as of particular dates, concerning IBM's directors and officers, their remuneration, stock options and other matters, the principal holders of IBM's securities and any material interest of such persons in transactions with IBM is required to be disclosed in proxy statements distributed to IBM's shareholders and filed with the Commission. Such reports, proxy statements and other information should be available for inspection at the Commission and copies thereof should be obtainable from the Commission in the same manner as is set forth with respect to the Company in Section 8. Such material should also be available for inspection at the offices of The New York Stock Exchange, Inc., 20 Broad Street, New York, NY 10005. 10. SOURCE AND AMOUNT OF FUNDS The Purchaser estimates that the total amount of funds required to purchase pursuant to the Offer the number of Shares that are outstanding on a fully diluted basis and to pay fees and expenses related to the Offer and the Merger will be approximately $110 million. The Purchaser plans to obtain all funds needed for the Offer and the Merger through a capital contribution. IBM intends to use its available cash on hand to make this capital contribution. 11. CONTACTS AND TRANSACTIONS WITH THE COMPANY; BACKGROUND OF THE OFFER During February 1996 representatives of IBM and Sally G. Narodick, at that time the Company's Chairman and Chief Executive Officer, discussed IBM's strategic focus on the enhanced learning area and possible cooperative relationships between IBM and the Company. Following such discussions, on March 28, 1996, IBM and the Company entered into a license agreement providing IBM with the right to market the Company's STRATEGY GAMES OF THE WORLD product with IBM's Aptiva personal computers. Amounts payable to the Company under this agreement have aggregated less than $500,000 to date. On May 16, 1996 James A. Firestone, General Manager of IBM's Consumer Division, and James B. Rice, Director of Consumer Software Marketing of IBM's Consumer Division, and Ms. Narodick met and had a general discussion about business trends. On August 13, 1996 Ms. Narodick called Mr. Firestone to arrange a meeting to discuss possible business relationships between IBM and the Company, including development activities and licensing by IBM of Company products, and inquiring as to IBM's interest in a possible acquisition of the Company. On August 29, 1996 Mr. Firestone and Ms. Narodick, along with other representatives of IBM and the Company, met and discussed the Company's interest in a possible acquisition by IBM. On such date IBM and the Company executed a bi-lateral Non-Disclosure Agreement and the Company presented IBM with certain financial and business information. On September 6, 1996, Ms. Narodick called Mr. Firestone to advise him that she intended to resign the following week and that Frances M. Conley would serve as Chairman of the Board and Donna G. Stanger would serve as acting Chief Executive Officer while the Company searched for a permanent Chief Executive Officer. At various times during September and October 1996 representatives of IBM met with representatives of the Company and Alex. Brown to discuss, among other things, personnel matters, sales and marketing plans and strategy, possible synergies, the Company's operating performance, financial projections and long-term objectives and IBM's interest in making an offer to acquire the Company. In addition, during this period and through the date hereof the Company and IBM have discussed potential development and marketing relationships. On November 1, 1996 IBM submitted an indication of interest in a possible acquisition of the Company. On November 2 and 3, 1996 a number of conversations were held among representatives of IBM and representatives of the Company, including Ms. Conley, as well as Alex. Brown, regarding the possible price that IBM would be willing to offer for the Shares. During the period from November 5 to November 8, 14 1996 representatives of IBM met with representatives of the Company to continue IBM's due diligence review of the Company and to discuss, among other things, the state of the Company's business, its prospects and personnel matters. During the period from November 7 to November 12, 1996 representatives of IBM, including Mr. Firestone, and IBM's legal counsel, on the one hand, and representatives of the Company, including Ms. Conley and Ms. Stanger, and the Company's legal counsel, on the other hand, negotiated documentation for the contemplated transactions. On November 12, 1996 the Boards of Directors of the Company and the Purchaser each approved the transactions and the purchase price. Following such approvals the Merger Agreement and other related agreements were executed and delivered, and the transaction was publicly announced before financial markets in the United States opened on November 13, 1996. Except as described in this Offer to Purchase (including Schedule I hereto), none of the Purchaser, IBM or, to the best knowledge of the Purchaser, any of the persons listed in Schedule I hereto, or any associate or majority-owned subsidiary of the Purchaser, IBM or any of the persons so listed, beneficially owns any equity security of the Company, and none of the Purchaser, IBM or, to the best knowledge of the Purchaser, any of the other persons referred to above, or any of the respective directors, executive officers or subsidiaries of any of the foregoing, has effected any transaction in any equity security of the Company during the past 60 days. The Purchaser and IBM disclaim beneficial ownership of any Shares owned by any pension plan of IBM or any affiliate of IBM. Except as described in this Offer to Purchase, as of the date hereof (a) there have not been any contacts, transactions or negotiations between the Purchaser or IBM, any of their respective subsidiaries or, to the best knowledge of the Purchaser, any of the persons listed in Schedule I hereto, on the one hand, and the Company or any of its directors, officers or affiliates, on the other hand, that are required to be disclosed pursuant to the rules and regulations of the Commission and (b) none of the Purchaser, IBM or, to the best knowledge of the Purchaser, any of the persons listed in Schedule I hereto has any contract, arrangement, understanding or relationship with any person with respect to any securities of the Company. During the Offer, the Purchaser and IBM intend to have ongoing contacts and negotiations with the Company and its directors, officers and shareholders. 12. PURPOSE OF THE OFFER; THE MERGER AGREEMENT; THE SHAREHOLDER AGREEMENT; ETC. PURPOSE The purpose of the Offer is to enable IBM to acquire control of, and the entire equity interest in, the Company. The Offer, as the first step in the acquisition of the Company, is intended to facilitate the acquisition of all the Shares. The purpose of the Merger is to acquire all Shares not tendered and purchased pursuant to the Offer, the Shareholder Agreement or otherwise. THE MERGER AGREEMENT The Merger Agreement provides that following the satisfaction or waiver of the conditions described below under "Conditions to the Merger", the Purchaser will be merged with and into the Company, and each then outstanding Share (other than Shares owned by IBM, the Purchaser, any other subsidiary of IBM or by shareholders, if any, who are entitled to and who properly exercise dissenters' rights under Washington law) will be converted into the right to receive an amount in cash equal to the price per Share paid pursuant to the Offer. The Merger Agreement further provides that, at the election of IBM, the Company may be merged with and into the Purchaser, with the Purchaser continuing as the surviving corporation. 15 VOTE REQUIRED TO APPROVE MERGER. The WBCA requires, among other things, that any plan of merger or consolidation of the Company must be adopted by the Board of Directors and, if the "short-form" merger procedure described below is not available, approved by the holders of the Company's outstanding voting securities. The Board of Directors of the Company has adopted the Merger Agreement and approved the Offer and the Merger; consequently, the only additional action of the Company that may be necessary to effect the Merger is approval by the Company's shareholders, if such "short-form" merger procedure is not available. Under the WBCA, if shareholder approval of the Merger is required, the vote required is the affirmative vote of the holders of two-thirds of the outstanding Shares. If the Purchaser acquires, through the Offer, the Shareholder Agreement or otherwise, voting power with respect to two-thirds of the outstanding Shares (which would be the case if the Minimum Condition were satisfied and the Purchaser were to accept for payment Shares tendered pursuant to the Offer), it would have sufficient voting power to effect the Merger without the vote of any other shareholder of the Company. The WBCA also provides that if a parent company owns at least 90% of the outstanding shares of each class of stock of a subsidiary, the parent company may merge that subsidiary into itself without the approval of the shareholders of the parent or the subsidiary. Accordingly, if, as a result of the Offer, the Shareholder Agreement or otherwise, the Purchaser owns at least 90% of the outstanding Shares and IBM elects, as described above, to merge the Company into the Purchaser, the Purchaser could effect the Merger without prior notice to, or any action by, any shareholder of the Company. CONDITIONS TO THE MERGER. The Merger Agreement provides that the respective obligations of each party to effect the Merger is subject to the satisfaction or waiver of the following conditions: (a) if required by applicable law, the Merger having been approved by the affirmative vote of the holders of two-thirds of the Shares; (b) no statute, rule, regulation, executive order, decree, temporary restraining order, preliminary or permanent injunction or other order issued by any federal, state or local government or any court, tribunal, administrative agency or commission or other governmental or other regulatory authority or agency, domestic, foreign or supranational (a "Governmental Entity"), or other legal restraint or prohibition preventing the consummation of the Merger being in effect; PROVIDED, HOWEVER, that each of the Company, the Purchaser and IBM has used reasonable efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may have been entered; and (c) the Purchaser having previously accepted for payment and paid for Shares pursuant to the Offer. TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated at any time prior to the effective time of the Merger, whether before or after approval of the terms of the Merger Agreement by the shareholders of the Company: (1) by mutual written consent of the Company and IBM; (2) by either the Company or IBM (a) if (i) as a result of the failure of any of the conditions to the Offer, the Offer has terminated or expired in accordance with its terms without the Purchaser having accepted for payment any Shares pursuant to the Offer or (ii) the Purchaser has not accepted for payment any Shares pursuant to the Offer prior to February 28, 1997, PROVIDED, HOWEVER, that the right to terminate the Merger Agreement described in this clause (2) is not available to any party whose failure to perform any of its obligations under the Merger Agreement results in the failure of any such condition or if the failure of such condition results from facts or circumstances that constitute a breach of a representation or warranty under the Merger Agreement by such party; or (b) if any Governmental Entity has issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the acceptance for payment of, or payment for, Shares pursuant to the Offer or the Merger and such order, decree or ruling or other action has become final and nonappealable; 16 (3) by the Purchaser or IBM (a) prior to the purchase of Shares pursuant to the Offer in the event of a breach by the Company of any representation, warranty, covenant or other agreement contained in the Merger Agreement which (i) would give rise to the failure of a condition set forth in paragraph (e) or (f) of Section 14 and (ii) cannot be or has not been cured within 20 days after the giving of written notice to the Company; or (b) if either the Purchaser or IBM is entitled to terminate the Offer as a result of (i) the Board of Directors of the Company or any committee thereof having withdrawn or modified in a manner adverse to the Purchaser or IBM its approval or recommendation of the Offer or the Merger or its adoption of the Merger Agreement, or approved or recommended any Takeover Proposal, (ii) the Company having entered into any agreement with respect to any Superior Proposal (as defined below) in accordance with the provisions described below under "Takeover Proposals" or (iii) the Board of Directors of the Company or any committee thereof having resolved to take any of the actions described in clauses (3)(b)(i) or (3)(b)(ii); or (4) by the Company (i) in accordance with the terms of the Merger Agreement described below under "Takeover Proposals", provided it has complied with all provisions thereof, including the notice provisions therein, and that it complies with the applicable requirements relating to the payment (including the timing of any payment) of Expenses and the Termination Fee (as such terms are defined below under "Fees and Expenses") or (ii) if the Purchaser or IBM has breached or failed to perform in any material respect any of their respective representations, warranties, covenants or other agreements contained in the Merger Agreement, which breach or failure to perform is incapable of being cured or has not been cured within 20 days after the giving of written notice to the Purchaser or IBM, as applicable, except, in any case, such breaches and failures which are not reasonably likely to affect adversely the Purchaser's or IBM's ability to consummate the Offer or the Merger. TAKEOVER PROPOSALS. The Merger Agreement provides that the Company will not, nor will it authorize or permit any of its directors, officers or employees or any investment banker, financial advisor, attorney, accountant or other representative or agent retained by it to, directly or indirectly, (1) solicit, initiate or encourage (including by way of furnishing information), or take any other action designed or reasonably likely to facilitate, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead to, any Takeover Proposal or (2) participate in any discussions or negotiations regarding any Takeover Proposal; PROVIDED, HOWEVER, that if, at any time prior to the acceptance for payment of Shares pursuant to the Offer, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, the Company may, in response to a Takeover Proposal which was not solicited subsequent to the date of the Merger Agreement, and subject to compliance with the notification provisions described below, (i) furnish information with respect to the Company to any person pursuant to a confidentiality agreement in a form approved by IBM (such approval not to be unreasonably withheld) and (ii) participate in negotiations regarding such Takeover Proposal. The Merger Agreement defines "Takeover Proposal" as any inquiry, proposal or offer, or any expression of interest by any third party relating to the Company's willingness or ability to receive or discuss a proposal or offer, other than a proposal or offer by IBM or any of its subsidiaries, for a merger, consolidation or other business combination involving the Company, or any purchase of, all or substantially all of its assets or more than 30% of the Shares. The Merger Agreement provides further that, except as described below, neither the Board of Directors of the Company nor any committee thereof may (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to IBM, the approval or recommendation by such Board of Directors or such committee of the Offer, the Merger Agreement or the Merger, (ii) approve or recommend, or propose to approve or recommend, any Takeover Proposal or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (each, an "Acquisition Agreement") related to any Takeover Proposal. Notwithstanding the foregoing, in the event that prior to the acceptance for payment of Shares pursuant to the Offer the Board of Directors of the 17 Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, such Board of Directors may, in response to a Takeover Proposal which was not solicited subsequent to the date of the Merger Agreement (subject to the provisions described in this and the following sentences), (x) withdraw or modify its approval or recommendation of the Offer, the Merger Agreement or the Merger or (y) approve or recommend a Superior Proposal or terminate the Merger Agreement (and concurrently with or after such termination, if it so chooses, cause the Company to enter into any Acquisition Agreement with respect to a Superior Proposal), but in each of the cases described in this clause (y) only at a time that is after the second business day following IBM's receipt of written notice advising IBM that the Board of Directors of the Company has received a Superior Proposal, specifying the material terms and conditions of such Superior Proposal and identifying the person making such Superior Proposal. The Merger Agreement defines "Superior Proposal" as any bona fide Takeover Proposal made by a third party on terms which the Board of Directors of the Company determines in its good faith judgment (based on the advice of a financial advisor of nationally recognized reputation) to be more favorable to the Company's shareholders than the Offer and the Merger and for which financing, to the extent required, is then committed or which, in the good faith judgment of the Board of Directors of the Company, is reasonably capable of being financed by such third party. In addition to the obligations of the Company described in the preceding two paragraphs, the Merger Agreement provides that the Company will immediately advise IBM orally and in writing of any request for information or of any Takeover Proposal, the material terms and conditions of such request or Takeover Proposal and the identity of the person making any such request or Takeover Proposal. The Company is further required under the terms of the Merger Agreement to immediately inform IBM of any material change in the details (including amendments or proposed amendments) of any such request or Takeover Proposal. The Merger Agreement provides that nothing contained therein will prohibit the Company from taking and disclosing to its shareholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's shareholders if, in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, failure so to disclose would be inconsistent with applicable law; PROVIDED, HOWEVER, that neither the Company nor its Board of Directors nor any committee thereof may, except as permitted by the Merger Agreement and as described above, withdraw or modify, or propose to withdraw or modify, its position with respect to the Offer, the Merger or this Agreement or approve or recommend, or propose to approve or recommend, a Takeover Proposal. FEES AND EXPENSES. The Merger Agreement provides that, except as provided below, all fees and expenses incurred in connection with the Offer, the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement will be paid by the party incurring such fees or expenses, whether or not the Offer or the Merger is consummated. The Merger Agreement further provides that the Company will pay, or cause to be paid, in same day funds to IBM the sum of (x) the Expenses and (y) $4,000,000 (the "Termination Fee") under the circumstances and at the times set forth as follows: (a) if the Company terminates the Merger Agreement in accordance with the provisions described above in clause (4)(i) under "Termination of the Merger Agreement", the Company will pay the Expenses and the Termination Fee upon demand; (b) if the Purchaser or IBM terminates the Merger Agreement in accordance with the provisions described above in clause (3)(b) under "Termination of the Merger Agreement", the Company will pay the Expenses upon demand; in addition, if within 12 months after such termination (or concurrently therewith), the Company enters into an Acquisition Agreement providing for a Takeover Proposal or a transaction resulting from a Takeover Proposal is consummated, the Company will pay the Termination Fee concurrently with the earlier of the entering into of such Acquisition Agreement or the consummation of such transaction; and (c) if, at the time of any other termination of the Merger Agreement (other than in accordance with the provisions described above in clause (1) or clause 18 (2)(b) under "Termination of the Merger Agreement" or by the Company in accordance with the provisions described above in clause (4)(ii) under "Termination of the Merger Agreement"), a Takeover Proposal has been made (other than a Takeover Proposal made prior to the date hereof), the Company will pay the Expenses, if terminated by the Company, concurrently therewith or, if terminated by IBM, upon demand; in addition, if within 12 months of such termination (or concurrently therewith), the Company enters into an Acquisition Agreement providing for a Takeover Proposal or a transaction resulting from a Takeover Proposal is consummated, the Company will pay the Termination Fee concurrently with the earlier of the entering into of such Acquisition Agreement or the consummation of such transaction. The Merger Agreement defines "Expenses" as reasonable documented out-of-pocket fees and expenses incurred or paid by or on behalf of IBM in connection with the Offer, the Merger or the consummation of any of the transactions contemplated by the Merger Agreement, including all fees and expenses of law firms, accountants, experts and consultants to IBM, but excluding all fees and expenses of commercial banks and investment banking firms. CONDUCT OF BUSINESS BY THE COMPANY. The Merger Agreement provides that, except as expressly contemplated or permitted by the Merger Agreement or to the extent that IBM shall otherwise consent in writing, until such time as IBM's designees constitute a majority of the Board of Directors of the Company, (a) the Company will carry on its business in the usual, regular and ordinary course in substantially the same manner as conducted prior to the execution of the Merger Agreement (it being understood that the foregoing does not cover future events resulting from public announcement of the Offer and the Merger) and in compliance in all material respects with all applicable laws and regulations and shall use all reasonable efforts to preserve intact its present business organizations, keep available the services of its present officers and employees and preserve its relationships with customers, suppliers and others having business dealings with the Company; (b) the Company will not (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) repurchase, redeem or otherwise acquire any shares of its capital stock or any of its other securities or any rights, warrants or options to acquire any such shares or other securities; (c) the Company will not issue, deliver, sell, pledge or encumber, or authorize or propose the issuance, delivery, sale, pledge or encumbrance of, any shares of its capital stock of any class or any securities convertible into, or rights, warrants, calls, subscriptions or options to acquire, any such shares or convertible securities, or any other ownership interest (including stock appreciation rights or phantom stock) other than the issuance of Shares (i) upon the exercise of Stock Options outstanding on the date of the Merger Agreement in accordance with their terms and (ii) in accordance with the terms of the Edmark Corporation 1994 Employee Stock Purchase Plan as in effect on the date of the Merger Agreement (the "Share Purchase Plan"); (d) the Company will not amend or propose to amend its Amended and Restated Articles of Incorporation or its Bylaws, as amended and restated; (e) the Company will not acquire or agree to acquire (i) any business or any corporation, partnership, joint venture, association or other business organization or division thereof or (ii) any assets that are material, individually or in the aggregate, to the Company, except purchases of inventory in the ordinary course of business consistent with past practice; (f) the Company will not sell, lease, license, encumber or otherwise dispose of, or agree to sell, lease, license, encumber or otherwise dispose of, any of its assets, other than sales or licenses of its products in the ordinary course of business consistent with past practice; (g) the Company will confer on a regular and frequent basis with IBM, as reasonably requested by IBM, report on operational matters and promptly advise IBM orally and in writing of any material adverse change with respect to the Company and will promptly provide to IBM (or its counsel) copies of all filings made by the Company with any Governmental Entity in connection with the Merger Agreement and the transactions contemplated thereby; (h) the Company will not make any tax election that would have a material adverse effect on the tax liability or tax attributes of the Company or settle or compromise any tax liability of the Company and the Company will, before filing or causing to be filed any tax return of the Company, consult with IBM and its advisors as to the positions and elections that may be taken or made with respect to such return, and 19 take such positions or make such elections as the Company and IBM shall jointly agree; (i) the Company will not make or agree to make any new capital expenditure or expenditures other than in accordance with the Company's fiscal year 1997 budget approved by the Company's Board of Directors, which capital expenditures do not exceed $250,000 in the aggregate; (j) the Company will not pay, discharge, settle or satisfy any claims, liabilities or obligations other than the payment, discharge, settlement or satisfaction of certain claims, liabilities and obligations in the ordinary course of business consistent with past practice or in accordance with their terms; (k) except in the ordinary course of business the Company will not (i) modify, amend or terminate any material contract or agreement to which the Company is a party, (ii) waive, release or assign any material rights or claims or (iii) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company is a party; and (l) the Company will not authorize any of, or commit or agree to take any of, the foregoing actions. In addition to the foregoing, in the Merger Agreement the Company has agreed that it will not take any action that would, or that could reasonably be expected to, result in (a) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified as to materiality becoming untrue, (b) any of such representations and warranties that are not so qualified becoming untrue in any material respect or (c) any of the conditions to the Offer set forth in Section 14 not being satisfied. BOARD OF DIRECTORS. The Merger Agreement provides that promptly upon the acceptance for payment of, and payment for, Shares by the Purchaser pursuant to the Offer, the Purchaser will be entitled to designate, subject to compliance with Section 14(f) of the Exchange Act, a majority of the directors on the Company's Board of Directors, and the Company will, at such time, cause the Purchaser's designees to be so elected by its existing Board of Directors. Subject to applicable law, the Company has agreed to take all action requested by IBM necessary to effect any such election, including mailing to its shareholders the Information Statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, which Information Statement is attached as Appendix A to the Schedule 14D-9. The Merger Agreement further provides that in the event that the Purchaser's designees are elected to the Board of Directors of the Company, until the effective time of the Merger the Board of Directors of the Company will have at least two directors who are directors on the date of the Merger Agreement and who are not officers of the Company. STOCK OPTIONS. Each director or former director of the Company who held any Stock Options on the date of the Merger Agreement has agreed in writing that all unexercised Stock Options (other than Stock Options granted under the Edmark Corporation Stock Option Plan (Restated as of July 14, 1995) (the "Plan")) which remain outstanding at the time the Purchaser accepts Shares for payment in the Offer will be cancelled. In the Merger Agreement, the parties acknowledged and agreed that all Stock Options granted under the Plan will terminate in accordance with their terms prior to the effective time of the Merger. INDEMNIFICATION AND INSURANCE. In the Merger Agreement, the Purchaser and IBM have agreed that all rights to indemnification for acts or omissions occurring prior to the effective time of the Merger that are in existence as of the date of the Merger Agreement in favor of the current or former directors or officers of the Company as provided in its Amended and Restated Articles of Incorporation or its Bylaws, as amended and restated, will survive the Merger and will continue in full force and effect in accordance with their terms. Pursuant to the Merger Agreement, IBM will, for a period of six years from the effective time of the Merger, unless IBM agrees in writing to guarantee the indemnification obligations described above, maintain in effect the Company's current directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy except that, to the extent that such coverage is not obtainable at less than or equal to 200% of the current annual premiums, IBM will be obligated to purchase only so much coverage as may then be obtained for such amount. 20 REASONABLE EFFORTS. The Merger Agreement provides that each of the parties will use its reasonable efforts to take, or cause to be taken, all actions necessary to comply promptly with all legal requirements that may be imposed on itself with respect to the Offer and the Merger and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their subsidiaries in connection with the Offer and the Merger and will use its reasonable efforts to take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party required to be obtained or made by any of them or any of their subsidiaries in connection with the Offer and the Merger or the taking of any action contemplated thereby or by the Merger Agreement, except that no party need waive any substantial rights or agree to any substantial limitation on its operations or to dispose of any assets. REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various customary representations and warranties. PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. The Merger Agreement provides that in the event the Purchaser's designees are appointed or elected to the Board of Directors of the Company as described above under "Board of Directors", after the acceptance for payment of Shares pursuant to the Offer and prior to the effective time of the Merger, the affirmative vote of the directors of the Company not designated by the Purchaser or IBM is required for the Company to amend or terminate the Merger Agreement, exercise or waive any of its rights or remedies under the Merger Agreement or extend the time for performance of IBM's and the Purchaser's respective obligations under the Merger Agreement. RIGHTS AGREEMENT. The Rights Agreement has been amended to (i) render the Rights Agreement inapplicable to the Offer, the Merger, the Merger Agreement, the Shareholder Agreement, the acquisition of Shares by the Purchaser pursuant to the Offer and the Shareholder Agreement and the other transactions contemplated by the Merger Agreement and the Shareholder Agreement and (ii) ensure that (y) none of the Purchaser, IBM or any of their respective affiliates is an Acquiring Person (as defined in the Rights Agreement) pursuant to the Rights Agreement and (z) a Distribution Date does not occur by reason of the Offer, the Merger, the execution of the Merger Agreement or the Shareholder Agreement, the acquisition of Shares by the Purchaser pursuant to the Offer or the Shareholder Agreement or the other transactions contemplated by the Merger Agreement or the Shareholder Agreement. The foregoing summary of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit (c)(1) to the Company's Tender Offer Statement on Schedule 14D-1 filed with the Commission on the date hereof (the "Schedule 14D-1"). The Merger Agreement should be read in its entirety for a more complete description of the matters summarized above. THE SHAREHOLDER AGREEMENT Pursuant to the Shareholder Agreement, the Selling Shareholders have unconditionally agreed to tender into the Offer, and not to withdraw therefrom, the 1,325,946 Shares that they owned on November 12, 1996, together with any Shares they acquire after such time, including upon the exercise of Stock Options. In addition, the Selling Shareholders have agreed to sell to the Purchaser, and the Purchaser has agreed to purchase, the foregoing number of Shares at a price per Share of $15.50, or such higher price per Share as may be offered by the Purchaser in the Offer, provided that (i) such obligation to purchase is subject to the Purchaser having accepted Shares for payment under the Offer and the Minimum Condition having been satisfied, which conditions to such obligation may be waived by the Purchaser in its sole discretion, and (ii) such obligation to sell is subject to the Minimum Condition having been satisfied or a Takeover Proposal having been made. 21 Each of the Selling Shareholders has agreed not to: (i) sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option or other arrangement (including any profit sharing arrangement) or understanding with respect to the sale, transfer, pledge, assignment or other disposition of, Shares to any person other than the Purchaser or the Purchaser's designee, (ii) enter into any voting arrangement, whether by proxy, voting agreement, voting trust, power-of-attorney or otherwise, with respect to Shares or (iii) take any other action that would in any way restrict, limit or interfere with the performance of its obligations hereunder or the transactions contemplated hereby. Each of the Selling Shareholders has also agreed not to solicit, initiate or encourage (including by way of furnishing information) and not to participate in any discussions or negotiations regarding any Takeover Proposal. Under the Shareholder Agreement, each Selling Shareholder has granted an irrevocable proxy with respect to the Shares subject to the Shareholder Agreement to IBM to vote such Shares against (i) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantial assets, reorganization, joint venture, recapitalization, dissolution, liquidation or winding up of or by the Company and (ii) any amendment of the Company's Amended and Restated Articles of Incorporation or its Bylaws, as amended and restated, or other proposal or transaction (including any consent solicitation to remove or elect any directors of the Company) involving the Company, which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify, or result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under or with respect to, the Offer, the Merger, the Merger Agreement or any of the other transactions contemplated by the Merger Agreement. The foregoing summary of the Shareholder Agreement is qualified in its entirety by reference to the Shareholder Agreement, a copy of which is filed as Exhibit (c)(2) to the Schedule 14D-1. The Shareholder Agreement should be read in its entirety for a more complete description of the matters summarized above. NONCOMPETITION AGREEMENTS Donna G. Stanger, the Company's Vice President--Product Development and Acting Chief Executive Officer, Paul N. Bialek, the Company's Vice President--Finance and Administration, Chief Financial Officer, Secretary and Treasurer, Daniel P. Vetras, the Company's Vice President--Consumer Sales, and Sally G. Narodick, the Company's former Chairman and Chief Executive Officer, who is one of the Company's directors, have entered into noncompetition agreements with IBM. The noncompetition agreement between IBM and Ms. Stanger provides that in the event that her employment with IBM or any of its subsidiaries terminates during the period of time for which she has agreed not to compete (the "Noncompetition Period"), other than as a result of a voluntary termination by her or a termination for cause by IBM or any of its subsidiaries (collectively, an "IBM Termination"), IBM will continue to pay and to provide her during the Noncompetition Period the salary (which will not be less than the salary she is paid at the effective time of the Merger, but not including bonus) and medical benefits (but not other benefits) that she is being paid and provided with at the date of her termination (or, with respect to salary, any higher salary that she had been paid in the preceeding 12 months). The noncompetition agreement between IBM and Ms. Narodick contains a provision which provides that, upon an IBM Termination, IBM will pay to Ms. Narodick $10,000 per month for the duration of the Noncompetition Period. PLANS FOR THE COMPANY IBM's current intention is to continue the Edmark operations under the Edmark name in Redmond, Washington. IBM expects that Edmark will continue to work closely with educators and parents to develop high-quality educational software for children, making products available across a wide range of technology platforms. 22 APPRAISAL RIGHTS Holders of Shares do not have dissenters' rights as a result of the Offer. However, if the Merger is consummated, holders of Shares at the effective time of the Merger will have certain rights pursuant to the provisions of Chapter 23B.13 of the WBCA ("Chapter 23B.13") to dissent and demand fair value of their Shares. Under Chapter 23B.13, dissenting shareholders who comply with the applicable statutory procedures will be entitled to receive a judicial determination of the fair value of their Shares (excluding any appreciation or depreciation in anticipation of the Merger unless such exclusion would be inequitable) and to receive payment of such fair value in cash, together with a fair rate of interest, if any. Any such judicial determination of the fair value of Shares could be based upon factors other than, or in addition to, the price per Share to be paid in the Merger or the market value of the Shares. The value so determined could be more or less than the price per Share to be paid in the Merger. The foregoing summary of Chapter 23B.13 does not purport to be complete and is qualified in its entirety by reference to Chapter 23B.13. FAILURE TO FOLLOW THE STEPS REQUIRED BY CHAPTER 23B.13 OF THE WBCA FOR PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. GOING PRIVATE TRANSACTIONS The Commission has adopted Rule 13e-3 under the Exchange Act which is applicable to certain "going private" transactions. The Purchaser does not believe that Rule 13e-3 will be applicable to the Merger unless the Merger is consummated more than one year after the termination of the Offer. If applicable, Rule 13e-3 requires, among other things, that certain financial information concerning the fairness of the Merger and the consideration offered to minority shareholders in such transaction be filed with the Commission and disclosed to shareholders prior to the consummation of the Merger. Except as otherwise described in this Offer to Purchase, the Purchaser and IBM have no current plans or proposals that would relate to, or result in, any extraordinary corporate transaction involving the Company, such as a merger, reorganization or liquidation involving the Company, a sale or transfer of a material amount of assets of the Company, any change in the Company's capitalization or dividend policy or any other material change in the Company's business, corporate structure or personnel. 13. DIVIDENDS AND DISTRIBUTIONS Pursuant to the terms of the Merger Agreement, the Company is prohibited from taking any of the actions described in the two succeeding paragraphs, and nothing herein shall constitute a waiver by the Purchaser or IBM of any of its rights under the Merger Agreement or a limitation of remedies available to the Purchaser or IBM for any breach of the Merger Agreement, including termination thereof. If, on or after November 12, 1996, the Company should (a) split, combine or otherwise change the Shares or its capitalization, (b) acquire or otherwise cause a reduction in the number of outstanding Shares or other securities or (c) issue or sell additional Shares, shares of any other class of capital stock, other voting securities or any securities convertible into, or rights, warrants or options, conditional or otherwise, to acquire any of the foregoing, other than Shares issued pursuant to the exercise of outstanding Company Stock Options or pursuant to the Share Purchase Plan, then, subject to the provisions of Section 14, the Purchaser, in its sole discretion, may make such adjustments as it deems appropriate in the Offer Price and other terms of the Offer, including, without limitation, the number or type of securities offered to be purchased. If, on or after November 12, 1996, the Company should declare or pay any cash dividend on the Shares or other distribution on the Shares, or issue with respect to the Shares any additional Shares, shares of any other class of capital stock, other voting securities or any securities convertible into, or rights, warrants or options, conditional or otherwise, to acquire, any of the foregoing, payable or distributable to shareholders of record on a date prior to the transfer of the Shares purchased pursuant to the Offer to the 23 Purchaser or its nominee or transferee on the Company's stock transfer records, then, subject to the provisions of Section 14, (a) the Offer Price may, in the sole discretion of the Purchaser, be reduced by the amount of any such cash dividend or cash distribution and (b) the whole of any such noncash dividend, distribution or issuance to be received by the tendering shareholders will (i) be received and held by the tendering shareholders for the account of the Purchaser and will be required to be promptly remitted and transferred by each tendering shareholder to the Depositary for the account of the Purchaser, accompanied by appropriate documentation of transfer, or (ii) at the direction of the Purchaser, be exercised for the benefit of the Purchaser, in which case the proceeds of such exercise will promptly be remitted to the Purchaser. Pending such remittance and subject to applicable law, the Purchaser will be entitled to all rights and privileges as owner of any such noncash dividend, distribution, issuance or proceeds and may withhold the entire Offer Price or deduct from the Offer Price the amount or value thereof, as determined by the Purchaser in its sole discretion. 14. CERTAIN CONDITIONS OF THE OFFER Notwithstanding any other term of the Offer or the Merger Agreement, the Purchaser will not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act (relating to the Purchaser's obligation to pay for or return tendered Shares after the termination or withdrawal of the Offer), to pay for any Shares tendered pursuant to the Offer unless (i) the Minimum Condition shall have been satisfied and (ii) the HSR Condition shall have been satisfied. Furthermore, notwithstanding any other term of the Offer or the Merger Agreement, the Purchaser will not be required to accept for payment or, subject as aforesaid, to pay for any Shares not theretofore accepted for payment or paid for, and may terminate the Offer if, at any time on or after the date of the Merger Agreement and before the acceptance of such Shares for payment or the payment therefor, any of the following conditions exists (other than as a result of any action or inaction of IBM or any of its subsidiaries that constitutes a breach of the Merger Agreement): (a) there shall be threatened, instituted or pending by any Governmental Entity any suit, action or proceeding (i) challenging the acquisition by IBM or the Purchaser of any Shares under the Offer, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or the performance of any of the other transactions contemplated by the Merger Agreement or the Shareholder Agreement, (ii) seeking to prohibit or materially limit the ownership or operation by the Company, IBM or any of IBM's subsidiaries of a material portion of the business or assets of the Company or IBM and its subsidiaries, taken as a whole, or to compel the Company or IBM to dispose of or hold separate any material portion of the business or assets of the Company or IBM and its subsidiaries, taken as a whole, in each case as a result of the Offer or any of the other transactions contemplated by the Merger Agreement, (iii) seeking to impose material limitations on the ability of IBM or the Purchaser to acquire or hold, or exercise full rights of ownership of, any Shares to be accepted for payment pursuant to the Offer, including, without limitation, the right to vote such Shares on all matters properly presented to the shareholders of the Company, (iv) seeking to prohibit IBM or any of its subsidiaries from effectively controlling in any material respect any material portion of the business or operations of the Company or (v) which otherwise is reasonably likely to have any effect (or any development that, insofar as can reasonably be foreseen, is likely to result in any effect) that, individually or in the aggregate with any such other effects, is materially adverse to the business, properties, financial condition or results of operations of the Company. (b) there shall be any statute, rule, regulation, judgment, order or injunction enacted, entered, enforced, promulgated or deemed applicable to the Offer or the Merger, by any Governmental Entity, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (v) of paragraph (a) above; 24 (c) there shall have occurred any change (or any development that, insofar as reasonably can be foreseen, is reasonably likely to result in any change) that, individually or in the aggregate with any other such changes, is materially adverse to the business, properties, financial condition or results of operations of the Company; (d) (i) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified in a manner adverse to IBM or the Purchaser its approval or recommendation of the Offer or the Merger or its adoption of the Merger Agreement, or approved or recommended any Takeover Proposal, (ii) the Company shall have entered into any agreement with respect to any Superior Proposal in accordance with the Merger Agreement or (iii) the Board of Directors of the Company or any committee thereof shall have resolved to take any of the foregoing actions (see "The Merger Agreement--Takeover Proposals" in Section 12); (e) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified as to materiality shall not be true and correct or any such representations and warranties that are not so qualified shall not be true and correct in any material respect, in each case at the date of the Merger Agreement and at the scheduled or extended expiration of the Offer; (f) the Company shall have failed to perform in any material respect any material obligation or to comply in any material respect with any material agreement or covenant of the Company to be performed or complied with by it under the Merger Agreement, which failure to perform or comply has not been cured within five business days after the giving of written notice to the Company; or (g) the Merger Agreement shall have been terminated in accordance with its terms. The foregoing conditions are for the sole benefit of the Purchaser and IBM and may, subject to the terms of the Merger Agreement, be waived by the Purchaser and IBM in whole or in part at any time and from time to time in their sole discretion. The failure by the Purchaser or IBM at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and circumstances will not be deemed a waiver with respect to any other facts and circumstances and each such right will be deemed an ongoing right that may be asserted at any time and from time to time. 15. CERTAIN LEGAL MATTERS Except as described in this Section 15, based on a review of publicly available filings made by the Company with the Commission and other publicly available information concerning the Company and discussions of representatives of IBM with representatives of the Company, neither the Purchaser nor IBM is aware of any license or regulatory permit that appears to be material to the business of the Company that might be adversely affected by the Purchaser's acquisition of Shares as contemplated herein or of any approval or other action by any Governmental Entity that would be required or desirable for the acquisition or ownership of Shares by the Purchaser as contemplated herein. Should any such approval or other action be required or desirable, the Purchaser and IBM currently contemplate that such approval or other action will be sought, except as described below under "State Takeover Laws". While, except as otherwise expressly described in this Section 15, the Purchaser does not presently intend to delay the acceptance for payment of or payment for Shares tendered pursuant to the Offer pending the outcome of any such matter, there can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that failure to obtain any such approval or other action might not result in consequences adverse to the Company's business or that certain parts of the Company's business might not have to be disposed of if such approvals were not obtained or such other actions were not taken or in order to obtain any such approval or other action. If certain types of adverse action are taken with respect to the matters discussed below, the Purchaser could decline to accept for payment or pay for any Shares tendered. See Section 14 for certain conditions to the Offer. 25 STATE TAKEOVER LAWS. A number of states throughout the United States have enacted takeover statutes that purport, in varying degrees, to be applicable to attempts to acquire securities of corporations that are incorporated or have assets, shareholders, executive offices or places of business in such states. In EDGAR V. MITE CORP., the Supreme Court of the United States held that the Illinois Business Takeover Act, which involved state securities laws that made the takeover of certain corporations more difficult, imposed a substantial burden on interstate commerce and therefore was unconstitutional. In CTS CORP. V. DYNAMICS CORP. OF AMERICA, however, the Supreme Court of the United States held that a state may, as a matter of corporate law and, in particular, those laws concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without prior approval of the remaining shareholders, provided that such laws were applicable only under certain conditions. Subsequently, a number of Federal courts ruled that various state takeover statutes were unconstitutional insofar as they apply to corporations incorporated outside the state of enactment. Chapter 23.B.19 of the WBCA, in general, prohibits a Washington corporation such as the Company from engaging in a "Significant Business Transaction" (defined as a variety of transactions, including mergers) with an "Acquiring Person" (defined generally as a person that is the beneficial owner of 10% or more of a corporation's outstanding voting stock) for a period of five years following the date that such person became an Acquiring Person unless, among other things, prior to the date such person became an Acquiring Person, the board of directors of the corporation approved either the Significant Business Transaction or the transaction that resulted in the shareholder becoming an Acquiring Person. The Company's Board of Directors has approved the Merger Agreement, the Shareholder Agreement and the Purchaser's acquisition of Shares pursuant to the Offer and the Shareholder Agreement. Therefore, Chapter 23.B.19 of the WBCA is inapplicable to the Merger. Based on information supplied by the Company, the Purchaser does not believe that any other state takeover statutes purport to apply to the Offer or the Merger. Neither the Purchaser nor IBM has currently complied with any state takeover statute or regulation. The Purchaser reserves the right to challenge the applicability or validity of any state law purportedly applicable to the Offer or the Merger and nothing in this Offer to Purchase or any action taken in connection with the Offer or the Merger is intended as a waiver of such right. If it is asserted that any state takeover statute is applicable to the Offer or the Merger and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer or the Merger, the Purchaser might be required to file certain information with, or to receive approvals from, the relevant state authorities, and the Purchaser might be unable to accept for payment or pay for Shares tendered pursuant to the Offer, or be delayed in consummating the Offer or the Merger. In such case, the Purchaser may not be obligated to accept payment or pay for any Shares tendered pursuant to the Offer. See Section 14. ANTITRUST. Under the provisions of the HSR Act applicable to the Offer, the acquisition of Shares under the Offer may be consummated after the expiration of a 15-calendar day waiting period commenced by the filing by IBM of a Notification and Report Form with respect to the Offer, unless IBM receives a request for additional information or documentary material from the Antitrust Division or the FTC or unless early termination of the waiting period is granted. IBM made such filing on November 15, 1996. If, within the initial 15-day waiting period, either the Antitrust Division or the FTC requests additional information or material from IBM concerning the Offer, the waiting period will be extended and would expire at 11:59 p.m., New York City time, on the tenth calendar day after the date of substantial compliance by IBM with such request. Only one extension of the waiting period pursuant to a request for additional information is authorized by the HSR Act. Thereafter, such waiting period may be extended only by court order or with the consent of IBM. In practice, complying with a request for additional information or material can take a significant amount of time. In addition, if the Antitrust Division or the FTC raises substantive issues in connection with a proposed transaction, the parties frequently engage in negotiations with the relevant governmental agency concerning possible means of addressing those issues and may agree to delay consummation of the transaction while such negotiations continue. Expiration or 26 termination of the applicable waiting period under the HSR Act is a condition to the Purchaser's obligation to accept for payment and pay for Shares tendered pursuant to the Offer. The provisions of the HSR Act would similarly apply to any purchase, other than pursuant to the Offer, of the Shares subject to the Shareholder Agreement, except that the initial waiting period for any purchase of such Shares would expire 30 calendar days following the filing of HSR Act Notification and Report Forms by IBM and the Company. IBM made such filing on November 15, 1996 and the Company intends to make such filing shortly. A request for additional information or material from IBM or the Company during the initial 30-day waiting period would extend the waiting period until 11:59 p.m. New York City time on the 20th calendar day after the date of substantial compliance by IBM and the Company with such request. If the purchase of Shares pursuant to the Shareholder Agreement is effected through a tender of such Shares pursuant to the Offer, the HSR requirements applicable to the Offer described in the prior paragraph would apply rather than the requirements described in this paragraph. The Merger would not require an additional filing under the HSR Act if the Purchaser owns 50% or more of the outstanding Shares at the time of the Merger or if the Merger occurs within one year after the HSR Act waiting period applicable to the Offer expires or is terminated. The Antitrust Division and the FTC frequently scrutinize the legality under the antitrust laws of transactions such as the Purchaser's proposed acquisition of the Company. At any time before or after the Purchaser's acquisition of Shares pursuant to the Offer, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the purchase of Shares pursuant to the Offer or the consummation of the Merger or seeking the divestiture of Shares acquired by the Purchaser or the divestiture of substantial assets of the Company or its subsidiaries or IBM or its subsidiaries. Private parties may also bring legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Offer on antitrust grounds will not be made or, if such a challenge is made, of the result thereof. 16. FEES AND EXPENSES The Purchaser and IBM have retained Morrow & Co., Inc. to act as the Information Agent and ChaseMellon Shareholder Services, L.L.C. to serve as the Depositary in connection with the Offer. The Information Agent and the Depositary each will receive reasonable and customary compensation for their services, be reimbursed for certain reasonable out-of-pocket expenses and be indemnified against certain liabilities and expenses in connection therewith, including certain liabilities and expenses under the U.S. federal securities laws. Neither the Purchaser nor IBM will pay any fees or commissions to any broker or dealer or other person (other than the Information Agent) in connection with the solicitation of tenders of Shares pursuant to the Offer. Brokers, dealers, banks and trust companies will be reimbursed by the Purchaser upon request for customary mailing and handling expenses incurred by them in forwarding material to their customers. 17. MISCELLANEOUS The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. Neither the Purchaser nor IBM is aware of any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. To the extent the Purchaser or IBM becomes aware of any state law that would limit the class of offerees in the Offer, the Purchaser will amend the Offer and, depending on the timing of such amendment, if any, will extend the Offer to provide adequate dissemination of such information to holders of Shares prior to the expiration of the Offer. 27 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION ON BEHALF OF THE PURCHASER OR IBM NOT CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. The Purchaser and IBM have filed with the Commission the Schedule 14D-1 pursuant to Rule 14d-3 under the Exchange Act, together with exhibits, furnishing certain additional information with respect to the Offer, and may file amendments thereto. In addition, the Company has filed the Schedule 14D-9 pursuant to Rule 14d-9 under the Exchange Act, together with exhibits, setting forth its recommendation with respect to the Offer and the reasons for such recommendation and furnishing certain additional related information. Such Schedules and any amendments thereto, including exhibits, should be available for inspection and copies should be obtainable in the manner set forth in Section 8 (except that such material will not be available at the regional offices of the Commission). INDIGO ACQUISITION CORP. November 18, 1996 28 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF IBM AND THE PURCHASER 1. DIRECTORS AND EXECUTIVE OFFICERS OF IBM. The name, business address, present principal occupation or employment and five-year employment history of each of the directors and executive officers of IBM are set forth below. All such directors and executive officers listed below are citizens of the United States except Mr. Dormann, who is a citizen of Germany, Mr. van Wachem, who is a citizen of the Netherlands, and Mr. Thompson, who is a citizen of Canada. Unless otherwise indicated, the principal business address of each director or executive officer is International Business Machines Corporation, Old Orchard Road, Armonk, NY 10504.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS NAME, AGE AND BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS - - --------------------------------------------- ------------------------------------------------------------------ Louis V. Gerstner, Jr. (54).................. Chairman of the Board and Chief Executive Officer of IBM since 1993. From 1989 until joining IBM, he was Chairman of the Board and Chief Executive Officer of RJR Nabisco Holdings Corp. Mr. Gerstner is a director of Bristol-Myers Squibb Company and The New York Times Company, the Vice Chairman of the Board of the New American School Development Corp., a director of The Council on Foreign Relations and a member of the Smithsonian Board of Regents. Cathleen Black (52).......................... Director of IBM since 1995. President, Hearst Magazines, a Hearst Magazines division of The Hearst Corporation, beginning January 1996. From 959 8th Avenue 1991 to 1996, she served as President and Chief Executive Officer New York, NY 10019 of Newspaper Association of America. From 1985 to 1991, Ms. Black was Executive Vice President/ Marketing for Gannett Company, Inc. and also President, then publisher, of USA TODAY from 1983 to 1991. She is a director of The Coca-Cola Company, the Advertising Council and the United Way of America and a Trustee of the University of Notre Dame. Harold Brown (69)............................ Director of IBM from 1972 to 1977 and since 1981. Counselor, Center for Strategic and Center for Strategic and International Studies, Washington, D.C., International Studies and a general partner in Warburg, Pincus & Company. He is former Suite 400 U.S. Secretary of Defense and former U.S. Secretary of the Air 1800 K Street, N.W. Force. He is a director of Alumax Inc., Cummins Engine Company, Washington, DC 20006 Inc., Philip Morris Companies Inc. and Mattel, Inc.; a member of the National Academy of Sciences and the National Academy of Engineering; and a trustee and President Emeritus of the California Institute of Technology. Juergen Dormann (56)......................... Director of IBM since January 1996. Chairman of the Management Hoechst AG Board of Hoechst AG. Mr. Dormann joined Hoechst in 1963 and was Frankfurt G65926 elected Finance and Accounting Director in 1987 and to his present Germany position in 1994. He is a director of Wacker Chemie GmbH, Allianz Lebensversicherungs AG and Rheinische Hypothekenbank AG.
S-1
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS NAME, AGE AND BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS - - --------------------------------------------- ------------------------------------------------------------------ Nannerl O. Keohane (56)...................... Director of IBM since 1986. President and professor of political Office of the President science at Duke University. She was formerly President of 207 Allen Building Wellesley College, and a former faculty member at Swarthmore Box 90001 College and Stanford University. She is a member of The Council on Duke University Foreign Relations and the American Academy of Arts and Sciences Durham, NC 27708-0001 and a trustee of the Colonial Williamsburg Foundation. Dr. Keohane is a member of the MIT Corporation and has served as Vice President of the American Political Science Association. Charles F. Knight (60)....................... Director of IBM since 1993. Chairman, Chief Executive Officer and Emerson Electric Co. President of Emerson Electric Co. He joined Emerson Electric Co. 8000 West Florissant Avenue in 1972 as Vice Chairman and was elected Chief Executive Officer P.O. Box 4100 in 1973, Chairman in 1974 and President in 1995. He is a director St. Louis, MO 63136-8506 of SBC Communications Inc., Anheuser Busch Companies, Inc. and The British Petroleum Company p.l.c. Lucio A. Noto (58)........................... Director of IBM since 1995. Chairman and Chief Executive Officer Mobil Corporation of Mobil Corporation. Mr. Noto joined Mobil in 1962 and was 3225 Gallows Road elected to Mobil's board in 1988. He was elected Chief Financial Fairfax, VA 22037 Officer in 1989, President and Chief Operating Officer in 1993 and to his present position in 1994. He also serves as Chairman of Mobil's executive committee. Mr. Noto is a member of The Council on Foreign Relations. John B. Slaughter (62)....................... Director of IBM since 1988. President of Occidental College. He is Office of the President a former chancellor of the University of Maryland and a former Occidental College director of the National Science Foundation. He is a director of 1600 Campus Road the Atlantic Richfield Company, Avery Dennison Corporation, Los Angeles, CA 90041 Monsanto Company and Northrop Grumman Corporation. He is a member of the National Academy of Engineering, a member of the American Academy of Arts and Sciences, a fellow of the American Association for the Advancement of Science, a fellow of the Institute of Electrical and Electronics Engineers and a member of the Hall of Fame of the American Society for Engineering Education. Alex Trotman (63)............................ Director of IBM since 1994. Chairman and Chief Executive Officer Ford Motor Company of the Ford Motor Company. Mr. Trotman joined Ford of Britain in American Road 1955 and was elected President of Ford Asia-Pacific in 1983 and Dearborn, MI 48121-1899 Chairman of Ford of Europe in 1988. He became President and Chief Operating Officer of Ford Automotive Group and a director in 1993. He was subsequently elected to his present position in 1993.
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PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS NAME, AGE AND BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS - - --------------------------------------------- ------------------------------------------------------------------ Lodewijk C. van Wachem (65).................. Director of IBM since 1992. Chairman of the supervisory board of Royal Dutch Petroleum Royal Dutch Petroleum Company. In 1992, Mr. van Wachem retired as Company President of Royal Dutch Petroleum, a post he had held since 1982. P.O. Box 162 He is a director of ATCO Ltd., ABB Asea Brown Boveri Ltd. and 2501 AN The Hague Zurich Versicherungs- Gesellschaft; and a member of the Netherlands supervisory boards of AKZO N.V., Philips Electronics N.V. and Bavarian Motor Works A.G. Charles M. Vest (55)......................... Director of IBM since 1994. President and professor of mechanical Massachusetts Institute of engineering at the Massachusetts Institute of Technology. Dr. Vest Technology was formerly the Provost and Vice President for Academic Affairs President's Office of the University of Michigan. He is a director of E.I. du Pont de Room 3-208 Nemours and Company, a fellow of the American Association for the 77 Massachusetts Avenue Advancement of Science, a member of the National Academy of Cambridge, MA 02139 Engineering and the Corporation of Woods Hole Oceanographic Institution and a trustee of Wellesley College. J. Thomas Bouchard (56)...................... Senior Vice President, Human Resources of IBM since 1994. Previously Mr. Bouchard was Senior Vice President, Chief Human Resources Officer of U.S. West, Inc. from 1989 to 1994. Nicholas M. Donofrio (51).................... Senior Vice President and Group Executive of IBM since 1995. Mr. Donofrio was General Manager, Large Scale Computing Division, from 1994 to 1995; IBM Senior Vice President and General Manager, Large Scale Computing Division, from 1993 to 1994; IBM Senior Vice President and General Manager, Enterprise Systems, 1993; IBM Vice President and General Manager, Enterprise Systems, from 1991 to 1993; IBM Vice President and President, Data Systems Division, 1991; IBM Vice President and President, Advanced Workstations Division, from 1988 to 1991. J. Bruce Harreld (45)........................ Senior Vice President, Strategy of IBM since 1995. Mr. Harreld was President of Boston Chicken Company from 1993 to 1995, Senior Vice President, Marketing and Information Services of Kraft General Foods from 1992 to 1993 and Senior Vice President, Chief Information Officer of Kraft General Foods from 1989 to 1992. Paul M. Horn (50)............................ Senior Vice President, Research of IBM since 1996. Dr. Horn was Vice President, Storage Systems Division and Director, Almaden Research Center from 1994 to 1995, Director, Advanced Semiconductor Technology Lab from 1992 to 1994 and Director, Silicon Technology from 1990 to 1992.
S-3
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS NAME, AGE AND BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS - - --------------------------------------------- ------------------------------------------------------------------ Ned C. Lautenbach (52)....................... Senior Vice President and Group Executive, Worldwide Sales and Services of IBM and Chairman, IBM World Trade Corporation since 1995. Mr. Lautenbach was IBM Senior Vice President and Group Executive and Chairman, IBM World Trade Corporation, from 1993 to 1995; IBM Senior Vice President and Chairman, IBM World Trade Corporation, 1993; IBM Senior Vice President and President and Representative Director, Asia Pacific, from 1992 to 1993; IBM Vice President and President and Representative Director, Asia Pacific, from 1991 to 1992; IBM Vice President and Senior Managing Director, Operations, Asia Pacific, 1991; and IBM Vice President and General Manager, Application Solutions, from 1988 to 1991. Lawrence R. Ricciardi (56)................... Senior Vice President and General Counsel of IBM since 1995. Mr. Ricciardi was President and General Counsel of RJR Nabisco Holdings Corp. from 1993 to 1995, Co-Chairman and Chief Executive Officer and General Counsel from March to May 1993 and Executive Vice President and General Counsel of RJR Nabisco Holdings Corp. from 1989 to 1993. Robert M. Stephenson (58).................... Senior Vice President and Group Executive of IBM since 1995. Mr. Stephenson was also General Manager, IBM North America in 1995 and IBM Vice President & Representative Director then General Manager, Asia Pacific from 1993 to 1995; IBM Vice President and President, Services Sector Division, Application Solutions, from 1991 to 1993; and IBM Vice President and Assistant General Manager, Operations, Finance & Planning, IBM U.S., from 1989 to 1991. G. Richard Thoman (52)....................... Senior Vice President and Chief Financial Officer of IBM since 1995. Mr. Thoman was IBM Senior Vice President and Group Executive from 1993 to 1995. He was President, Nabisco International, from 1992 until joining IBM in 1993. From 1989 to 1992 he was Co-Chief Executive Officer, American Express Travel Related Services and Chief Executive Officer, American Express International. John M. Thompson (54)........................ Senior Vice President and Group Executive of IBM since 1994 and Chairman, IBM Canada, from 1990 to 1995. Mr. Thompson was IBM Senior Vice President and Group Executive, from 1993 to 1994; IBM Senior Vice President and General Manager, Applications Business Systems, 1993; IBM Vice President and General Manager, Applications Business Systems, from 1991 to 1993; IBM Vice President, Corporate Marketing and Services, 1991; IBM Vice President, from 1990 to 1991; IBM Vice President, Chairman and Chief Executive Officer, Americas Group, from 1989 to 1990.
S-4
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS NAME, AGE AND BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS - - --------------------------------------------- ------------------------------------------------------------------ Patrick A. Toole (59)........................ Senior Vice President and Group Executive of IBM since 1994. Mr. Toole was IBM Senior Vice President, Manufacturing and Development, from 1992 to 1994; IBM Senior Vice President and General Manager, Worldwide Manufacturing and Development Operations, from 1990 to 1992; IBM Senior Vice President and General Manager, Operations, IBM U.S., 1990; and IBM Senior Vice President and General Manager, Technology Products, from 1988 to 1990. John E. Hickey (53).......................... Vice President, Assistant General Counsel and Secretary of IBM since 1994. Mr. Hickey was IBM Secretary and Assistant General Counsel from 1990 to 1994 and Assistant General Counsel from 1989 to 1990. John R. Joyce (43)........................... Vice President and Controller of IBM since June 1996. Mr. Joyce was Vice President, Finance and Planning, IBM North America, from 1995 to 1996; Vice President, Finance, Asia Pacific, from 1994 to 1995; Chief Financial Officer, IBM Japan, from 1993 to 1994; and Managing Director, Finance Planning and Accounting, Asia Pacific, from 1991 to 1993. Jeffrey D. Serkes (37)....................... Vice President and Treasurer of IBM since 1995. Mr. Serkes was Assistant Treasurer of IBM from 1994 to 1995. Previously, he was Vice President and Deputy Treasurer of RJR Nabisco. Inc., from 1993 to 1994; Vice President and Assistant Treasurer--Corporate Finance from 1991 to 1993; and Director--Capital Markets from 1989 to 1991.
S-5 2. DIRECTORS AND EXECUTIVE OFFICERS OF THE PURCHASER. The name, business address, present principal occupation or employment and five-year employment history of each of the directors and executive officers of the Purchaser are set forth below. The business address of each such director and executive officer is Indigo Acquisition Corp. in care of International Business Machines Corporation, Old Orchard Road, Armonk, NY 10504. All such directors and executive officers listed below are citizens of the United States.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS NAME, AGE AND BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS - - --------------------------------------------- ------------------------------------------------------------------ Lee A. Dayton (53)........................... Director and President of the Purchaser. Vice President, Corporate Development and Real Estate of IBM since 1996. Mr. Dayton was General Manager, Real Estate and Business Development of IBM from 1994 to 1996; General Manager, Real Estate and Procurement Services, General Manager, Real Estate Services, and IBM Director, Real Estate and Construction Staff, from 1990 to 1994; and Senior Managing Director, Asia Pacific, from 1988 to 1990. Donald D. Westfall (58)...................... Director, Vice President and Secretary of the Purchaser. Associate General Counsel of IBM since 1988. Archie W. Colburn (43)....................... Director, Vice President, Treasurer and Assistant Secretary of the Purchaser. Business Development Executive of IBM since 1995. Mr. Colburn was Business Development Consultant of IBM from 1994 to 1995; and Business Development Associate from 1989 to 1994.
S-6 Manually signed facsimile copies of the Letter of Transmittal will be accepted. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each shareholder of the Company or such shareholder's broker, dealer, bank, trust company or other nominee to the Depositary at one of its addresses set forth below. THE DEPOSITARY FOR THE OFFER IS CHASEMELLON SHAREHOLDER SERVICES Reorganization Dept. BY MAIL: BY HAND OR OVERNIGHT PO Box 798 DELIVERY: Midtown Station 120 Broadway New York, NY 10018 13th Floor New York, NY 10271 BY FACSIMILE TRANSMISSION: 201-329-8936 FOR CONFIRMATION OF FACSIMILE: 201-296-4209 201-296-4381
Questions and requests for assistance or for additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Information Agent at its telephone numbers and location listed below. You may also contact your broker, dealer, bank, trust company or other nominee for assistance concerning the Offer. THE INFORMATION AGENT FOR THE OFFER IS: Morrow & Co., Inc. 909 Third Avenue 20th Floor New York, NY 10022 (212) 754-8000 Toll Free (800) 566-9061 Banks and Brokerage Firms please call: (800) 662-5200 EX-99.(A)(2) 3 EXHIBIT 99(A)(2)-LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK (INCLUDING THE ASSOCIATED RIGHTS TO PURCHASE COMMON STOCK) OF EDMARK CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED NOVEMBER 18, 1996 BY INDIGO ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF INTERNATIONAL BUSINESS MACHINES CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, DECEMBER 16, 1996, UNLESS THE OFFER IS EXTENDED. TO: CHASEMELLON SHAREHOLDER SERVICES, AS DEPOSITARY Reorganization Dept. BY MAIL: BY HAND OR OVERNIGHT DELIVERY: PO Box 798 120 Broadway Midtown Station 13th Floor New York, NY 10018 New York, NY 10271
BY FACSIMILE TRANSMISSION: 201-329-8936 FOR CONFIRMATION OF FACSIMILE: 201-296-4209 201-296-4381 ------------------------ DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be used either if certificates for Shares (as defined below) are to be forwarded herewith or, unless an Agent's Message (as defined in Section 2 of the Offer to Purchase (as defined below)) is utilized, if delivery of Shares is to be made by book-entry transfer to an account maintained by the Depositary at a Book-Entry Transfer Facility as defined in and pursuant to the procedures set forth in Section 2 of the Offer to Purchase. Shareholders who deliver Shares by book-entry transfer are referred to herein as "Book-Entry Shareholders" and other shareholders are referred to herein as "Certificate Shareholders". Shareholders whose certificates for Shares are not immediately available or who cannot deliver either the certificates for, or a Book-Entry Confirmation (as defined in Section 2 of the Offer to Purchase) with respect to, their Shares and all other documents required hereby to the Depositary prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase) must tender their Shares in accordance with the guaranteed delivery procedures set forth in Section 2 of the Offer to Purchase. See Instruction 2. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Holders of Shares will be required to tender one Right (as defined below) for each Share tendered to effect a valid tender of such Share. Unless and until the Distribution Date (as defined in the Offer to Purchase) occurs, the Rights are represented by and transferred with the Shares. Accordingly, if the Distribution Date does not occur prior to the Expiration Date (and under the terms of the Rights Agreement (as defined below), a Distribution Date will not occur by reason of the Offer (as defined below)), a tender of Shares will constitute a tender of the associated Rights. If, however, pursuant to the Rights Agreement or otherwise, a Distribution Date does occur, certificates representing a number of Rights equal to the number of Shares being tendered must be delivered to the Depositary in order for such Shares to be validly tendered. If a Distribution Date has occurred, a tender of Shares without Rights constitutes an agreement by the tendering shareholder to deliver certificates representing a number of Rights equal to the number of Shares tendered pursuant to the Offer to the Depositary within three trading days (as defined herein) after the date such certificates are distributed. The Purchaser (as defined herein) reserves the right to require that it receive such certificates prior to accepting Shares for payment. Payment for Shares tendered and purchased pursuant to the Offer will be made only after timely receipt by the Depositary of, among other things, such certificates, if such certificates have been distributed to holders of Shares. The Purchaser will not pay any additional consideration for the Rights tendered pursuant to the Offer. DESCRIPTION OF SHARES TENDERED
NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) SHARES TENDERED ON CERTIFICATE(S)) (ATTACH ADDITIONAL LIST IF NECESSARY) TOTAL NUMBER OF SHARES NUMBER CERTIFICATE REPRESENTED BY OF SHARES NUMBER(S)(1) CERTIFICATE(S)(1) TENDERED(2) TOTAL SHARES (1) Need not be completed by Book-Entry Shareholders. (2) Unless otherwise indicated, it will be assumed that all Shares described above are being tendered. See Instruction 4.
/ / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE DEPOSITARY WITH A BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK-ENTRY TRANSFER FACILITY MAY DELIVER SHARES BY BOOK-ENTRY TRANSFER): Name of Tendering Institution Check box of Book-Entry Transfer Facility: / / The Depository Trust Company / / Midwest Securities Trust Company / / Philadelphia Depository Trust Company Account Number Transaction Code Number / / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Owner(s) Date of Execution of Notice of Guaranteed Delivery Name of Institution that Guaranteed Delivery If delivered by book-entry transfer check box: / / The Depository Trust Company / / Midwest Securities Trust Company / / Philadelphia Depository Trust Company Account Number Transaction Code Number
NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to Indigo Acquisition Corp., a Washington corporation (the "Purchaser") which is a wholly owned subsidiary of International Business Machines Corporation, a New York corporation, the above- described shares of Common Stock, no par value (the "Shares"), of Edmark Corporation, a Washington corporation (the "Company"), together with the associated rights (the "Rights") to purchase Shares issued pursuant to the Shareholder Rights Agreement dated as of November 29, 1995 between the Company and ChaseMellon Shareholder Services, L.L.C. (as successor to First Interstate Bank of Washington, N.A.), as rights agent (as amended, the "Rights Agreement"), upon the terms and subject to the conditions set forth in the Purchaser's Offer to Purchase dated November 18, 1996 (the "Offer to Purchase"), and this Letter of Transmittal (which, together with any amendments or supplements thereto or hereto, collectively constitute the "Offer"), receipt of which is hereby acknowledged. Unless the context otherwise requires, all references to Shares include the associated Rights. Upon the terms of the Offer, subject to, and effective upon, acceptance for payment of, and payment for, the Shares tendered herewith in accordance with the terms of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Purchaser all right, title and interest in and to all the Shares that are being tendered hereby (and any and all other Shares or other securities or rights issued or issuable in respect thereof on or after November 12, 1996), and irrevocably constitutes and appoints ChaseMellon Shareholder Services, L.L.C. (the "Depositary"), the true and lawful agent and attorney-in-fact of the undersigned, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to the full extent of the undersigned's rights with respect to such Shares (and any such other Shares or securities or rights), (a) to deliver certificates for such Shares (and any such other Shares or securities or rights) or transfer ownership of such Shares (and any such other Shares or securities or rights) on the account books maintained by a Book-Entry Transfer Facility together, in any such case, with all accompanying evidences of transfer and authenticity to, or upon the order of, the Purchaser, (b) to present such Shares (and any such other Shares or securities or rights) for transfer on the Company's books and (c) to receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares (and any such other Shares or securities or rights), all in accordance with the terms of the Offer. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the tendered Shares (and any and all other Shares or other securities or rights issued or issuable in respect of such Shares on or after November 12, 1996) and, when the same are accepted for payment by the Purchaser, the Purchaser will acquire good title thereto, free and clear of all liens, restrictions, claims and encumbrances, and the same will not be subject to any adverse claim. The undersigned will, upon request, execute any additional documents deemed by the Depositary or the Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the tendered Shares (and any and all such other Shares or securities or rights). All authority conferred or agreed to be conferred pursuant to this Letter of Transmittal shall be binding upon the successors, assigns, heirs, executors, administrators and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. The undersigned hereby irrevocably appoints Lee A. Dayton, Donald D. Westfall and Archie W. Colburn, and each of them, and any other designees of the Purchaser, the attorneys-in-fact and proxies of the undersigned, each with full power of substitution, to vote at any annual, special or adjourned meeting of the Company's shareholders or otherwise in such manner as each such attorney-in-fact and proxy or his substitute shall in his sole discretion deem proper with respect to, to execute any written consent concerning any matter as each such attorney-in-fact and proxy or his substitute shall in his sole discretion deem proper with respect to, and to otherwise act as each such attorney-in-fact and proxy or his substitute shall in his sole discretion deem proper with respect to, the Shares tendered hereby that have been accepted for payment by the Purchaser prior to the time any such action is taken and with respect to which the undersigned is entitled to vote (and any and all other Shares or other securities or rights issued or issuable in respect of such Shares on or after November 12, 1996). This appointment is effective when, and only to the extent that, the Purchaser accepts for payment such Shares as provided in the Offer to Purchase. This power of attorney and proxy are irrevocable and are granted in consideration of the acceptance for payment of such Shares in accordance with the terms of the Offer. Upon such acceptance for payment, all prior powers of attorney, proxies and consents given by the undersigned with respect to such Shares (and any such other Shares or securities or rights) will, without further action, be revoked and no subsequent powers of attorney, proxies, consents or revocations may be given (and, if given, will not be deemed effective) by the undersigned. The undersigned understands that the valid tender of Shares pursuant to any of the procedures described in Section 2 of the Offer to Purchase and in the Instructions hereto will constitute a binding agreement between the undersigned and the Purchaser upon the terms and subject to the conditions of the Offer. Unless otherwise indicated herein under "Special Payment Instructions", please issue the check for the purchase price and/or return any certificates for Shares not tendered or accepted for payment in the name(s) of the registered holder(s) appearing under "Description of Shares Tendered". Similarly, unless otherwise indicated under "Special Delivery Instructions", please mail the check for the purchase price and/or return any certificates for Shares not tendered or accepted for payment (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing under "Description of Shares Tendered". In the event that both "Special Delivery Instructions" and "Special Payment Instructions" are completed, please issue the check for the purchase price and/or return any certificates for Shares not tendered or accepted for payment (and any accompanying documents, as appropriate) in the name of, and deliver such check and/or return such certificates (and any accompanying documents, as appropriate) to, the person or persons so indicated. Please credit any Shares tendered herewith by book-entry transfer that are not accepted for payment by crediting the account at the Book-Entry Transfer Facility designated above. The undersigned recognizes that the Purchaser has no obligation pursuant to "Special Payment Instructions" to transfer any Shares from the name of the registered holder thereof if the Purchaser does not accept for payment any of the Shares so tendered. / / CHECK HERE IF ANY OF THE CERTIFICATES REPRESENTING SHARES THAT YOU OWN HAVE BEEN LOST OR DESTROYED AND SEE INSTRUCTION 11. Number of Shares represented by the lost or destroyed certificates: ___________________ SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 5, 6 AND 7) To be completed ONLY if certificates for Shares not tendered or not accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be issued in the name of someone other than the undersigned. Issue: / / Check / / Certificate(s) to: Name ___________________________________________________________________________ (PLEASE PRINT) Address ________________________________________________________________________ ________________________________________________________________________________ (INCLUDE ZIP CODE) ________________________________________________________________________________ (EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 5, 6 AND 7) To be completed ONLY if certificates for Shares not tendered or not accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be sent to someone other than the undersigned, or to the undersigned at an address other than that above. Mail: / / Check / / Certificate(s) to: Name ___________________________________________________________________________ (PLEASE PRINT) Address ________________________________________________________________________ ________________________________________________________________________________ (INCLUDE ZIP CODE) ________________________________________________________________________________ (EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER) SIGN HERE (ALSO COMPLETE SUBSTITUTE FORM W-9 BELOW) ______________________________________________________ ______________________________________________________ (Signature(s) of Shareholder(s)) Dated: ________________, 1996 (Must be signed by registered holder(s) as name(s) appear(s) on the certificate(s) for the Shares or on a security position listing or by person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please provide the following information and see Instruction 5.) Name(s) ______________________________________________ ______________________________________________________ (Please Print) Capacity (Full Title) ________________________________ Address ______________________________________________ ______________________________________________________ (Include Zip Code) Daytime Area Code and Telephone No. __________________ Employer Identification or Social Security Number _______________________________ (See Substitute Form W-9) GUARANTEE OF SIGNATURE(S) (IF REQUIRED--SEE INSTRUCTIONS 1 AND 5) ______________________________________________________ Authorized Signature ______________________________________________________ Name (Please Print) ______________________________________________________ Name of Firm ______________________________________________________ Address ______________________________________________________ (Include Zip Code) ______________________________________________________ Daytime Area Code and Telephone No. Dated: ________________, 1996 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES. No signature guarantee is required on this Letter of Transmittal (a) if this Letter of Transmittal is signed by the registered holder(s) (which term, for purposes of this Section, includes any participant in any of the Book-Entry Transfer Facilities' systems whose name appears on a security position listing as the owner of the Shares) of Shares tendered herewith, unless such registered holder(s) has completed either the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (b) if such Shares are tendered for the account of a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (such participant, an "Eligible Institution"). In all other cases, all signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution. See Instruction 5. 2. REQUIREMENTS OF TENDER. This Letter of Transmittal is to be completed by shareholders either if certificates are to be forwarded herewith or, unless an Agent's Message (as defined below) is utilized, if delivery of Shares is to be made pursuant to the procedures for book-entry transfer set forth in Section 2 of the Offer to Purchase. For a shareholder validly to tender Shares pursuant to the Offer, either (a) a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, together with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and any other required documents, must be received by the Depositary at one of its addresses set forth herein prior to the Expiration Date and either certificates for tendered Shares must be received by the Depositary at one of such addresses or Shares must be delivered pursuant to the procedures for book-entry transfer set forth herein (and a Book-Entry Confirmation received by the Depositary), in each case prior to the Expiration Date, or (b) the tendering shareholder must comply with the guaranteed delivery procedures set forth below and in Section 2 of the Offer to Purchase. Shareholders whose certificates for Shares are not immediately available or who cannot deliver their certificates and all other required documents to the Depositary or complete the procedures for book-entry transfer prior to the Expiration Date may tender their Shares by properly completing and duly executing the Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth in Section 2 of the Offer to Purchase. Pursuant to such procedures, (a) such tender must be made by or through an Eligible Institution, (b) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by the Purchaser, must be received by the Depositary prior to the Expiration Date and (c) the certificates for all tendered Shares in proper form for transfer (or a Book-Entry Confirmation with respect to all such Shares), together with a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and any other required documents, must be received by the Depositary within three trading days after the date of execution of such Notice of Guaranteed Delivery as provided in Section 2 of the Offer to Purchase. A "trading day" is any day on which the Nasdaq National Market operated by the National Association of Securities Dealers, Inc. is open for business. The term "Agent's Message" means a message transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation which states that such Book-Entry Transfer Facility has received an express acknowledgement from the participant in such Book-Entry Transfer Facility tendering the Shares that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Purchaser may enforce such agreement against the participant. THE METHOD OF DELIVERY OF SHARES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE ELECTION AND RISK OF THE TENDERING SHAREHOLDER. SHARES WILL BE DEEMED DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE OF A BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. All tendering shareholders, by execution of this Letter of Transmittal (or facsimile hereof), waive any right to receive any notice of the acceptance of their Shares for payment. 3. INADEQUATE SPACE. If the space provided herein is inadequate, the certificate numbers and/or the number of Shares should be listed on a separate schedule attached hereto. 4. PARTIAL TENDERS (APPLICABLE TO CERTIFICATE SHAREHOLDERS ONLY). If fewer than all the Shares evidenced by any certificate submitted are to be tendered, fill in the number of Shares that are to be tendered in the box entitled "Number of Shares Tendered". In any such case, new certificate(s) for the remainder of the Shares that were evidenced by the old certificate(s) will be sent to the registered holder, unless otherwise provided in the appropriate box on this Letter of Transmittal, as soon as practicable after the acceptance for payment of, and payment for, the Shares tendered herewith. All Shares represented by certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder of the Shares tendered hereby, the signature must correspond with the name as written on the face of the certificate(s) without any change whatsoever. If any of the Shares tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any tendered Shares are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of certificates. If this Letter of Transmittal or any certificates or stock powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and proper evidence satisfactory to the Purchaser of their authority so to act must be submitted. When this Letter of Transmittal is signed by the registered owner(s) of the Shares listed and transmitted hereby, no endorsements of certificates or separate stock powers are required unless payment is to be made to, or certificates for Shares not tendered or accepted for payment are to be issued to, a person other than the registered owner(s). Signatures on such certificates or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered owner(s) of the certificates listed, the certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on the certificates. Signatures on such certificates or stock powers must be guaranteed by an Eligible Institution. 6. STOCK TRANSFER TAXES. The Purchaser will pay any stock transfer taxes with respect to the transfer and sale of Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price is to be made to, or if certificates for Shares not tendered or accepted for payment are to be registered in the name of, any person(s) other than the registered owner(s), or if tendered certificates are registered in the name(s) of any person(s) other than the person(s) signing this Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered owner(s) or such person(s)) payable on account of the transfer to such person(s) will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES LISTED IN THIS LETTER OF TRANSMITTAL. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check is to be issued in the name of, and/or certificates for Shares not accepted for payment are to be returned to, a person other than the signer of this Letter of Transmittal or if a check is to be sent and/or such certificates are to be returned to a person other than the signer of this Letter of Transmittal or to an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. 8. WAIVER OF CONDITIONS. The Purchaser reserves the absolute right in its sole discretion to waive any of the specified conditions of the Offer, in whole or in part, in the case of any Shares tendered. 9. 31% BACKUP WITHHOLDING. In order to avoid backup withholding of Federal income tax on payments of cash pursuant to the Offer, a shareholder surrendering Shares in the Offer must, unless an exemption applies, provide the Depositary with such shareholder's correct taxpayer identification number ("TIN") on Substitute Form W-9 below in this Letter of Transmittal and certify under penalties of perjury that such TIN is correct and that such shareholder is not subject to backup withholding. If a shareholder does not provide such shareholder's correct TIN or fails to provide the certifications described above, the Internal Revenue Service (the "IRS") may impose a $50 penalty on such shareholder and payment of cash to such shareholder pursuant to the Offer may be subject to backup withholding of 31%. Backup withholding is not an additional income tax. Rather, the amount of the backup withholding can be credited against the U.S. federal income tax liability of the person subject to the backup withholding, provided that the required information is given to the IRS. If backup withholding results in an overpayment of tax, a refund can be obtained by the shareholder upon filing an income tax return. The shareholder is required to give the Depositary the TIN (i.e., social security number or employer identification number) of the record owner of the Shares. If the Shares are held in more than one name or are not in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which number to report. The box in Part 3 of the Substitute Form W-9 may be checked if the tendering shareholder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part 3 is checked, the shareholder or other payee must also complete the Certificate of Awaiting Taxpayer Identification Number below in order to avoid backup withholding. Notwithstanding that the box in Part 3 is checked and the Certificate of Awaiting Taxpayer Identification Number is completed, the Depositary will withhold 31% on all payments made prior to the time a properly certified TIN is provided to the Depositary. However, such amounts will be refunded to such shareholder if a TIN is provided to the Depositary within 60 days. Certain shareholders (including, among others, all corporations and certain foreign individuals and entities) are not subject to backup withholding. Noncorporate foreign shareholders should complete and sign the main signature form and a Form W-8, Certificate of Foreign Status, a copy of which may be obtained from the Depositary, in order to avoid backup withholding. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for more instructions. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance or additional copies of the Offer to Purchase, this Letter of Transmittal, the Notice of Guaranteed Delivery and the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 may be directed to the Information Agent at its address set forth below. 11. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate representing Shares has been lost, destroyed or stolen, the shareholder should promptly notify the Depositary by checking the box immediately preceding the special payment/special delivery instructions and indicating the number of Shares lost. The shareholder will then be instructed as to the steps that must be taken in order to replace the certificate. This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed certificates have been followed. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), TOGETHER WITH ANY REQUIRED SIGNATURE GUARANTEES, OR, IN THE CASE OF A BOOK-ENTRY TRANSFER, AN AGENT'S MESSAGE, AND ANY OTHER REQUIRED DOCUMENTS, MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE AND EITHER CERTIFICATES FOR TENDERED SHARES MUST BE RECEIVED BY THE DEPOSITARY OR SHARES MUST BE DELIVERED PURSUANT TO THE PROCEDURES FOR BOOK-ENTRY TRANSFER, IN EACH CASE PRIOR TO THE EXPIRATION DATE, OR THE TENDERING SHAREHOLDER MUST COMPLY WITH THE PROCEDURES FOR GUARANTEED DELIVERY. PAYER'S NAME: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND FORM W-9 CERTIFY BY SIGNING AND DATING BELOW Social Security Number(s) OR Employer Identification Number(s) PART 2--Certification--Under penalties of perjury, I Part 3-- certify that: Awaiting TIN (1) the number shown on this form is my correct Taxpayer / / Identification Number (or I am waiting for a number Part 4-- to be issued to me) and Exempt TIN (2) I am not subject to backup withholding because (a) I / / am exempt from backup withholding or (b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. Certification instructions--You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of under reporting interest or dividends on your tax returns. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out such item (2). If you are exempt from backup withholding, check the box in Part 4 above. Department of the Treasury Internal Revenue Service Payer's Request for Taxpayer Identification Number (TIN) SIGNATURE DATE , 1996
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that, if I do not provide a taxpayer identification number to the Depositary, 31% of all reportable payments made to me will be withheld, but will be refunded if I provide a certified taxpayer identification number within 60 days. , 1996 Signature Date
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL INFORMATION. THE INFORMATION AGENT FOR THE OFFER IS: Morrow & Co., Inc. 909 Third Avenue 20th Floor New York, NY 10022 (212) 754-8000 Toll Free (800) 566-9061 Banks and Brokerage Firms please call: (800) 662-5200 EX-99.(A)(3) 4 EXHIBIT 99(A)(3)/PRESS RELEASE FOR RELEASE: IMMEDIATE [LETTERHEAD] Contacts: Rob Wilson Kendra Collins Paul Bialek IBM IBM CFO, Edmark 914-765-6565 914-766-3804 206-556-8810 IBM, EDMARK ANNOUNCE MERGER AGREEMENT ARMONK, N.Y., Nov. 13, 1996--IBM and Edmark (NASDAQ:EDMK) today announced that they have entered into a definitive merger agreement under which IBM will shortly commence a cash tender offer for Edmark's shares at a price of $15.50 per share. Edmark, based in Redmond, Washington, is a leading developer and publisher of quality consumer and education software for kindergarten through 12th grade. The directors and executive officers of Edmark have agreed to sell their shares to IBM. The net cash cost of the transaction to IBM is expected to be approximately $80 million. "The merger of Edmark represents the next stage in our strategy of focusing on education and enhanced learning and further strengthens our leadership position in the home consumer marketplace," said Jim Firestone, general manager, IBM Consumer Division. "As a company, we are strongly committed to bringing the power and the magic of technology to the home. Education software is one of the most important applications for consumers and this merger will substantially accelerate our efforts in this area." The merger brings to IBM a library of high quality educational software titles, as well as a highly experienced management and software development team. The creator of the newly released Mighty Math Series, Sammy's Science House, Stanley's Stickers Stories, and the popular Thinkin' Things Series, Edmark is widely recognized as having some of the most advanced educational software products on the market. The - more - - 2 - company currently offers 20 multimedia titles that have been recognized with more than 100 important industry awards for their rich educational depth, thought-provoking content and open-ended environments where children can investigate, experiment, role play and construct their own ideas and projects. IBM plans to operate the unit under the Edmark name in Redmond. Mr. Firestone will oversee and direct the operations of the company. "Schools and parents are changing the way they use technology to educate their children," Firestone added. "Increasingly, networks and the Internet will allow parents, teachers and students to work together in new ways. Having both an understanding of educational content and networking technology, IBM is well-positioned to make this happen." The terms and conditions of IBM's cash tender offer will be set forth in the offering documents expected to be filed by November 19, 1996 with the Securities and Exchange Commission. These conditions will include the acquisition of at least two-thirds of all outstanding shares of Edmark common stock on a fully diluted basis. "IBM brings size, scale, distribution and marketing to our company and will add viability and credibility," said Donna Stanger, Edmark acting CEO. "With our award-winning products and IBM's strong commitment to education and technology, we can break out of the pack and be a leader in education software sales. Edmark has more than 25 years of experience applying proven educational concepts to the development of educational products for children. The company develops products for both consumers and educational institutions, including such award-winning titles as The Early Learning House Series, Strategy Challenges Series, and The Imagination Express Series. - more - - 3 - The IBM Consumer Division is a leading manufacturer and developer of both hardware and software solutions for the home. Established as a business unit within IBM in 1995, the Consumer Division's products include the award-winning Aptiva family of personal computers. These products have been recognized for technology innovation and product design. IBM's multimedia software titles, including Emergency Room, Pinocchio and Friendly Forest, have attracted a strong following among consumers. For additional information, access the IBM Aptiva home page at http://www.pc.ibm.com/Aptiva/. # # # 111396 EX-99.(A)(4) 5 EXHIBIT 99-A4/FAIRNESS OPINION ALEX BROWN & SONS LOGO November 12, 1996 Board of Directors Edmark Corporation 6727 185th Avenue NE Redmond, WA 98073 Dear Members of the Board of Directors: Edmark Corporation ("Edmark" or the "Company"), International Business Machines Corporation ("IBM") and Indigo Acquisition Corp., a Washington Corporation and a wholly-owned subsidiary of IBM (the "Merger Sub"), propose to enter into an Agreement and Plan of Merger dated as of November 12, 1996 (the "Agreement"). Pursuant to the Agreement, the Merger Sub will commence a tender offer (the "Tender Offer") to purchase all outstanding shares of the common stock, no par value per share (the "Common Stock"), of Edmark at a price of $15.50 per share, net to the seller in cash. The Agreement also provides that following such tender offer, Merger Sub will be merged with and into Edmark (the "Merger"), and that each then outstanding share of Common Stock, other than shares held by IBM or the Company, will be converted into the right to receive $15.50 in cash. You have requested our opinion as to whether the cash consideration to be received by the holders of the Common Stock in the Tender Offer and Merger is fair, from a financial point of view, to such shareholders. Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. We have acted as financial advisor to the Board of Directors of Edmark in connection with the transaction described above and will receive a fee for our services, a portion of which is contingent upon the consummation of the Tender Offer and a portion of which becomes payable upon the delivery of this opinion. Alex. Brown served as the lead-managing underwriter to Edmark in its follow-on offering of Common Stock in August 1995. Alex. Brown maintains a market in the Common Stock of Edmark and regularly publishes research reports regarding the consumer software industry and the businesses and securities of Edmark and other publicly traded companies in the consumer software industry. In the ordinary course of business, Alex. Brown may actively trade the securities of Edmark for our own account and the account of our customers and, accordingly, may at any time hold a long or short position in such securities. ALEX BROWN LOGO Board of Directors Edmark Corporation November 12, 1996 Page Two In connection with this opinion, we have reviewed certain publicly available financial information and other information concerning Edmark and certain internal analyses and other information furnished to us by Edmark. We have also held discussions with the members of the senior management of Edmark regarding the businesses and prospects of the Company. In addition, we have (i) reviewed the reported price and trading activity for the Common Stock of Edmark, (ii) compared certain financial and stock market information for Edmark with similar information for certain companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which we deemed comparable in whole or in part, (iv) reviewed the terms of the Agreement and certain related documents and (v) performed such other studies and analyses and considered such other factors as we deemed appropriate. We have not independently verified the information described above and for purposes of this opinion have assumed the accuracy, completeness and fairness thereof. With respect to the information relating to the prospects of Edmark, we have assumed that such information reflects the best currently available judgments and estimates of the management of Edmark as to the likely future financial performance of Edmark. In addition, we have not made nor been provided with an independent evaluation or appraisal of the assets or liabilities of Edmark, nor have we been furnished with any such evaluations or appraisals, nor have we made any physical inspection of the properties or assets of Edmark. Our opinion is based on market, economic and other conditions as they exist and can be evaluated as of the date of this letter. Our opinion expressed herein was prepared for the use of the Board of Directors of the Company and does not constitute a recommendation to any shareholder as to whether such shareholder should tender its Common Stock pursuant to the Tender Offer. We hereby consent to the inclusion of this opinion in its entirety as an exhibit to any filing made with the Securities and Exchange Commission with respect to the Tender Offer and the Merger. Based upon, and subject to the foregoing, it is our opinion that, as of the date of this letter, the cash consideration to be received by the holders of the Common Stock in the Tender Offer and Merger is fair, from a financial point of view, to such shareholders. Very truly yours, /s/ Alex. Brown & Sons, Incorporated ------------------------------------ Alex. Brown & Sons, Incorporated EX-99.(A)(5) 6 EXHIBIT 99(A)(5)/LETTER TO SHAREHOLDERS [LOGO] November 18, 1996 Dear Shareholder: I am pleased to report that on November 12, 1996, Edmark Corporation ("Edmark") entered into a merger agreement with International Business Machines Corporation and its wholly owned subsidiary, Indigo Acquisition Corp. ("Indigo"), that provides for the acquisition of Edmark by IBM through Indigo at a price of $15.50 per share. Under the terms of the proposed transaction, Indigo has commenced a cash tender offer for all outstanding shares of Edmark Common Stock at a price of $15.50 per share. The tender offer is currently scheduled to expire at 12:00 midnight, New York City time, on Monday, December 16, 1996. Following the successful completion of the tender offer, upon approval by shareholder vote, if required, Indigo will be merged with Edmark and all shares not purchased in the tender offer will be converted into the right to receive in cash $15.50 per share or such higher price per share as may be offered in the tender offer, without interest. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE IBM OFFER AND THE MERGER AND DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF EDMARK SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT EDMARK SHAREHOLDERS ACCEPT THE IBM OFFER AND TENDER THEIR SHARES. In arriving at its recommendation, the Board of Directors gave careful consideration to a number of factors. All of these factors are more fully described in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by Edmark with the Securities and Exchange Commission and enclosed with this letter. We urge you to read carefully the Schedule 14D-9 in its entirety so that you will be fully informed as to the Board's recommendations. Also accompanying this letter is a copy of Indigo's Offer to Purchase and related materials, including a Letter of Transmittal for use in tendering shares. These documents set forth the terms and conditions of the Indigo offer and provide instructions as to how to tender your shares. We urge you to read each of the enclosed materials carefully. The Board of Directors and management of Edmark thank you for the support you have given the Company. On behalf of the Board of Directors, Sincerely, EDMARK CORPORATION Frances M. Conley Chairman of the Board of Directors Enclosures 6727 185th Ave., N.E., P.O. Box 97021 Redmond, WA 98073-9721 206.556.8400 / / 800.426.0856 FAX 206.556.8998 TDD 206.356.8402 EX-99.(C)(1) 7 EXHIBIT 99(C)(1)/AGREEMENT AND PLAN OF MERGER ========================================================================= AGREEMENT AND PLAN OF MERGER Among INTERNATIONAL BUSINESS MACHINES CORPORATION, INDIGO ACQUISITION CORP. and EDMARK CORPORATION Dated as of November 12, 1996 ========================================================================= TABLE OF CONTENTS Page ---- ARTICLE I The Offer SECTION 1.01. The Offer................................................ 2 SECTION 1.02. Company Actions.......................................... 4 ARTICLE II The Merger SECTION 2.01. The Merger............................................... 6 SECTION 2.02. Closing.................................................. 6 SECTION 2.03. Effective Time........................................... 6 SECTION 2.04. Effects of the Merger.................................... 7 SECTION 2.05. Articles of Incorporation and Bylaws..................... 7 SECTION 2.06. Directors................................................ 7 SECTION 2.07. Officers................................................. 7 ARTICLE III Effect of the Merger on the Capital Stock of the Constituent Corporations; Exchange of Certificates SECTION 3.01. Effect on Capital Stock.................................. 8 (a) Capital Stock of Sub................................ 8 (b) Cancellation of Parent Owned Stock.................. 8 (c) Conversion of Shares................................ 8 (d) Shares of Dissenting Shareholders................... 8 (e) Withholding Tax..................................... 9 SECTION 3.02. Exchange of Certificates................................ 9 (a) Paying Agent........................................ 9 (b) Exchange Procedure.................................. 9 (c) No Further Ownership Rights in Shares............................................. 10 (d) No Liability........................................ 10 Contents, p. 2 Page ---- ARTICLE IV Representations and Warranties of the Company SECTION 4.01. Organization............................................. 11 SECTION 4.02. Subsidiaries............................................. 11 SECTION 4.03. Capitalization........................................... 11 SECTION 4.04. Authority................................................ 12 SECTION 4.05. Consents and Approvals; No Violations.................... 13 SECTION 4.06. SEC Reports and Financial Statements..................... 14 SECTION 4.07. Absence of Certain Changes or Events..................... 15 SECTION 4.08. No Undisclosed Liabilities............................... 15 SECTION 4.09. Information Supplied..................................... 16 SECTION 4.10. Benefit Plans; Employees and Employment Practices ............................................ 16 SECTION 4.11. Contracts................................................ 18 SECTION 4.12. Litigation .............................................. 19 SECTION 4.13. Compliance with Applicable Law........................... 19 SECTION 4.14. Tax Matters.............................................. 20 SECTION 4.15. State Takeover Statutes.................................. 22 SECTION 4.16. Brokers; Schedule of Fees and Expenses................... 22 SECTION 4.17. Opinion of Financial Advisor............................. 22 SECTION 4.18. Intellectual Property.................................... 23 SECTION 4.19. Certain Agreements....................................... 25 SECTION 4.20. Indebtedness............................................. 25 SECTION 4.21. Rights Agreement......................................... 25 SECTION 4.22 Director Stock Options .................................. 26 ARTICLE V Representations and Warranties of Parent and Sub SECTION 5.01. Organization ............................................ 26 SECTION 5.02. Authority................................................ 26 SECTION 5.03. Consents and Approvals; No Violations ................... 27 SECTION 5.04. Information Supplied..................................... 28 SECTION 5.05. Interim Operations of Sub................................ 28 SECTION 5.06. Brokers.................................................. 28 SECTION 5.07. Financing................................................ 28 Contents, p. 3 Page ---- ARTICLE VI Covenants SECTION 6.01. Covenants of the Company................................. 29 (a) Ordinary Course..................................... 29 (b) Dividends; Changes in Stock......................... 29 (c) Issuance of Securities.............................. 29 (d) Governing Documents................................. 30 (e) No Acquisitions..................................... 30 (f) No Dispositions..................................... 30 (g) Advice of Changes; Filings.......................... 30 (h) Tax Matters......................................... 30 (i) Capital Expenditures................................ 31 (j) Discharge of Liabilities............................ 31 (k) Material Contracts.................................. 31 (l) General............................................. 31 SECTION 6.02. No Solicitation.......................................... 31 SECTION 6.03. Other Actions............................................ 34 ARTICLE VII Additional Agreements SECTION 7.01. Shareholder Approval; Preparation of Proxy Statement....................................... 34 SECTION 7.02. Access to Information.................................... 35 SECTION 7.03. Reasonable Efforts....................................... 36 SECTION 7.04. Company Stock Options.................................... 36 SECTION 7.05. Directors................................................ 37 SECTION 7.06. Fees and Expenses........................................ 37 SECTION 7.07. Indemnification; Insurance............................... 39 SECTION 7.08. Certain Litigation....................................... 39 SECTION 7.09. Rights Agreement......................................... 39 ARTICLE VIII Conditions SECTION 8.01. Conditions to Each Party's Obligation To Effect the Merger..................................... 40 (a) Company Shareholder Approval........................ 40 (b) No Injunctions or Restraints........................ 40 (c) Purchase of Shares.................................. 41 Contents, p. 4 Page ---- ARTICLE IX Termination and Amendment SECTION 9.01. Termination.............................................. 41 SECTION 9.02. Effect of Termination.................................... 42 SECTION 9.03. Amendment................................................ 43 SECTION 9.04. Extension; Waiver........................................ 43 ARTICLE X Miscellaneous SECTION 10.01. Nonsurvival of Representations, Warranties and Agreements............................. 43 SECTION 10.02. Notices.................................................. 44 SECTION 10.03. Interpretation........................................... 45 SECTION 10.04. Counterparts............................................. 45 SECTION 10.05. Entire Agreement; No Third Party Beneficiaries......................................... 45 SECTION 10.06. Governing Law............................................ 46 SECTION 10.07. Publicity................................................ 46 SECTION 10.08. Assignment............................................... 46 SECTION 10.09. Enforcement.............................................. 46 EXHIBIT A -- Conditions of the Offer AGREEMENT AND PLAN OF MERGER dated as of November 12, 1996, among INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation ("Parent"), INDIGO ACQUISITION CORP., a Washington corporation and a wholly owned subsidiary of Parent ("Sub"), and EDMARK CORPORATION, a Washington corporation (the "Company"). WHEREAS, the acquisition of the Company by Parent on the terms and subject to the conditions set forth in this Agreement has been authorized by all necessary corporate action on behalf of Parent and Sub and has been approved by the Board of Directors of the Company; WHEREAS, in furtherance of such acquisition, Parent proposes to cause Sub to make a tender offer (as it may be amended from time to time as permitted under this Agreement, the "Offer") to purchase all the outstanding shares of Common Stock, no par value, of the Company (the "Company Common Stock"; the shares of Company Common Stock being hereinafter collectively referred to as the "Shares"), including the associated Rights (as defined in Section 4.03)), at a purchase price (the "Offer Price") of $15.50 per Share (including the associated Right), net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, the merger of Sub with the Company (the "Merger") upon the terms and subject to the conditions set forth in this Agreement, whereby each issued and outstanding Share, other than Shares owned directly or indirectly by Parent and Dissenting Shares (as defined in Section 3.01(d)), will be converted into the right to receive in cash the price per share paid in the Offer, has been authorized by all necessary corporate action on behalf of Parent and Sub and has been approved by the Board of Directors of the Company; WHEREAS, concurrently with the execution of this Agreement and as an inducement to Parent to enter into this Agreement, Parent, Sub and certain shareholders of the Company are entering into a Shareholder Agreement (the "Shareholder Agreement") pursuant to which such shareholders have, among other things, agreed to sell all such shareholders' Shares to Sub at the price per Share paid in the Offer, upon the terms and subject to the conditions set 2 forth in the Shareholder Agreement; and the Shareholder Agreement has been approved by the Board of Directors of the Company; WHEREAS, concurrently with the execution of this Agreement and as an inducement to Parent to enter into this Agreement, Parent and certain shareholders of the Company who are employed by the Company are entering into Noncompetition Agreements (the "Noncompetition Agreements") pursuant to which such shareholders have, among other things, agreed to not have any Relationship (as defined in the Noncompetition Agreements) with certain third parties during the Noncompetition Period (as defined in the Noncompetition Agreements); and WHEREAS, Parent, Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Offer and the Merger and also to prescribe various conditions to the Offer and the Merger. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Sub and the Company hereby agree as follows: ARTICLE I The Offer SECTION 1.01. The Offer. (a) Subject to the provisions of this Agreement, as promptly as practicable but in no event later than five business days after the date of the public announcement by Parent and the Company of this Agreement, Sub shall, and Parent shall cause Sub to, commence the Offer. The obligation of Sub to, and of Parent to cause Sub to, commence the Offer and accept for payment, and pay for, any Shares tendered pursuant to the Offer shall be subject only to the conditions set forth in Exhibit A (the "Offer Conditions") (any of which may be waived in whole or in part by Sub in its sole discretion, provided that, without the consent of the Company, Sub shall not waive the Minimum Condition (as defined in Exhibit A)) and to the terms and conditions of this Agreement. Sub expressly reserves the right to modify the terms of the Offer, except that, without the consent of the Company, Sub 3 shall not (i) reduce the number of Shares subject to the Offer, (ii) reduce the Offer Price, (iii) amend or add to the Offer Conditions, (iv) except as provided in the next sentence, extend the Offer, (v) change the form of consideration payable in the Offer or (vi) amend any other term of the Offer in any manner adverse to the holders of the Shares. Notwithstanding the foregoing, Sub may, without the consent of the Company, (i) extend the Offer, if at the scheduled or extended expiration date of the Offer any of the Offer Conditions shall not be satisfied or waived, until such time as such conditions are satisfied or waived, (ii) extend the Offer for any period required by any rule, regulation, interpretation or position of the Securities and Exchange Commission (the "SEC") or the staff thereof applicable to the Offer and (iii) extend the Offer for any reason on one or more occasions for an aggregate period of not more than 25 business days beyond the latest expiration date that would otherwise be permitted under clause (i) or (ii) of this sentence. Subject to the terms and conditions of the Offer and this Agreement, Sub shall, and Parent shall cause Sub to, accept for payment, and pay for, all Shares validly tendered and not withdrawn pursuant to the Offer that Sub becomes obligated to accept for payment, and pay for, pursuant to the Offer as promptly as practicable after the expiration of the Offer. (b) On the date of commencement of the Offer, Parent and Sub shall file with the SEC a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") with respect to the Offer, which shall contain an offer to purchase and a related letter of transmittal and summary advertisement (such Schedule 14D-1 and the documents included therein pursuant to which the Offer will be made, together with any supplements or amendments thereto, the "Offer Documents"). Parent and Sub agree that the Offer Documents shall comply as to form in all material respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder and the Offer Documents, on the date first published, sent or given to the Company's shareholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation or warranty is made by Parent or Sub with respect to information supplied by the Company or any of its shareholders specifically for inclusion or incorporation by 4 reference in the Offer Documents. Each of Parent, Sub and the Company agree promptly to correct any information provided by it for use in the Offer Documents if and to the extent that such information shall have become false or misleading in any material respect, and Parent and Sub further agree to take all steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to the Company's shareholders, in each case as and to the extent required by applicable federal securities laws. The Company and its counsel shall be given reasonable opportunity to review and comment upon the Offer Documents prior to their filing with the SEC or dissemination to the shareholders of the Company. Parent and Sub agree to provide the Company and its counsel any comments Parent, Sub or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments. (c) Parent shall provide or cause to be provided to Sub on a timely basis the funds necessary to accept for payment, and pay for, any Shares that Sub becomes obligated to accept for payment, and pay for, pursuant to the Offer. SECTION 1.02. Company Actions. (a) The Company hereby approves of and consents to the Offer and represents that the Board of Directors of the Company, at a meeting duly called and held, duly and unanimously adopted resolutions adopting this Agreement and approving the Shareholder Agreement, approving the Offer and the Merger, determining that the terms of the Offer and the Merger are fair to, and in the best interests of, the Company's shareholders, recommending that the Company's shareholders accept the Offer, tender their shares pursuant to the Offer and approve this Agreement (if required) and approving the acquisition of Shares by Sub pursuant to the Offer and the Shareholder Agreement and the other transactions contemplated by this Agreement and the Shareholder Agreement. The Company has been advised by each of its directors and executive officers that each such person intends to tender all Shares owned by such person pursuant to the Offer. (b) On the date the Offer Documents are filed with the SEC, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer (such Schedule 14D-9, as amended from time to time, the "Schedule 14D-9") containing the recommendation described in paragraph (a) and shall mail the 5 Schedule 14D-9 to the shareholders of the Company. The Schedule 14D-9 shall comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder and, on the date filed with the SEC and on the date first published, sent or given to the Company's shareholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation or warranty is made by the Company with respect to information supplied by Parent or Sub specifically for inclusion in the Schedule 14D-9. Each of the Company, Parent and Sub agrees promptly to correct any information provided by it for use in the Schedule 14D-9 if and to the extent that such information shall have become false or misleading in any material respect, and the Company further agrees to take all steps necessary to amend or supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended or supplemented to be filed with the SEC and disseminated to the Company's shareholders, in each case as and to the extent required by applicable federal securities laws. Parent and its counsel shall be given reasonable opportunity to review and comment upon the Schedule 14D-9 prior to its filing with the SEC or dissemination to shareholders of the Company. The Company agrees to provide Parent and its counsel any comments the Company or its counsel may receive from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments. (c) In connection with the Offer and the Merger, the Company shall cause its transfer agent to furnish Sub promptly with mailing labels containing the names and addresses of the record holders of Shares as of a recent date and of those persons becoming record holders subsequent to such date, together with copies of all lists of shareholders, security position listings and computer files and all other information in the Company's possession or control regarding the beneficial owners of Shares, and shall furnish to Sub such information and assistance (including updated lists of shareholders, security position listings and computer files) as Parent may reasonably request in communicating the Offer to the Company's shareholders. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Merger, Parent and Sub and their agents shall hold in 6 confidence the information contained in any such labels, listings and files, will use such information only in connection with the Offer and the Merger and, if this Agreement shall be terminated, will, upon request, deliver, and will use their reasonable efforts to cause their agents to deliver, to the Company all copies and any extracts or summaries from such information then in their possession or control. ARTICLE II The Merger SECTION 2.01. The Merger. Subject to the last two sentences of this Section 2.01, upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Washington Business Corporation Act (the "WBCA"), Sub shall be merged with and into the Company at the Effective Time (as defined in Section 2.03). Following the Effective Time, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation") and shall succeed to and assume all the rights and obligations of Sub in accordance with the WBCA. At the election of Parent, (i) any direct or indirect wholly owned subsidiary (as defined in Section 10.03) of Parent may be substituted for and assume all of the rights and obligations of Sub as a constituent corporation in the Merger or (ii) the Company may be merged with and into Sub with Sub continuing as the Surviving Corporation with the effects set forth above and in Section 2.04. In either such event, the parties agree to execute an appropriate amendment to this Agreement in order to reflect the foregoing. SECTION 2.02. Closing. The closing of the Merger will take place at 10:00 a.m. (New York City time) on a date to be specified by Parent or Sub, which shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Article VIII (the "Closing Date"), at the offices of Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019, unless another date, time or place is agreed to in writing by the parties hereto. SECTION 2.03. Effective Time. Subject to the provisions of this Agreement, as soon as practicable on or after the Closing Date, the parties shall file articles of 7 merger or other appropriate documents (in any such case, the "Articles of Merger") executed in accordance with the relevant provisions of the WBCA and shall make all other filings or recordings required under the WBCA. The Merger shall become effective at such time as the Articles of Merger are duly filed with the Washington Secretary of State, or at such other time as Sub and the Company shall agree should be specified in the Articles of Merger (the time the Merger becomes effective being hereinafter referred to as the "Effective Time"). SECTION 2.04. Effects of the Merger. The Merger shall have the effects set forth in Section 23B.11.060 of the WBCA. SECTION 2.05. Articles of Incorporation and Bylaws. (a) The Amended and Restated Articles of Incorporation of the Company as in effect immediately prior to the Effective Time shall be the articles of incorporation of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law. (b) The Bylaws of the Company, as amended and restated and as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law. SECTION 2.06. Directors. The directors of Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. SECTION 2.07. Officers. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. 8 ARTICLE III Effect of the Merger on the Capital Stock of the Constituent Corporations; Exchange of Certificates SECTION 3.01. Effect on Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any Shares or any shares of capital stock of Sub: (a) Capital Stock of Sub. Each issued and outstanding share of capital stock of Sub shall be converted into and become one fully paid and nonassessable share of Common Stock, no par value, of the Surviving Corporation. (b) Cancellation of Parent Owned Stock. Each Share that is owned by Parent, Sub or any other subsidiary of Parent shall automatically be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor. (c) Conversion of Shares. Subject to Section 3.01(d), each issued and outstanding Share (other than Shares to be canceled in accordance with Section 3.01(b)) shall be converted into the right to receive from the Surviving Corporation in cash, without interest, the price paid in the Offer (the "Merger Consideration"). As of the Effective Time, all such Shares shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration, without interest. (d) Shares of Dissenting Shareholders. Notwithstanding anything in this Agreement to the contrary, any issued and outstanding Shares held by a person (a "Dissenting Shareholder") who does not vote to approve the Merger and complies with all the provisions of the WBCA concerning the right of holders of Shares to dissent from the Merger and require payment of fair value (as defined in the WBCA) for their Shares ("Dissenting Shares") shall not be converted as described in Section 3.01(c), but shall be converted into the right to receive such consideration as may be determined to be due to such Dissenting 9 Shareholder pursuant to the WBCA. If, after the Effective Time, such Dissenting Shareholder withdraws his demand or fails to perfect or otherwise loses his rights as a Dissenting Shareholder to payment of fair value, in any case pursuant to the WBCA, his Shares shall be deemed to be converted as of the Effective Time into the right to receive the Merger Consideration. The Company shall give Parent (i) prompt notice of any demands for fair value for Shares received by the Company and (ii) the opportunity to participate in and direct all negotiations and proceedings with respect to any such demands. The Company shall not, without the prior written consent of Parent, make any payment with respect to, or settle, offer to settle or otherwise negotiate, any such demands. (e) Withholding Tax. The right of any shareholder to receive the Merger Consideration shall be subject to and reduced by the amount of any required tax withholding obligation. SECTION 3.02. Exchange of Certificates. (a) Paying Agent. Prior to the Effective Time, Parent shall designate a bank or trust company to act as paying agent in the Merger (the "Paying Agent"), and, from time to time on, prior to or after the Effective Time, Parent shall make available, or cause the Surviving Corporation to make available, to the Paying Agent cash in amounts and at the times necessary for the prompt payment of the Merger Consideration upon surrender of certificates representing Shares as part of the Merger pursuant to Section 3.01 (it being understood that any and all interest earned on funds made available to the Paying Agent pursuant to this Agreement shall be turned over to Parent). (b) Exchange Procedure. As soon as reasonably practicable after the Effective Time, the Paying Agent shall mail to each holder of record of a certificate or certificates that immediately prior to the Effective Time represented Shares (the "Certificates"), (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in a form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon 10 surrender of a Certificate for cancellation to the Paying Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate shall be entitled to receive in exchange therefor the amount of cash into which the Shares theretofore represented by such Certificate shall have been converted pursuant to Section 3.01, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Shares that is not registered in the transfer records of the Company, payment may be made to a person other than the person in whose name the Certificate so surrendered is registered, if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of such Certificate or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 3.02, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the amount of cash, without interest, into which the Shares theretofore represented by such Certificate shall have been converted pursuant to Section 3.01. No interest will be paid or will accrue on the cash payable upon the surrender of any Certificate. (c) No Further Ownership Rights in Shares. All cash paid upon the surrender of Certificates in accordance with the terms of this Article III shall be deemed to have been paid in full satisfaction of all rights pertaining to the Shares theretofore represented by such Certificates. At the Effective Time, the stock transfer books of the Company shall be closed, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the Shares that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation or the Paying Agent for any reason, they shall be canceled and exchanged as provided in this Article III. (d) No Liability. None of Parent, Sub, the Company or the Paying Agent shall be liable to any person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificates shall not have been surrendered 11 prior to seven years after the Effective Time (or immediately prior to such earlier date on which any payment pursuant to this Article III would otherwise escheat to or become the property of any Governmental Entity (as defined in Section 4.05)), the cash payment in respect of such Certificate shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interests of any person previously entitled thereto. ARTICLE IV Representations and Warranties of the Company The Company represents and warrants to Parent and Sub as follows: SECTION 4.01. Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now being conducted. The Company is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have a material adverse effect (as defined in Section 10.03) on the Company or prevent or materially delay the consummation of the Offer and/or the Merger. The Company has delivered to Parent complete and correct copies of its Amended and Restated Articles of Incorporation and Bylaws, as amended and restated. SECTION 4.02. Subsidiaries. Except pursuant to contracts, agreements, arrangements or understandings referred to in Section 4.19 and except for shares of publicly-traded companies owned by the Company which collectively have a market value of less than $5,000, the Company does not own, directly or indirectly, any capital stock or other ownership interest in any corporation, partnership, joint venture or other entity. SECTION 4.03. Capitalization. The authorized capital stock of the Company consists of 30,000,000 Shares. At the close of business on November 10, 1996, (i) 6,632,111 12 Shares were issued and outstanding, and (ii) 1,248,110 Shares were reserved for issuance upon exercise of outstanding Company Stock Options (as defined in Section 7.04(a)). Except as set forth above, for Shares reserved for issuance in connection with the rights (the "Rights") to purchase Shares issued pursuant to the Shareholder Rights Agreement dated as of November 29, 1995 (the "Rights Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C. (as successor to First Interstate Bank of Washington, N.A.), as rights agent, and for Shares reserved for issuance pursuant to the Company's employee stock purchase plan, as of the date of this Agreement, no shares of capital stock or other voting securities of the Company were issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are, and all shares which may be issued will be, when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders of the Company may vote. Except as set forth above, as of the date of this Agreement, there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company is a party or by which the Company is bound obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of the Company. As of the date of this Agreement, there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares of capital stock of the Company. SECTION 4.04. Authority. The Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby (other than, with respect to the Merger, the approval of this Agreement by the holders of two-thirds of the Shares (the "Company Shareholder Approval")). The execution, delivery and performance of this Agreement and the consummation by the Company of the Merger and of the other transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (in each case, other than, with respect to the Merger, the Company 13 Shareholder Approval). This Agreement has been duly executed and delivered by the Company and, assuming this Agreement constitutes a valid and binding obligation of Parent and Sub, constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. SECTION 4.05. Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act (including the filing with the SEC of the Schedule 14D-9 and a proxy statement relating to any required approval by the Company's shareholders of this Agreement (the "Proxy Statement")), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the WBCA or the laws of other states in which the Company is qualified to do or is doing business, neither the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the Amended and Restated Articles of Incorporation or Bylaws, as amended and restated, of the Company, (ii) require any filing with, or permit, authorization, consent or approval of, any federal, state or local government or any court, tribunal, administrative agency or commission or other governmental or regulatory authority or agency, domestic, foreign or supranational (a "Governmental Entity") (except where the failure to make such filings or to obtain such permits, authorizations, consents or approvals would not have a material adverse effect on the Company or prevent or materially delay the consummation of the Offer and/or the Merger), (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company is a party or by which any of its properties or assets may be bound or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its properties or assets, except in 14 the case of clauses (iii) or (iv) for violations, breaches or defaults that could not reasonably be expected to have a material adverse effect on the Company or prevent or materially delay the consummation of the Offer and/or the Merger. SECTION 4.06. SEC Reports and Financial Statements. The Company has filed with the SEC, and has heretofore made available to Parent, true and complete copies of, all forms, reports, schedules, statements and other documents required to be filed by it since June 30, 1995 under the Exchange Act or the Securities Act of 1933 (the "Securities Act") (such forms, reports, schedules, statements and other documents, including any financial statements or schedules included therein, are referred to as the "Company SEC Documents"). The Company SEC Documents, at the time filed, (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. Except to the extent that information contained in any Company SEC Document has been revised or superseded by a subsequently filed Company Filed SEC Document (as defined in Section 4.07) (a copy of which has been made available to Parent prior to the date hereof), none of the Company SEC Documents contains an untrue statement of a material fact or omits to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the Company SEC Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments) the financial position of the Company as at the dates thereof and the results of its operations and cash flows for the periods then ended. 15 SECTION 4.07. Absence of Certain Changes or Events. Except as disclosed in Schedule 4.07 or in the Company SEC Documents filed and publicly available prior to the date of this Agreement (the "Company Filed SEC Documents"), since June 30, 1996, the Company has conducted its business only in the ordinary course, and there has not been (i) any material adverse change (as defined in Section 10.03) with respect to the Company, (ii) any declaration, setting aside or payment of any dividend or other distribution with respect to its capital stock or any redemption, purchase or other acquisition of any of its capital stock, (iii) any split, combination or reclassification of any of its capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (iv) (x) any granting by the Company to any officer of the Company of any increase in compensation (including in connection with promotions), except in the ordinary course of business consistent with past practice or as was required under employment agreements in effect as of June 30, 1996, (y) any granting by the Company to any such officer of any increase in severance or termination pay, except as required under employment, severance or termination agreements in effect as of June 30, 1996, or (z) except employment agreements in the ordinary course of business consistent with past practice with employees other than any executive officer of the Company, any entry by the Company into any employment, consulting, severance, termination, change in control or indemnification agreement with any such employee or executive officer, (v) any damage, destruction or loss, whether or not covered by insurance, that has or reasonably could be expected to have a material adverse effect on the Company, (vi) any revaluation by the Company of any of its material assets, (vii) any material change in accounting methods, principles or practices by the Company or (viii) (A) any licensing or other agreement with regard to the acquisition or disposition of any material Intellectual Property (as defined in Section 4.18) or rights thereto other than sales or licenses of its products to customers in the ordinary course of business consistent with past practice or (B) any amendment or consent with respect to any licensing or other agreement described in clause (A) above. SECTION 4.08. No Undisclosed Liabilities. Except as and to the extent set forth in the Company's financial statements dated as of June 30, 1996, as of June 30, 1996, the Company did not have any liabilities or obligations of 16 any nature, whether or not accrued, contingent or otherwise, that would be required by generally accepted accounting principles to be reflected on a balance sheet of the Company (including the notes thereto). Since June 30, 1996, except as and to the extent set forth in the Company Filed SEC Documents, the Company has not incurred any liabilities of any nature, whether or not accrued, contingent or otherwise, that would be reasonably expected to have a material adverse effect on the Company. SECTION 4.09. Information Supplied. None of the information supplied or to be supplied by the Company specifically for inclusion or incorporation by reference in (i) the Offer Documents, (ii) the Schedule 14D-9, (iii) the information to be filed by the Company in connection with the Offer pursuant to Rule 14f-1 promulgated under the Exchange Act (the "Information Statement") or (iv) the Proxy Statement, will, in the case of the Offer Documents, the Schedule 14D-9 and the Information Statement, at the respective times the Offer Documents, the Schedule 14D-9 and the Information Statement are filed with the SEC or first published, sent or given to the Company's shareholders, or, in the case of the Proxy Statement, at the time the Proxy Statement is first mailed to the Company's shareholders or at the time of the Shareholders Meeting (as defined in Section 7.01), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Schedule 14D-9, the Information Statement and the Proxy Statement will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, except that no representation or warranty is made by the Company with respect to statements made or incorporated by reference therein based on information supplied by Parent or Sub specifically for inclusion or incorporation by reference therein. SECTION 4.10. Benefit Plans; Employees and Employment Practices. (a) Except as disclosed in the Company Filed SEC Documents, since June 30, 1996 there has not been any adoption or amendment in any material respect (including any increase or improvements in benefits or coverage) by the Company of any Benefit Plan (as defined in Section 4.10(b)). Except as disclosed in Schedule 4.10(a), there exist no employment or consulting agreements, or any other similar arrangements or understandings (whether or not 17 in writing), between the Company and any current or former employee, officer or director of the Company. (b) Schedule 4.10(b) lists each "employee pension benefit plan" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (sometimes referred to herein as "Pension Plans"), "employee welfare benefit plan" (as defined in Section 3(1) of ERISA), bonus, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, change of control, disability, death benefit, hospitalization, medical, fringe benefit, excess benefit, supplemental executive compensation, stock appreciation, restricted stock, indemnification, collective bargaining agreement or other material employee benefit plan, policy, agreement, arrangement or understanding (whether or not in writing) providing benefits to any current or former employee, officer, director or independent contractor of the Company or any entity that is or required under Section 414 of the Code to be treated with the Company as a single employer (an "ERISA Affiliate") or with respect to which the Company or any ERISA Affiliate could have any liability (collectively, the "Benefit Plans"). The Company has delivered to Parent true, complete and correct copies of (i) each Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof) and each employment and consulting agreement, arrangement or understanding between the Company and any current or former employee, officer or director of the Company, (ii) the most recent annual report on Form 5500 (and related schedules and financial statements or opinions required in connection therewith) filed with the Internal Revenue Service with respect to each Benefit Plan (if any such report was required), (iii) the most recent actuarial report with respect to each Benefit Plan, as applicable, (iv) the most recent summary plan description (and a summary of material modifications, if applicable) for each Benefit Plan, (v) each trust agreement and group annuity contract relating to any Benefit Plan, and (vi) the most recent determination letter, if any, issued with respect to such Benefit Plan. (c) Each Benefit Plan has been administered in all material respects in accordance with its terms and the applicable requirements of ERISA, the Internal Revenue Code of 1986, as amended (the "Code") and all other applicable laws. No event has occurred and to the knowledge of the Company there exists no condition or set of conditions in 18 connection with the Benefit Plans that, individually or in the aggregate, could have a material adverse effect on, or give rise to material liability to, the Company or any ERISA Affiliate under ERISA, the Code or any other applicable law. (d) Each Pension Plan intended to be qualified under Section 401(a) of the Code has been the subject of a determination letter from the Internal Revenue Service to the effect that such Pension Plan is so qualified under all currently applicable provisions of Section 401(a) of the Code and, to the knowledge of the Company, no circumstances exist that would adversely affect the qualification of any such Pension Plan. (e) No Benefit Plan is subject to Title IV of ERISA. (f) Each Benefit Plan may be amended or terminated without material liability to the Company or any ERISA Affiliate. (g) The Company has previously delivered to Parent a list which sets forth the names of all current officers, directors and employees of the Company, together with each employee's current salary, most recent bonus (excluding sales bonuses), date of birth and date of employment. (h) (i) There are no material controversies, strikes, work stoppages or disputes pending or threatened between the Company and any current or former employees, (ii) no labor union or other collective bargaining unit represents or has ever represented any employee of the Company and (iii) no organizational effort by any labor union or other collective bargaining unit currently is under way or threatened with respect to any employee. SECTION 4.11. Contracts. Except as referred to in Section 4.18 or 4.19 or disclosed in the Company Filed SEC Documents and except for contracts or agreements which have previously been delivered to Parent, there are no contracts or agreements that are material to the business, properties, financial condition or results of operations of the Company. The Company is not in violation or breach of or in default under (nor does there exist any condition which upon the passage of time or the giving of notice would cause such a violation or breach of or default under) any note, bond, mortgage, indenture, lease, permit, concession, 19 franchise, license, contract, agreement or other instrument or obligation to which it is a party or by which it or any of its properties or assets is bound, except for violations, breaches or defaults that could not reasonably be expected to have a material adverse effect on the Company. SECTION 4.12. Litigation. Except as disclosed in the Company Filed SEC Documents, there is no suit, claim, action, proceeding or investigation pending before any Governmental Entity or, to the best knowledge of the Company, threatened against the Company that could reasonably be expected to have a material adverse effect on the Company or prevent or materially delay the consummation of the Offer and/or the Merger. Except as disclosed in the Company Filed SEC Documents, the Company is not subject to any outstanding judgment, order, writ, injunction or decree that could reasonably be expected to have a material adverse effect on the Company or prevent or materially delay the consummation of the Offer and/or the Merger. SECTION 4.13. Compliance with Applicable Law. The Company holds all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary for the lawful conduct of its business (the "Company Permits"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals that would not have a material adverse effect on the Company. The Company is in compliance with the terms of the Company Permits, except where the failure so to comply would not have a material adverse effect on the Company. Except as disclosed in the Company Filed SEC Documents, to the best knowledge of the Company, the business of the Company is not being conducted in violation of any law, ordinance or regulation of any Governmental Entity, except for possible violations that would not have a material adverse effect on the Company or prevent or materially delay the consummation of the Offer and/or the Merger. As of the date of this Agreement, no investigation or review by any Governmental Entity with respect to the Company is pending or, to the best knowledge of the Company, threatened, nor has any Governmental Entity indicated an intention to conduct any such investigation or review, other than, in each case, those the outcome of which would not be reasonably expected to have a material adverse effect on the Company or prevent or materially delay the consummation of the Offer and/or the Merger. 20 SECTION 4.14. Tax Matters. Except as set forth in Schedule 4.14: (a) The Company has timely filed all federal, state and local, domestic and foreign, income and franchise tax returns and reports and all other material tax returns and reports required to be filed by it. All such returns and reports are complete and correct in all material respects. The Company has timely paid all taxes due with respect to the taxable periods covered by such returns and reports and all other material taxes (as defined below), and the most recent financial statements contained in the Company Filed SEC Documents reflect an adequate reserve for all taxes payable by the Company for all taxable periods and portions thereof through the date of such financial statements. (b) No federal, state or local, domestic or foreign, income or franchise tax return or report or any other material tax return or report of the Company is under audit or examination by any taxing authority, and no written or unwritten notice of such an audit or examination has been received by the Company. Each material deficiency resulting from any audit or examination relating to taxes by any taxing authority has been timely paid. No material issues relating to taxes were raised by the relevant taxing authority during any presently pending audit or examination, and no material issues relating to taxes were raised by the relevant taxing authority in any completed audit or examination that can reasonably be expected to recur in a later taxable period. No federal, state or local, domestic or foreign, tax return or report of the Company has ever been under audit or examination by the Internal Revenue Service or other relevant taxing authority, except for the Company's (i) U.S. federal tax return for the year ended June 30, 1994, which has been examined by and settled with the Internal Revenue Service, and (ii) Washington State Sales and Use tax returns for all years through June 30, 1992, which have been examined by and settled with the relevant taxing authority. The relevant statute of limitations is closed with respect to the U.S. federal tax returns of the Company for all years through June 30, 1990. (c) There is no agreement or other document extending, or having the effect of extending, the period of assessment or collection of any taxes and no power of attorney with respect to any taxes has been executed or filed with any taxing authority. 21 (d) No material liens for taxes exist with respect to any assets or properties of the Company, except for statutory liens for taxes not yet due. (e) The Company is not a party to or bound by any tax sharing agreement, tax indemnity obligation or similar agreement, arrangement or practice with respect to taxes (including any advance pricing agreement, closing agreement or other agreement relating to taxes with any taxing authority). (f) The Company will not be required to include in a taxable period ending after the Effective Time taxable income attributable to income that accrued in a prior taxable period but was not recognized in any prior taxable period as a result of the installment method of accounting, the completed contract method of accounting, the long-term contract method of accounting, the cash method of accounting or Section 481 of the Code or comparable provisions of state or local tax law, domestic or foreign, or for any other reason. (g) The disallowance of a deduction under Section 162(m) of the Code for employee remuneration will not apply to any amount paid or payable by the Company under any Benefit Plan or other compensation arrangement currently in effect. (h) Any amount or other entitlement that could be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of the Company or any of its affiliates who is a "disqualified individual" (as such term is defined in proposed Treasury Regulation Section 1.280G-1) under any Benefit Plan or other compensation arrangement currently in effect would not be characterized as an "excess parachute payment" or a "parachute payment" (as such terms are defined in Section 280G(b)(1) of the Code). (i) The Company has complied in all respects with all applicable laws, rules and regulations relating to the payment and withholding of taxes (including, without limitation, withholding of taxes pursuant to Sections 1441, 1442, 3121 and 3402 of the Code or similar provisions under any foreign federal laws or any state or local laws, domestic and foreign) and has, within the time and the manner prescribed by law, withheld from and paid over to the 22 proper governmental authorities all amounts required to be so withheld and paid over under applicable laws. (j) As used in this Agreement, "taxes" shall include all federal, state and local, domestic and foreign, income, franchise, property, sales, excise, employment, payroll, social security, value-added, ad valorum, transfer, withholding and other taxes, including taxes based on or measured by gross receipts, profits, sales, use or occupation, tariffs, levies, impositions, assessments or governmental charges of any nature whatsoever, including any interest penalties or additions with respect thereto. SECTION 4.15. State Takeover Statutes. The Board of Directors of the Company has approved the Offer, the Merger, this Agreement, the Shareholder Agreement, the acquisition of Shares by Sub pursuant to the Offer and the Shareholder Agreement and the other transactions contemplated by this Agreement and the Shareholder Agreement and such approval is sufficient to render inapplicable to the Offer, the Merger, this Agreement, the Shareholder Agreement, the acquisition of Shares by Sub pursuant to the Offer and the Shareholder Agreement and the other transactions contemplated by this Agreement and the Shareholder Agreement the provisions of Chapter 23B.19 of the WBCA. To the best knowledge of the Company, no other state takeover statute or similar statute or regulation applies or purports to apply to the Offer, the Merger, this Agreement, the Shareholder Agreement, the acquisition of Shares by Sub pursuant to the Offer and the Shareholder Agreement or any of the transactions contemplated by this Agreement or the Shareholder Agreement. SECTION 4.16. Brokers; Schedule of Fees and Expenses. No broker, investment banker, financial advisor or other person, other than Alex. Brown & Sons Incorporated, the fees and expenses of which will be paid by the Company (as reflected in an agreement between such firm and the Company, a copy of which has been delivered to Parent), is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. SECTION 4.17. Opinion of Financial Advisor. The Company has received the opinion of Alex. Brown & Sons Incorporated, dated the date of this Agreement, to the effect that, as of the date of this Agreement, the 23 consideration to be received in the Offer and the Merger by the Company's shareholders is fair to the Company's shareholders from a financial point of view, and a complete and correct signed copy of such opinion has been, or promptly upon receipt thereof will be, delivered to Parent. SECTION 4.18. Intellectual Property. (a) The Company has provided Parent with true and correct copies of all license agreements relating to Intellectual Property to which the Company is a party. (b) Except as set forth in Schedule 4.18(b) and except to the extent that the inaccuracy of any of the following (or the circumstances giving rise to such inaccuracy) would not have a material adverse effect on the Company: (1) the Company owns, or is licensed or otherwise has the right to use (in each case, clear of any liens or encumbrances of any kind), all Intellectual Property used in or necessary for the conduct of its business as currently conducted; (2) no claims are pending or, to the best knowledge of the Company, threatened that the Company is infringing on or otherwise violating the rights of any person with regard to any Intellectual Property owned by and/or licensed to the Company; (3) to the best knowledge of the Company, no person is infringing on or otherwise violating any right of the Company with respect to any Intellectual Property owned by and/or licensed to the Company; (4) none of the former or current members of management or key personnel of the Company, including all former and current employees, agents, consultants and contractors who have contributed to or participated in the conception and development of computer software or other Intellectual Property of the Company, have any valid claim against the Company in connection with the involvement of such persons in the conception and development of any computer software or other Intellectual Property of the Company, and no such claim has been asserted or threatened; (5) the execution and delivery of this Agreement, compliance with its terms and the consummation of the 24 transactions contemplated hereby do not and will not conflict with or result in any violation, breach or default (with or without notice or lapse of time or both) or give rise to any right, license or encumbrance relating to Intellectual Property owned by the Company or with respect to which the Company now has or has had any agreement with any third party, or right of termination, cancellation or acceleration of any material Intellectual Property right or obligation set forth in any agreement to which the Company is a party, or the loss or encumbrance of any Intellectual Property or material benefit related thereto, or result in or require the creation, imposition or extension of any lien or encumbrance upon any Intellectual Property or right; (6) no licenses or rights have been granted to distribute the source code of, or to use the source code to create Derivative Works (as hereinafter defined) of, any product currently marketed by, commercially available from or under development by the Company; and (7) the Company has taken reasonable and necessary steps to protect their Intellectual Property and their rights thereunder, and to the best knowledge of the Company no such rights to Intellectual Property have been lost or are in jeopardy of being lost through failure to act by the Company or any of its subsidiaries. As used herein, "Derivative Work" shall mean a work that is based upon one or more preexisting works, such as a revision, enhancement, modification, abridgement, condensation, expansion or any other form in which such preexisting works may be recast, transformed or adapted, and which, if prepared without authorization of the owner of the copyright in such preexisting work, would constitute a copyright infringement. For purposes hereof, a Derivative Work shall also include any compilation that incorporates such a preexisting work as well as translations from one human language to another and from one type of code to another. (c) For purposes of this Agreement, "Intellectual Property" shall mean trademarks (registered or unregistered), service marks, brand names, certification marks, trade dress, assumed names, trade names and other 25 indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patented, patentable or not in any jurisdiction; nonpublic information, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrighted, copyrightable or not in any jurisdiction; registration or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; any similar intellectual property or proprietary rights and computer programs and software (including source code, object code and data); licenses, immunities, covenants not to sue and the like relating to the foregoing; and any claims or causes of action arising out of or related to any infringement or misappropriation of any of the foregoing. SECTION 4.19. Certain Agreements. The Company has delivered to Parent and its representatives true and correct copies of all contracts, agreements, arrangements or understandings to which it is a party, relating to (i) the distribution or sale of its products or products licensed by it, and (ii) strategic alliances, joint ventures and similar types of cooperative ventures, including the Company's agreement with Harcourt Brace School Publishers. SECTION 4.20. Indebtedness. The Company has no outstanding indebtedness for borrowed money, guarantees of any such indebtedness, debt securities, guarantees of such debt securities or warrants or rights to acquire any of the foregoing, nor has the Company entered into any "keep-well" or other agreement to maintain any financial statement condition of another person or any arrangement having the economic effect of any of the foregoing SECTION 4.21. Rights Agreement. The Rights Agreement has been amended to (i) render the Rights Agreement inapplicable to the Offer, the Merger, this Agreement, the Shareholder Agreement, the acquisition of Shares by Sub pursuant to the Offer and the Shareholder Agreement and the other transactions contemplated by this Agreement and the Shareholder Agreement and (ii) ensure that (y) none of Parent, Sub or any of their respective affiliates is an Acquiring Person (as defined in the Rights Agreement) pursuant to the Rights Agreement and (z) a 26 Distribution Date (as defined in the Rights Agreement) does not occur by reason of the Offer, the Merger, the execution of this Agreement or the Shareholder Agreement, the acquisition of Shares by Sub pursuant to the Offer or the Shareholder Agreement or the other transactions contemplated by this Agreement or the Shareholder Agreement. SECTION 4.22. Director Stock Options. Except as set forth on Schedule 4.22, each director or former director of the Company who holds any Company Stock Options on the date hereof has agreed in writing prior to the date hereof or concurrently herewith that all Company Stock Options (other than Company Stock Options granted under the Edmark Corporation Stock Option Plan (Restated as of July 14, 1995)) which have not been exercised and which remain outstanding at the time Sub accepts Shares for payment in the Offer shall be canceled and be of no further force or effect, and such director or former director shall have no rights after such time with respect to Company Stock Options which have not been exercised. ARTICLE V Representations and Warranties of Parent and Sub Parent and Sub represent and warrant to the Company as follows: SECTION 5.01. Organization. Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not be reasonably expected to prevent or materially delay the consummation of the Offer and/or the Merger. SECTION 5.02. Authority. Parent and Sub have the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Sub and no other corporate proceedings on the part of 27 Parent and Sub are necessary to authorize this Agreement or to consummate such transactions. No vote of Parent shareholders is required to approve this Agreement or the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and Sub, as the case may be, and, assuming this Agreement constitutes a valid and binding obligation of the Company, constitutes a valid and binding obligation of each of Parent and Sub enforceable against them in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. SECTION 5.03. Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act (including the filing with the SEC of the Offer Documents), the HSR Act, the WBCA or the laws of other states in which Parent is qualified to do or is doing business, neither the execution, delivery or performance of this Agreement by Parent and Sub nor the consummation by Parent and Sub of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the respective certificate or articles of incorporation or bylaws of Parent and Sub, (ii) require any filing with, or permit, authorization, consent or approval of, any Governmental Entity (except where the failure to make such filings or to obtain such permits, authorizations, consents or approvals would not be reasonably expected to prevent or materially delay the consummation of the Offer and/or the Merger), (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Parent or any of its subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent, any of its subsidiaries or any of their properties or assets, except in the case of clauses (iii) and (iv) for violations, breaches or defaults that could not, individually or in the aggregate, reasonably be 28 expected to prevent or materially delay the consummation of the Offer and/or the Merger. SECTION 5.04. Information Supplied. None of the information supplied or to be supplied by Parent or Sub specifically for inclusion or incorporation by reference in (i) the Offer Documents, (ii) the Schedule 14D-9, (iii) the Information Statement or (iv) the Proxy Statement will, in the case of the Offer Documents, the Schedule 14D-9 and the Information Statement, at the respective times the Offer Documents, the Schedule 14D-9 and the Information Statement are filed with the SEC or first published, sent or given to the Company's shareholders, or, in the case of the Proxy Statement, at the time the Proxy Statement is first mailed to the Company's shareholders or at the time of the Shareholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Offer Documents will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, except that no representation or warranty is made by Parent or Sub with respect to statements made or incorporated by reference therein based on information supplied by the Company specifically for inclusion or incorporation by reference therein. SECTION 5.05. Interim Operations of Sub. Sub was formed solely for the purpose of engaging in the transactions contemplated hereby, has engaged in no other business activities and has conducted its operations only as contemplated hereby. SECTION 5.06. Brokers. No broker, investment banker, financial advisor or other person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or Sub. SECTION 5.07. Financing. Parent has sufficient funds available to purchase, or to cause Sub to purchase, all the Shares pursuant to the Offer and the Merger and to pay all fees and expenses related to the transactions contemplated by this Agreement. 29 ARTICLE VI Covenants SECTION 6.01. Covenants of the Company. Until such time as Parent's designees shall constitute a majority of the members of the Board of Directors of the Company, the Company agrees that (except as expressly contemplated or permitted by this Agreement or except to the extent that Parent shall otherwise consent in writing): (a) Ordinary Course. The Company shall carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted (it being understood that the foregoing does not cover future events resulting from public announcement of the Offer or the Merger) and in compliance in all material respects with all applicable laws and regulations and shall use all reasonable efforts to preserve intact its present business organizations, keep available the services of its present officers and employees and preserve its relationships with customers, suppliers and others having business dealings with the Company. (b) Dividends; Changes in Stock. The Company shall not (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any other securities of the Company or any rights, warrants or options to acquire any such shares or other securities. (c) Issuance of Securities. The Company shall not issue, deliver, sell, pledge or encumber, or authorize or propose the issuance, delivery, sale, pledge or encumbrance of, any shares of its capital stock of any class or any securities convertible into, or any rights, warrants, calls, subscriptions or options to acquire, any such shares or convertible securities, or any other ownership interest (including stock appreciation rights or phantom stock) other than the issuance of Shares (i) upon the exercise of Company Stock Options outstanding on the date of this Agreement and in accordance with the terms of such Company Stock Options and (ii) in accordance with the terms of the Edmark 30 Corporation 1994 Employee Stock Purchase Plan as in effect on the date of this Agreement. (d) Governing Documents. The Company shall not amend or propose to amend its Amended and Restated Articles of Incorporation or Bylaws, as amended and restated. (e) No Acquisitions. The Company shall not acquire or agree to acquire (i) by merging or consolidating with, or by purchasing a substantial equity interest in or substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organization or division thereof or (ii) any assets that are material, individually or in the aggregate, to the Company, except purchases of inventory in the ordinary course of business consistent with past practice. (f) No Dispositions. Other than sales or licenses of its products in the ordinary course of business consistent with past practice, the Company shall not sell, lease, license, encumber or otherwise dispose of, or agree to sell, lease, license, encumber or otherwise dispose of, any of its assets. (g) Advice of Changes; Filings. The Company shall confer on a regular and frequent basis with Parent, as reasonably requested by Parent, report on operational matters and promptly advise Parent orally and in writing of any material adverse change with respect to the Company. The Company shall promptly provide to Parent (or its counsel) copies of all filings made by the Company with any Governmental Entity in connection with this Agreement and the transactions contemplated hereby. (h) Tax Matters. The Company shall not make any tax election that would have a material adverse effect on the tax liability or tax attributes of the Company or settle or compromise any tax liability of the Company. The Company shall, before filing or causing to be filed any tax return of the Company or settling any tax liability not described in the preceding sentence, consult with Parent and its advisors as to the positions and elections that may be taken or made with respect to such return, and shall take such positions or make such elections as the Company and Parent shall jointly agree. 31 (i) Capital Expenditures. The Company shall not make or agree to make any new capital expenditure or expenditures other than in accordance with the Company's fiscal year 1997 budget approved by the Company's Board of Directors, a copy of which budget has been made available to Parent, which capital expenditures do not exceed $250,000 in the aggregate. (j) Discharge of Liabilities. The Company shall not pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of claims, liabilities or obligations recognized or disclosed in the most recent financial statements (or the notes thereto) of the Company included in the Company Filed SEC Documents or incurred since the date of such financial statements in the ordinary course of business consistent with past practice. (k) Material Contracts. Except in the ordinary course of business, the Company shall not (i) modify, amend or terminate any material contract or agreement to which the Company is a party, (ii) waive, release or assign any material rights or claims or (iii) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company is a party. (l) General. The Company shall not authorize any of, or commit or agree to take any of, the foregoing actions otherwise prohibited by this Section 6.01. SECTION 6.02. No Solicitation. (a) The Company shall, and shall direct and use reasonable efforts to cause its officers, directors, employees, representatives and agents to, immediately cease any discussions or negotiations with any parties that may be ongoing with respect to a Takeover Proposal (as hereinafter defined). The Company shall not, nor shall it authorize or permit any of its officers, directors or employees or any investment banker, financial advisor, attorney, accountant or other representative or agent retained by it to, directly or indirectly, (i) solicit, initiate or encourage (including by way of furnishing information), or take any other action designed or reasonably likely to facilitate, any inquiries or the making of any proposal which constitutes, or may 32 reasonably be expected to lead to, any Takeover Proposal or (ii) participate in any discussions or negotiations regarding any Takeover Proposal; provided, however, that if, at any time prior to the acceptance for payment of Shares pursuant to the Offer, the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, the Company may, in response to a Takeover Proposal which was not solicited subsequent to the date hereof, and subject to compliance with Section 6.02(c), (x) furnish information with respect to the Company to any person pursuant to a confidentiality agreement in a form approved by Parent (such approval not to be unreasonably withheld) and (y) participate in negotiations regarding such Takeover Proposal. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding sentence by any director or executive officer of the Company or any investment banker, financial advisor, attorney, accountant or other representative or agent of the Company shall be deemed to be a breach of this Section 6.02(a) by the Company. For purposes of this Agreement, "Takeover Proposal" means any inquiry, proposal or offer, or any expression of interest by any third party relating to the Company's willingness or ability to receive or discuss a proposal or offer, other than a proposal or offer by Parent or any of its subsidiaries, for a merger, consolidation or other business combination involving, or any purchase of, all or substantially all of the assets or more than 30% of the Shares. (b) Except as set forth in this Section 6.02, neither the Board of Directors of the Company nor any committee thereof shall (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent, the approval or recommendation by such Board of Directors or such committee of the Offer, the Merger or this Agreement, (ii) approve or recommend, or propose to approve or recommend, any Takeover Proposal or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (each, an "Acquisition Agreement") related to any Takeover Proposal. Notwithstanding the foregoing, in the event that prior to the acceptance for payment of Shares pursuant to the Offer the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders under applicable law, 33 the Board of Directors of the Company may, in response to a Takeover Proposal which was not solicited subsequent to the date hereof (subject to this and the following sentences), (x) withdraw or modify its approval or recommendation of the Offer, the Merger or this Agreement or (y) approve or recommend a Superior Proposal (as defined below) or terminate this Agreement (and concurrently with or after such termination, if it so chooses, cause the Company to enter into any Acquisition Agreement with respect to a Superior Proposal), but in each of the cases set forth in this clause (y) only at a time that is after the second business day following Parent's receipt of written notice advising Parent that the Board of Directors of the Company has received a Superior Proposal, specifying the material terms and conditions of such Superior Proposal and identifying the person making such Superior Proposal. For purposes of this Agreement, a "Superior Proposal" means any bona fide Takeover Proposal made by a third party on terms which the Board of Directors of the Company determines in its good faith judgment (based on the advice of a financial advisor of nationally recognized reputation) to be more favorable to the Company's shareholders than the Offer and the Merger and for which financing, to the extent required, is then committed or which, in the good faith judgment of the Board of Directors of the Company, is reasonably capable of being financed by such third party. (c) In addition to the obligations of the Company set forth in paragraphs (a) and (b) of this Section 6.02, the Company shall immediately advise Parent orally and in writing of any request for information or of any Takeover Proposal, the material terms and conditions of such request or Takeover Proposal and the identity of the person making such request or Takeover Proposal. The Company will immediately inform Parent of any material change in the details (including amendments or proposed amendments) of any such request or Takeover Proposal. (d) Nothing contained in this Section 6.02 shall prohibit the Company from taking and disclosing to its shareholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's shareholders if, in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, failure so to disclose would be inconsistent with applicable law; provided, however, neither the Company nor its Board of Directors nor any committee thereof shall, except as 34 permitted by Section 6.02(b), withdraw or modify, or propose to withdraw or modify, its position with respect to the Offer, the Merger or this Agreement or approve or recommend, or propose to approve or recommend, a Takeover Proposal. SECTION 6.03. Other Actions. The Company shall not take any action that would, or that could reasonably be expected to, result in (i) any of the representations and warranties of the Company set forth in this Agreement that are qualified as to materiality becoming untrue, (ii) any of such representations and warranties that are not so qualified becoming untrue in any material respect or (iii) any of the Offer Conditions not being satisfied (subject to the Company's right to take actions specifically permitted by Section 6.02). ARTICLE VII Additional Agreements SECTION 7.01. Shareholder Approval; Preparation of Proxy Statement. (a) If the Company Shareholder Approval is required by law, the Company shall, as soon as practicable following the expiration of the Offer, duly call, give notice of, convene and hold a meeting of its shareholders (the "Shareholders Meeting") for the purpose of obtaining the Company Shareholder Approval. The Company shall, through its Board of Directors, recommend to its shareholders that the Company Shareholder Approval be given. Notwithstanding the foregoing, if Sub or any other subsidiary of Parent shall acquire at least 90% of the outstanding Shares, the parties shall, at the option and request of Parent, take all necessary and appropriate action to cause the Merger (as a merger of the Company with and into Sub in accordance with Section 2.01) to become effective as soon as practicable after the expiration of the Offer without a Shareholders Meeting in accordance with Section 23B.11.040 of the WBCA. Without limiting the generality of the foregoing, the Company agrees that its obligations pursuant to the first sentence of this Section 7.01(a) shall not be affected by (i) the commencement, public proposal, public disclosure or communication to the Company of any Takeover Proposal or (ii) the withdrawal or modification by the Board of Directors of the Company of its approval or recommendation of the Offer, this Agreement or the Merger. 35 (b) If the Company Shareholder Approval is required by law, the Company shall, as soon as practicable following the expiration of the Offer, prepare and file a preliminary Proxy Statement with the SEC and shall use its best efforts to respond to any comments of the SEC or its staff and to cause the Proxy Statement to be mailed to the Company's shareholders as promptly as practicable after responding to all such comments to the satisfaction of the staff. The Company shall notify Parent promptly of the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments or supplements to the Proxy Statement or for additional information and will supply Parent with copies of all correspondence between the Company or any of its representatives, on the one hand, and the SEC or its staff, on the other hand, with respect to the Proxy Statement or the Merger. If at any time prior to the Shareholders Meeting there shall occur any event that should be set forth in an amendment or supplement to the Proxy Statement, the Company shall promptly prepare and mail to its shareholders such an amendment or supplement. The Company shall not mail any Proxy Statement, or any amendment or supplement thereto, to which Parent reasonably objects. (c) Parent agrees to cause all Shares purchased pursuant to the Offer and all other Shares owned by Parent or any subsidiary of Parent to be voted in favor of the Company Shareholder Approval. SECTION 7.02. Access to Information. Upon reasonable notice and subject to restrictions contained in confidentiality agreements to which the Company is subject (from which it shall use reasonable efforts to be released), the Company shall afford to Parent and to the officers, employees, accountants, counsel and other representatives of Parent access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, the Company shall furnish promptly to Parent (a) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of the federal or state securities laws or the federal tax laws, or state, local or foreign tax laws and (b) all other information concerning its business, properties and personnel as Parent may reasonably request (including the Company's outside accountants' work papers). Except as otherwise agreed to by the Company, unless and until Parent and Sub shall have 36 purchased a majority of the outstanding Shares pursuant to the Offer or otherwise, and notwithstanding termination of this Agreement, the terms of the IBM Business Development Non-Disclosure Agreement dated August 29, 1996 between Parent and the Company shall apply to all information about the Company which has been furnished under this Agreement by the Company to Parent or Sub. SECTION 7.03. Reasonable Efforts. Each of the Company, Parent and Sub agree to use its reasonable efforts to take, or cause to be taken, all actions necessary to comply promptly with all legal requirements that may be imposed on itself with respect to the Offer and the Merger (which actions shall include furnishing all information required under the HSR Act and in connection with approvals of or filings with any other Governmental Entity) and shall promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their subsidiaries in connection with the Offer and the Merger. Each of the Company, Parent and Sub shall, and shall cause its subsidiaries to, use its reasonable efforts to take all reasonable actions necessary to obtain (and shall cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party required to be obtained or made by the Company, Parent, Sub or any of their subsidiaries in connection with the Offer and the Merger or the taking of any action contemplated thereby or by this Agreement, except that no party need waive any substantial rights or agree to any substantial limitation on its operations or to dispose of any assets. SECTION 7.04. Company Stock Options. Holders of outstanding options to purchase Shares (a "Company Stock Option") under each of the Company's stock option plans (the "Company Stock Option Plans") may exercise such Company Stock Options in accordance with their terms as of the date hereof and tender all or any portion of the Shares delivered pursuant to such exercise in response to the Offer. The parties acknowledge and agree that all Company Stock Options granted under the Edmark Corporation Stock Option Plan (restated as of July 14, 1995) terminate in accordance with their terms prior to the Effective Time. SECTION 7.05. Directors. Promptly upon the acceptance for payment of, and payment for, Shares by Sub pursuant to the Offer, Sub shall be entitled to designate 37 such number of directors on the Board of Directors of the Company as will give Sub, subject to compliance with Section 14(f) of the Exchange Act, a majority of such directors, and the Company shall, at such time, cause Sub's designees to be so elected by its existing Board of Directors; provided, however, that in the event that Sub's designees are elected to the Board of Directors of the Company, until the Effective Time such Board of Directors shall have at least two directors who are directors on the date of this Agreement and who are not officers of the Company (the "Independent Directors"); and provided further that, in such event, if the number of Independent Directors shall be reduced below two for any reason whatsoever, the remaining Independent Director shall designate a person to fill such vacancy who shall be deemed to be an Independent Director for purposes of this Agreement or, if no Independent Directors then remain, the other directors shall designate two persons to fill such vacancies who shall not be officers or affiliates of the Company, or officers or affiliates of Parent or any of its subsidiaries, and such persons shall be deemed to be Independent Directors for purposes of this Agreement. Subject to applicable law, the Company shall take all action requested by Parent necessary to effect any such election, including mailing to its shareholders the Information Statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, and the Company agrees to make such mailing with the mailing of the Schedule 14D-9 (provided that Sub shall have provided to the Company on a timely basis all information required to be included in the Information Statement with respect to Sub's designees). In connection with the foregoing, the Company will promptly, at the option of Parent, either increase the size of the Company's Board of Directors and/or obtain the resignation of such number of its current directors as is necessary to enable Sub's designees to be elected or appointed to, and to constitute a majority of the Company's Board of Directors as provided above. SECTION 7.06. Fees and Expenses. (a) Except as provided below in this Section 7.06, all fees and expenses incurred in connection with the Offer, the Merger, this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such fees or expenses, whether or not the Offer or the Merger is consummated. 38 (b) The Company shall pay, or cause to be paid, in same day funds to Parent the sum of (x) the Expenses (as hereinafter defined) and (y) $4,000,000 (the "Termination Fee") under the circumstances and at the times set forth as follows: (i) if the Company terminates this Agreement under Section 9.01(e), the Company shall pay the Expenses and the Termination Fee upon demand; (ii) if Parent or Sub terminates this Agreement under Section 9.01(d), the Company shall pay the Expenses upon demand; in addition, if within 12 months after such termination (or concurrently therewith), the Company shall enter into an Acquisition Agreement providing for a Takeover Proposal or a transaction resulting from a Takeover Proposal shall be consummated, the Company shall pay the Termination Fee concurrently with the earlier of the entering into of such Acquisition Agreement or the consummation of such transaction; and (iii) if, at the time of any other termination of this Agreement (other than pursuant to Section 9.01(a) or Section 9.01(b)(ii) or by the Company pursuant to Section 9.01(f)), a Takeover Proposal shall have been made (other than a Takeover Proposal made prior to the date hereof), the Company shall pay the Expenses, if terminated by the Company, concurrently therewith or, if terminated by Parent, upon demand; in addition, if within 12 months of such termination (or concurrently therewith), the Company shall enter into an Acquisition Agreement providing for a Takeover Proposal or a transaction resulting from a Takeover Proposal shall be consummated, the Company shall pay the Termination Fee concurrently with the earlier of the entering into of such Acquisition Agreement or the consummation of such transaction. "Expenses" shall mean reasonable documented out-of-pocket fees and expenses incurred or paid by or on behalf of Parent in connection with the Offer, the Merger or the consummation of any of the transactions contemplated by this Agreement, including all fees and expenses of law firms, accountants, experts and consultants to Parent, but excluding all fees and expenses of commercial banks and investment banking firms. 39 SECTION 7.07. Indemnification; Insurance. (a) Parent and Sub agree that all rights to indemnification for acts or omissions occurring prior to the Effective Time now existing in favor of the current or former directors or officers (the "Indemnified Parties") of the Company as provided in its Amended and Restated Articles of Incorporation or Bylaws, as amended and restated, shall survive the Merger and shall continue in full force and effect in accordance with their terms. (b) For six years from the Effective Time, Parent shall, unless Parent agrees in writing to guarantee the indemnification obligations set forth in Section 7.07(a), maintain in effect the Company's current directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy (a copy of which has been heretofore delivered to Parent); provided, however, that in no event shall Parent be required to expend in any one year an amount in excess of 200% of the annual premiums currently paid by the Company for such insurance, which the Company represents is $150,000; and, provided further, that if the annual premiums of such insurance coverage exceed such amount, Parent shall be obligated to obtain a policy with the greatest coverage available for a cost not exceeding such amount. (c) This Section 7.07 shall survive the consummation of the Merger at the Effective Time, is intended to benefit the Company, Parent, the Surviving Corporation and the Indemnified Parties, and shall be binding on all successors and assigns of Parent and the Surviving Corporation. SECTION 7.08. Certain Litigation. The Company agrees that it shall not settle any litigation commenced after the date hereof against the Company or any of its directors by any shareholder of the Company relating to the Offer, the Merger, this Agreement, the Shareholder Agreement or the Noncompetition Agreements, without the prior written consent of Parent. In addition, the Company shall not voluntarily cooperate with any third party that may hereafter seek to restrain or prohibit or otherwise oppose the Offer or the Merger and shall cooperate with Parent and Sub to resist any such effort to restrain or prohibit or otherwise oppose the Offer or the Merger. 40 SECTION 7.09. Rights Agreement. The Company shall take all necessary action to (i) render the Rights Agreement inapplicable to the Offer, the Merger, this Agreement, the Shareholder Agreement, the acquisition of Shares by Sub pursuant to the Offer and the Shareholder Agreement and the other transactions contemplated by this Agreement and the Shareholder Agreement and (ii) ensure that (y) none of Parent, Sub or any of their respective affiliates is an Acquiring Person (as defined in the Rights Agreement) pursuant to the Rights Agreement and (z) a Distribution Date (as defined in the Rights Agreement) does not occur by reason of the Offer, the Merger the execution of this Agreement or the Shareholder Agreement, the acquisition of Shares by Sub pursuant to the Offer or the Shareholder Agreement or the other transactions contemplated by this Agreement or the Shareholder Agreement. Except as provided above or as requested in writing by Parent, the Board of Directors of the Company shall not (i) amend the Rights Agreement or (ii) take any action with respect to, or make any determination under, the Rights Agreement, including a redemption of the Rights or any action to facilitate a Takeover Proposal. ARTICLE VIII Conditions SECTION 8.01. Conditions to Each Party's Obligation To Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction or waiver prior to the Closing Date of the following conditions: (a) Company Shareholder Approval. If required by applicable law, the Company Shareholder Approval shall have been obtained. (b) No Injunctions or Restraints. No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other Governmental Entity or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that each of the parties shall have used reasonable efforts to prevent the entry of any such injunction or other order and to appeal as 41 promptly as possible any injunction or other order that may be entered. (c) Purchase of Shares. Sub shall have previously accepted for payment and paid for Shares pursuant to the Offer. ARTICLE IX Termination and Amendment SECTION 9.01. Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the terms of this Agreement by the shareholders of the Company: (a) by mutual written consent of Parent and the Company; (b) by either Parent or the Company: (i) if (x) as a result of the failure of any of the Offer Conditions the Offer shall have terminated or expired in accordance with its terms without Sub having accepted for payment any Shares pursuant to the Offer or (y) Sub shall not have accepted for payment any Shares pursuant to the Offer prior to February 28, 1997; provided, however, that the right to terminate this Agreement pursuant to this Section 9.01(b)(i) shall not be available to any party whose failure to perform any of its obligations under this Agreement results in the failure of any such condition or if the failure of such condition results from facts or circumstances that constitute a breach of representation or warranty under this Agreement by such party; or (ii) if any Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the acceptance for payment of, or payment for, Shares pursuant to the Offer or the Merger and such order, decree or ruling or other action shall have become final and nonappealable; 42 (c) by Parent or Sub prior to the purchase of Shares pursuant to the Offer in the event of a breach or failure to perform by the Company of any representation, warranty, covenant or other agreement contained in this Agreement which (i) would give rise to the failure of a condition set forth in paragraph (e) or (f) of Exhibit A and (ii) cannot be or has not been cured within 20 days after the giving of written notice to the Company; (d) by Parent or Sub if either Parent or Sub is entitled to terminate the Offer as a result of the occurrence of any event set forth in paragraph (d) of Exhibit A to this Agreement; (e) by the Company in accordance with Section 6.02(b), provided that it has complied with all provisions thereof, including the notice provisions therein, and that it complies with applicable requirements relating to the payment (including the timing of any payment) of Expenses and the Termination Fee; or (f) by the Company, if Parent or Sub shall have breached or failed to perform in any material respect any of their respective representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform is incapable of being cured or has not been cured within 20 days after the giving of written notice to Parent or Sub, as applicable, except, in any case, such breaches and failures which are not reasonably likely to affect adversely Parent's or Sub's ability to consummate the Offer or the Merger. SECTION 9.02. Effect of Termination. In the event of a termination of this Agreement by either the Company or Parent as provided in Section 9.01, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Sub or the Company or their respective officers or directors, except with respect to the last sentence of Section 1.02(c), Section 4.16, Section 5.06, the last sentence of Section 7.02, Section 7.06, this Section 9.02 and Article X; provided, however, that nothing herein shall relieve any party for liability for any wilful breach hereof. 43 SECTION 9.03. Amendment. This Agreement may be amended by the parties hereto, by duly authorized action taken, at any time before or after obtaining the Company Shareholder Approval, but, after the purchase of Shares pursuant to the Offer, no amendment shall be made which decreases the Merger Consideration and, after the Company Shareholder Approval, no amendment shall be made which by law requires further approval by such shareholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Following the election or appointment of the Sub's designees pursuant to Section 7.05 and prior to the Effective Time, the affirmative vote of a majority of the Independent Directors then in office shall be required by the Company to (i) amend or terminate this Agreement by the Company, (ii) exercise or waive any of the Company's rights or remedies under this Agreement or (iii) extend the time for performance of Parent and Sub's respective obligations under this Agreement. SECTION 9.04. Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, subject to Section 9.03, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. ARTICLE X Miscellaneous SECTION 10.01. Nonsurvival of Representations, Warranties and Agreements. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time or, in the case of the Company, shall survive the acceptance for payment of, and payment for, Shares by Sub pursuant to 44 the Offer. This Section 10.01 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time of the Merger, including Section 7.07. SECTION 10.02. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed), sent by overnight courier (providing proof of delivery) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Sub, to International Business Machines Corporation Old Orchard Road Armonk, NY 10504 Attention: Mr. Lee A. Dayton Telecopy No.: (914) 765-7803 with a copy to: Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, NY 10019-7475 Attention: Allen Finkelson, Esq. Telecopy No.: (212) 474-3700 and (b) if to the Company, to Edmark Corporation 6727 - 185th Avenue NE Redmond, WA 98052 Attention: Ms. Donna G. Stanger Telecopy No.: (206) 556-3700 with a copy to: 45 Lane Powell Spears Lubersky LLP 1420 Fifth Avenue, Suite 4100 Seattle, WA 98101-2338 Attention: Michael E. Morgan, Esq. Telecopy No.: (206) 223-7107 SECTION 10.03. Interpretation. When a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. As used in this Agreement, the term "subsidiary" of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests of which) is owned directly or indirectly by such first person. As used in this Agreement, "material adverse change" or "material adverse effect" means, when used in connection with the Company, any change or effect (or any development that, insofar as can reasonably be foreseen, is likely to result in any change or effect) that, individually or in the aggregate with any such other changes or effects, is materially adverse to the business, properties, financial condition or results of operations of the Company. SECTION 10.04. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. SECTION 10.05. Entire Agreement; No Third Party Beneficiaries. This Agreement (including the documents and the instruments referred to herein) (a) constitutes the 46 entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Section 7.07, is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. SECTION 10.06. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York without regard to any applicable conflicts of law, except to the extent the WBCA shall be held to govern the terms of the Merger. SECTION 10.07. Publicity. Except as otherwise required by law, court process or the rules of the NYSE or the Nasdaq National Market or as contemplated or provided elsewhere herein, for so long as this Agreement is in effect, neither the Company nor Parent shall, or shall permit any of its subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement, the Shareholder Agreement or the Noncompetition Agreements without the consent of the other party, which consent shall not be unreasonably withheld. SECTION 10.08. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Sub may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect wholly owned subsidiary of Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. SECTION 10.09. Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto waives any right to trial by jury with respect to any claim 47 or proceeding related to or arising out of this Agreement or any of the transactions contemplated hereby. IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. INTERNATIONAL BUSINESS MACHINES CORPORATION, by /s/ Lee A. Dayton ---------------------------- Name: Lee A. Dayton Title: Vice President, Corporate Development & Real Estate INDIGO ACQUISITION CORP., by /s/ Lee A. Dayton ---------------------------- Name: Lee A. Dayton Title: President EDMARK CORPORATION, by /s/ Donna G. Stanger ---------------------------- Name: Donna G. Stanger Title: Vice President - Product Development EXHIBIT A Conditions of the Offer Notwithstanding any other term of the Offer or this Agreement, Sub shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Sub's obligation to pay for or return tendered Shares after the termination or withdrawal of the Offer), to pay for any Shares tendered pursuant to the Offer unless (i) there shall have been validly tendered and not withdrawn prior to the expiration of the Offer such number of Shares that would constitute two-thirds of the outstanding Shares (determined on a fully diluted basis for all outstanding stock options and any other rights to acquire Shares) (the "Minimum Condition") and (ii) any waiting period under the HSR Act applicable to the purchase of Shares pursuant to the Offer shall have expired or been terminated. Furthermore, notwithstanding any other term of the Offer or this Agreement, Sub shall not be required to accept for payment or, subject as aforesaid, to pay for any Shares not theretofore accepted for payment or paid for, and may terminate the Offer if, at any time on or after the date of this Agreement and before the acceptance of such Shares for payment or the payment therefor, any of the following conditions exists (other than as a result of any action or inaction of Parent or any of its subsidiaries that constitutes a breach of this Agreement): (a) there shall be threatened instituted or pending by any Governmental Entity any suit, action or proceeding (i) challenging the acquisition by Parent or Sub of any Shares under the Offer, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or the performance of any of the other transactions contemplated by this Agreement or the Shareholder Agreement, (ii) seeking to prohibit or materially limit the ownership or operation by the Company, Parent or any of Parent's subsidiaries of a material portion of the business or assets of the Company or Parent and its subsidiaries, taken as a whole, or to compel the Company or Parent to dispose of or hold separate any material portion of the business or assets of the Company or Parent and its subsidiaries, taken as a whole, in each case as a result of the Offer or any of the other transactions contemplated by this Agreement, (iii) seeking to impose material limitations on the ability of Parent or Sub to 2 acquire or hold, or exercise full rights of ownership of, any Shares to be accepted for payment pursuant to the Offer including, without limitation, the right to vote such Shares on all matters properly presented to the shareholders of the Company, (iv) seeking to prohibit Parent or any of its subsidiaries from effectively controlling in any material respect any material portion of the business or operations of the Company or (v) which otherwise is reasonably likely to have a material adverse effect on the Company; (b) there shall be any statute, rule, regulation, judgment, order or injunction enacted, entered, enforced, promulgated or deemed applicable to the Offer or the Merger, by any Governmental Entity or court, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (v) of paragraph (a) above; (c) there shall have occurred any material adverse change with respect to the Company; (d) (i) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified in a manner adverse to Parent or Sub its approval or recommendation of the Offer or the Merger or its adoption of this Agreement, or approved or recommended any Takeover Proposal, (ii) the Company shall have entered into any agreement with respect to any Superior Proposal in accordance with Section 6.02(b) of this Agreement or (iii) the Board of Directors of the Company or any committee thereof shall have resolved to take any of the foregoing actions; (e) any of the representations and warranties of the Company set forth in this Agreement that are qualified as to materiality shall not be true and correct or any such representations and warranties that are not so qualified shall not be true and correct in any material respect, in each case at the date of this Agreement and at the scheduled or extended expiration of the Offer; (f) the Company shall have failed to perform in any material respect any material obligation or to comply in any material respect with any material 3 agreement or material covenant of the Company to be performed or complied with by it under this Agreement, which failure to perform or comply has not been cured within 5 business days after the giving of written notice to the Company; or (g) this Agreement shall have been terminated in accordance with its terms. The foregoing conditions are for the sole benefit of Parent and Sub and may, subject to the terms of this Agreement, be waived by Parent and Sub in whole or in part at any time and from time to time in their sole discretion. The failure by Parent or Sub at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and circumstances shall not be deemed a waiver with respect to any other facts and circumstances and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. Terms used but not defined herein shall have the meanings assigned to such terms in the Agreement to which this Exhibit A is a part. EX-99.(C)(2) 8 EXHIBIT 99-C2 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of August 30, 1996, certain information with respect to the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to own beneficially more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) certain of the Company's executive officers and (iv) all directors and executive officers as a group. Except as otherwise noted, the named beneficial owner has sole voting and investment power. SHARES PERCENTAGE BENEFICIALLY OF NAME OWNED CLASS - - ---- ------------ --------- FMR Corp.(1) 689,250 10.40% 82 Devonsheir Street Boston, MA 02109 Douglas J. Mackenzie(2) 450,852 6.8% Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025 Frances M. Conley(3) 409,500 6.2% Roanoke Investors' Limited Partnership c/o Roanoke Capital, Ltd. 1111 Third Avenue, Suite 2220 Seattle, WA 98101 Richard S. Thorp(4) 383,987 5.8% c/o Supertronix, Inc. 14624 - 4th South Seattle, WA 98168 Keystone Investment Management Company(5) 375,000 5.7% 200 Berkeley Street Boston, MA 02116 Sally G. Narodick(6) 240,346 3.5% Donna G. Stanger(7) 99,750 1.5% W. Hunter Simpson(8) 41,360 * Timothy Mott(9) 40,377 * Daniel P. Vetras(10) 31,125 * Paul N. Bialek(11) 28,500 * Harvey N. Gillis(12) 17,000 * Allen D. Glenn(13) 9,900 * Allan Epstein(14) 9,500 * All directors and executive officers as a group (13 persons)(15) 1,802,946 25.4% ------- * Less than 1%. (1) Based on Schedule 13 G filed by FMR Corp. with the SEC and dated June 7, 1996, FMR beneficially owns (a) through its wholly-owned subsidiary, Fidelity Management & Research Company ("Fidelity"), as advisor to certain investment companies, 272,050 shares of the Company's Common Stock as to which FMR has dispositive but not voting power, and (b) through another controlled entity, Fidelity Management Trust Company ("FMTC"), as a managing agent, 417,200 shares of the Company's Common Stock as to which FMR has dispositive and voting power. (2) Includes 387,566 shares of Common Stock held by Kleiner Perkins Caufield & Byers VI, L.P. ("KPCB") and 59,454 shares of Common Stock held by KPCB VI Founders Fund, L.P. ("Founders"). The general partner of both KPCB and Founders is KPCB VI Associates, L.P. ("Associates"). Mr. Mackenzie, a director of the Company, has dispositive and voting power over the shares of Company Common Stock held by KPCB and Founders pursuant to consent resolutions adopted by Associates on November 13, 1995. Mr. Mackenzie disclaims beneficial ownership of the shares that exceed his pro rata interest in KPCB and Founders. Also includes 2,000 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (3) Includes 396,000 shares held of record by Roanoke Investors' Limited Partnership ("Roanoke"). Ms. Conley, a director of the Company, is a shareholder, director and principal of Roanoke Capital, Ltd. ("Roanoke Capital"), the general partner of Roanoke. The only other shareholder, director and principal of Roanoke Capital is Gerald R. Conley, Ms. Conley's husband. Ms. Conley disclaims beneficial ownership of these shares that exceed Roanoke Capital's interest in Roanoke. Also includes 2,000 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (4) Includes 500 shares held by Mr. Thorp's wife. Mr. Thorp disclaims beneficial ownership of those shares. Also includes 2,000 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (5) Based on Schedule 13 G filed by Keystone Investment Management Company ("Keystone") with the SEC and dated February 14, 1996, certain Keystone investment managers are considered beneficial owners in the aggregate of 375,000 shares of the Company's Common Stock. (6) Includes 230,625 shares issuable upon exercise of options exercisable with 60 days of August 30, 1996. (7) Includes 3,000 shares held by Ms. Stanger's children. Ms. Stanger disclaims beneficial ownership of those shares. Also includes 93,750 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (8) Includes 3,000 shares held by Mr. Simpson's wife. Mr. Simpson disclaims beneficial ownership of those shares. Also includes 17,000 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (9) All of these shares are held of record by Ironwood Capital ("Ironwood"). Mr. Mott, a director of the Company, is a general partner of Ironwood. Mr. Mott disclaims benefiical ownership of the shares that exceed his pro rata interest in Ironwood. Also includes 2,000 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (10) Represents 31,125 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (11) Represents 28,500 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (12) Includes 5,750 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (13) Includes 8,000 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (14) Represents 9,500 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. (15) Includes 473,000 shares issuable upon exercise of options exercisable within 60 days of August 30, 1996. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth certain information concerning the compensation paid or accrued for the fiscal years ended June 30, 1996, 1995 and 1994, to the Company's Chairman and Chief Executive Officer and the other executive officers of the Company who received compensation of at least $100,000 for services rendered to the Company in all capacities during the 1996 fiscal year (the "Named Executive Officers").
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ---------- ALL OTHER FISCAL ---------------------- UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) ($) - - --------------------------- ----- --------- ----------- ------------ ------------- Sally G. Narodick (2) 1996 $220,000 -0- -0- $4,800 Chairman and Chief Executive 1995 $200,000 $100,000 37,500 $4,800 Officer 1994 $135,000 -0- 15,000 $4,800 Paul N. Bialek (3) 1996 $100,000 -0- 30,000 -0- Vice President--Finance and 1995 $86,875 $43,438 30,000 -0- Administration, Chief Financial 1994 $51,917 $7,500 37,500 -0- Officer, Treasurer and Secretary Judith G. Meleliat (4) 1996 $102,405 -0- 160,000 $112,500 Vice President--Marketing Donna G. Stanger 1996 $175,000 -0- -0- -0- Vice President--Product 1995 $150,000 $75,000 52,500 -0- Development 1994 $110,000 $30,000 67,500 -0- Daniel P. Vetras (5) 1996 $125,000 $62,593 30,000 -0- Vice President--Consumer Sales 1995 $94,167 $47,084 -0- -0- 1994 $55,487 $16,385 67,500 -0-
- - ----- (1) The Compensation Committee of the Company's Board of Directors adopts a Management Incentive Award Program for certain key employees each year. That program establishes several performance targets and a cash bonus pool based on a percentage of the aggregate officer base salaries. All of the Named Executive Officers were eligible for bonuses under that program. (2) All Other Compensation represents an automobile allowance. (3) Mr. Bialek joined the Company in September 1993. (4) Ms. Meleliat joined the Company in August 1995, and resigned from the Company in May 1996. (5) Mr. Vetras joined the Company in October 1993. OPTION GRANTS IN FISCAL YEAR 1996 The following table sets forth certain information with respect to stock options granted during the 1996 fiscal year to the Named Executive Officers.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ---------------------------------------------- ANNUAL RATES OF STOCK NUMBER OF PERCENT OF PRICE APPRECIATION FOR SECURITIES TOTAL OPTIONS OPTION TERM(2) UNDERLYING GRANTED TO EXERCISE --------------------------------- OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION NAME (#)(1) FISCAL YEAR ($/SH) DATE 0%($) 5%($) 10%($) - - ------------------ -------------- ------------- -------- ---------- ------- ----- ------- Sally G. Narodick -0- N/A N/A N/A N/A N/A N/A Paul N. Bialek 30,000 6.4% $25.75 3/11/06 -0- $485,821 $1,231,166 Judith G. Meleliat(3) 90,000 19.1% $39.50 8/17/05 -0- $2,235,720 $5,665,754 30,000 6.4% $29.50 12/19/05 -0- $556,572 $1,410,462 40,000 8.5% $22.50 3/22/06 -0- $566,005 $1,434,368 Donna G. Stanger -0- N/A N/A N/A N/A N/A N/A Daniel P. Vetras 30,000 6.4% $29.50 12/19/05 -0- $556,572 $1,410,462
- - ------------ (1) The options listed were granted under the Company's Stock Option Plan. The exercise price of each option is equal to the fair market value of the underlying Common Stock on the date of grant as determined by the Compensation Committee of the Company's Board of Directors and vest ratably over four years from the date of grant. To the extent not already vested, the options generally become fully vested and exercisable upon a change in control of the Company. The options have ten year terms. (2) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5% and 10% rate of stock price appreciation are mandated by the rules of the Securities and Exchange Commission. None of the assumed rates of stock price appreciation represent the Company's estimate or projection of the future price of the Company's Common Stock. (3) The options listed were not vested and expired on May 22, 1996, the date of Ms. Meleliat's termination of employment with the Company. OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR END OPTION VALUES The following table sets forth certain information concerning option exercises by the Named Executive Officers during the 1996 fiscal year. In addition, the table includes the number of shares covered by both exercisable and unexercisable stock options as of June 30, 1996. Also reported are the values for "in-the-money" options, which values represent the positive spread between the exercise prices of those existing stock options and the fair market value of the Company's Common Stock as of June 30, 1996.
VALUE OF UNEXERCISED NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY NUMBER OF UNEXERCISED OPTIONS AT OPTIONS AT SHARES FISCAL YEAR END(#) FISCAL YEAR END ($)(1) ACQUIRED ON DOLLAR VALUE ------------------------------ --------------------------- NAME EXERCOSE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - ------------------ ------------- ------------ ----------- ------------- ----------- ------------- Sally G. Narodick -0- N/A 226,875 35,625 $3,876,994 $105,094 Paul N. Bialek 9,000 $261,720 17,250 71,250 $186,300 $417,150 Judith G. Meleliat -0- N/A -0- -0- -0- Donna G. Stanger 37,500 $1,254,863 76,875 73,125 $1,114,088 $950,400 Daniel P. Vetras 10,500 $279,885 14,250 63,750 $194,798 $461,363
- - ------------- (1) These values represent the number of shares subject to in-the-money options multiplied by the difference between the closing bid price of the Company's Common Stock on June 30, 1996 ($20.00 per share), and the exercise price. The Audit Committee generally selects the Company's independent auditors, subject to ratification by Shareholders, and considers related scope and fee arrangements. Current members of the Audit Committee are Harvey N. Gillis (Chair), Allan Epstein, Dr. Allen D. Glenn and Richard S. Thorp. The Compensation Committee generally recommends the framework for establishing officer compensation and reviews and recommends officer salary levels and variable compensation awards. That committee also administers the Company's Stock Option Plan. Current members of the Compensation Committee are W. Hunter Simpson (Chair), Frances M. Conley, Harvey N. Gillis and Douglas J. Mackenzie. The Nominating Committee is primarily responsible for recommending candidates for the Board of Directors to be elected by Shareholders of the Company. Current members of the Nominating Committee are Harvey N. Gillis (Chair), Allan Epstein, Sally G. Narodick, W. Hunter Simpson and Timothy Mott. The Nominating Committee will consider nominees recommended by the Shareholders. Suggestions may submitted to the Secretary of the Company. COMPENSATION OF DIRECTORS Beginning in the 1996 fiscal year, non-employee directors are paid a fee of $500 for each Board meeting attended and for each Committee meeting attended when those meetings are held on days different from Board meetings. Employee directors are not paid any fees for those services. All directors are entitled to reimbursement for expenses incurred in traveling to and from Board and Committee meetings. In addition, each non-employee director also participates in the 1995 Non-Employee Directors' Stock Option Plan. Upon reelection to the Board of Directors, each non-employee director receives an option to purchase 2,000 shares of the Company's Common Stock on the third day following the day of each Annual Meeting of Shareholders. The option is granted at the then current fair market value of the Company's Common Stock, has a ten-year term and is vested upon grant. In fiscal year 1996, options to purchase 2,000 shares of the Company's Common Stock were granted to each of the Company's eight non-employee directors at an exercise price of $44.00 per share. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES FOR DIRECTOR LISTED ABOVE. PROPOSAL NO. 2: RATIFICATION OF APPOINTMENT OF AUDITORS The Board of Directors, acting upon the recommendation of the Audit Committee, has appointed KPMG Peat Marwick LLP ("KPMG") as auditors of the Company for the fiscal year ending June 30, 1997. KPMG has audited the accounts of the Company since 1987. Representatives of KPMG are expected to attend the Annual Meeting and will have the opportunity to make a statement and to respond to appropriate questions from Shareholders. In the event Shareholders do not ratify the appointment of KPMG, the selection of auditors will be considered by the Board of Directors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF KPMG AS AUDITORS FOR THE COMPANY. EX-99.(C)(3) 9 EXHIBIT 99-C3/ARTICLE XII ARTICLE XII OF THE COMPANY'S BYLAWS INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS Section 1. RIGHT TO INDEMNIFICATION. Each person (including a person's personal representative) who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, investigative or by or in the right of the corporation, or otherwise (hereinafter a "proceeding"), by reason of the fact that he or she (or a person of whom he or she is a personal representative) is or was a director, officer, trustee, employee or agent of the corporation or any predecessor or is or was serving at the request of the corporation or any predecessor as a director, officer, partner, trustee, employee agent or in any other relationship or capacity whatsoever, of any other foreign or domestic corporation, partnership, joint venture, employee benefit plan or trust or other trust, enterprise or other private or governmental entity, board, commission, body or other unit whatsoever (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action or inaction in an official capacity as a director, officer, partner, trustee, employee, agent, or in any other relationship or capacity whatsoever, or otherwise, shall be indemnified and held harmless by the corporation to the fullest extent not prohibited by the Washington Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment does not prohibit the corporation from providing broader indemnification rights than prior to the amendment), against all expenses, liabilities, and losses (including but not limited to attorneys' fees, judgments, claims, fines, ERISA and other excise and other taxes and penalties, and other adverse effects and amounts paid in settlement), reasonably incurred or suffered by the indemnitee; provided, however, that no such indemnity shall indemnify any person from or on account of acts or omissions of such person finally adjudged to be intentional misconduct or a knowing violation of law, or from or on account of conduct of a director finally adjudged to be in violation of RCW 23B.08.310, or from or on account of any transaction with respect to which it was finally adjudged that such person personally received a benefit in money, property, or services to which the person was not legally entitled; and further provided, however, that, except as provided in Section 2 of this Article with respect to suits relating to rights to indemnification, the corporation shall indemnify any indemnitee in connection with a proceeding (or part thereof) initiated by the indemnitee only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. The right to indemnification granted in this Article is a contract right and includes the right to be paid by the corporation the expenses incurred in connection with any proceeding in advance of its final disposition (hereinafter an "advance of expenses"); provided, however, that an advance of expenses received by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee unless required by the Board of Directors) shall be made only upon (i) receipt by the corporation of a written undertaking (hereinafter an "undertaking") by or on behalf of such indemnitee, to repay advances of expenses if and to the extent it shall ultimately be determined by order of a court having jurisdiction (which determination shall become final upon expiration of all rights to appeal), hereinafter a "final adjudication", that the indemnitee is not entitled to be indemnified for such expenses under this Article, and (ii) receipt by the corporation of written affirmation by the indemnitee of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation under this Article as authorized by the Washington Business Corporaiton Act. Section 2. RIGHT OF INDEMNITEE TO BRING SUIT. If any claim for indemnification under Section 1 of this Article is not paid in full by the corporation within sixty days after a written claim has been received by the corporation, except in the case of a claim for an advance of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If the indemnitee is successful in whole or in part in any such suit, or in any suit in which the corporation seeks to recover an advance of expenses, the corporation shall also pay to the indemnitee all the indemnitee's expenses in connection with such suit. The indemnitee shall be presumed to be entitled to indemnification under this Article upon the corporation's receipt of indemnitee's written claim (and in any suits relating to rights to indemnification where the required undertaking and affirmation have been received by the corporation), and thereafter the corporation shall have the burden of proof to overcome that presumption. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or shareholders) to have made a determination prior to the commencement of such suit that the indemnitee is entitled to indemnification, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or shareholders) that the indemnitee is not entitled to indemnification, shall be a defense to the suit or create a presumption that the indemnitee is not so entitled. It shall be a defense to a claim for an amount of indemnification under this Article (other than a claim for advances of expenses prior to final disposition of a proceeding where the required undertaking and affirmation have been received by the corporation) that the claimant has not met the standards of conduct applicable (if any) under the Washington Business Corporation Act to entitle the claimant to the amount claimed, but the corporation shall have the burden of proving such defense. If requested by the indemnitee, determination of the right to indemnity and amount of indemnity shall be made by final adjudication (as defined above) and such final adjudication shall supersede any determination made in accordance with RCW 23B.08.550. Section 3. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification (including, but not limited to, payment, reimbursement and advances of expenses) granted in this Article shall not be exclusive of any other powers or obligations of the corporation or of any other rights which any person may have or hereafter acquire under any statute, the common law, the corporation's articles of incorporation or bylaws, agreement, vote of shareholders or disinterested directors, or otherwise. Notwithstanding any amendment to or repeal of this Article, any indemnitee shall be entitled to indemnification in accordance with the provisions hereof with respect to any acts or omissions of such indemnitee occurring prior to such amendment or repeal. Section 4. INSURANCE, CONTRACTS AND FUNDING. The corporation may maintain insurance, at its expense, to protect itself and any person (including a person's personal representative) who is or was a director, officer, employee or agent of the corporation or any predecessor or who is or was a director, officer, partner, trustee, employee, agent, or in any other relationship or capacity whatsoever, of any other foreign or domestic corporation, partnership, joint venture, employee benefit plan or trust or other trust, enterprise or other private or governmental entity, agency, board, commission, body or other unit whatsoever, against any expense, liability or loss, whether or not the power to indemnify such person against such expense, liability or loss is now or hereafter granted to the corporation under the Washington Business Corporation Act. The corporation may grant indemnity, and may enter into contracts granting indemnity, to any such person, whether or not in furtherance of the provisions of this Article, and may create trust funds, grant security interests and use other means (including, without limitation, letters of credit) to secure and ensure the payment of indemnification amounts. Section 5. SEPARABILITY OF PROVISIONS. If any provision or provisions of this Article shall be held to be invalid, illegal or unenforceable for any reason whatsoever (i) the validity, legality and enforceability of the remaining provisions of this Article (including without limitation, all portions of any paragraphs of this Article containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Article (including, without limitation, all portions of any paragraph of this Article containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 6. PARTIAL INDEMNIFICATION. If a claimant is entitled to indemnification by the corporation for some or a portion of expenses, liabilities or losses, but not for the total amount thereof, the corporation shall nevertheless indemnify the claimant for the portion of such expenses, liabilities and losses to which the claimant is entitled. Section 7. SUCCESSORS AND ASSIGNS. All obligations of the corporation to indemnify any director or officer: (i) shall be binding upon all successors and assigns of the corporation (including any transferee of all or substantially all of its assets and any successor by merger or otherwise by operation of law), (ii) shall be binding on and inure to the benefit of the spouse, heirs, personal representatives and estate of the director or officer, and (iii) shall continue as to any indemnitee who has ceased to be a director, officer, partner, trustee, employee or agent (or other relationship or capacity). The corporation shall not effect any sale of substantially all of its assets, merger, consolidation or other reorganization unless the surviving entity agrees in writing to assume all such obligations of the corporation. EX-99.(C)(4) 10 EXHIBIT 99-C4/ARTICLE XIII ARTICLE XIII OF THE COMPANY'S ARTICLES OF INCORPORATION Any personal liability of a director to the corporation or its shareholders for monetary damages for conduct as a director is eliminated, except for any liability for any acts or omissions that involve intentional misconduct by a director or a knowing violation of law by a director, for conduct violating RCW 23A.08.450, for any transaction from which the director will personally receive a benefit in money, property, or services to which the director is not legally entitled, or for any act or omission occurring prior to the date when this Article becomes effective. If hereafter the Washington Business Corporation Act is amended to change the corporation's power to eliminate or limit the liability of a director to the corporation, then, upon the effective date of the amendment and without further act: if the amendment permits further elimination or limitation of liability, the liability of a director shall be additionally eliminated and limited to such further extent, or if the amendment changes the power to eliminate the liability of a director in any other respect, the liability of a director shall be eliminated and limited with respect to acts or omissions occurring after the effective date of the amendment to the fullest extent permitted by the Washington Business Corporation Act as so amended. No amendment or repeal of these Articles of Incorporation shall adversely affect any right or any elimination or limitation of liability of a director existing immediately prior to the amendment or repeal. EX-99.(C)(5) 11 SHAREHOLDERS AGREEMENT(17) SHAREHOLDER AGREEMENT, dated as of November 12, 1996, among INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation ("Parent"), INDIGO ACQUISITION CORP., a Washington corporation and a wholly owned subsidiary of Parent ("Sub"), and the persons listed on Schedule A hereto (each a "Shareholder", and, collectively, the "Shareholders"). WHEREAS, Parent, Sub and Edmark Corporation, a Washington corporation (the "Company"), propose to enter into an Agreement and Plan of Merger of even date herewith (as the same may be amended or supplemented, the "Merger Agreement") providing for (i) the making of a cash tender offer (as such offer may be amended from time to time as permitted under the Merger Agreement, the "Offer") by Sub for all of the outstanding shares of Common Stock, no par value, of the Company (the "Company Common Stock"), including the associated rights (the "Rights") to purchase Company Common Stock issued pursuant to the Shareholder Rights Agreement dated as of November 29, 1995 between the Company and ChaseMellon Shareholder Services, L.L.C. (as successor to First Interstate Bank of Washington, N.A.), as rights agent (as amended, the "Rights Agreement"), and (ii) the merger of Sub with the Company (the "Merger"); WHEREAS, each Shareholder is the record and beneficial owner of the number of shares of Company Common Stock, including the associated Rights, set forth opposite such Shareholder's name on Schedule A hereto, which number excludes shares issuable upon the exercise of Company Stock Options (as such term is defined in the Merger Agreement) held by such Shareholder; such shares of Company Common Stock, as such shares may be adjusted by stock dividend, stock split, recapitalization, combination or exchange of shares, merger, consolidation, reorganization or other change or transaction of or by the Company, together with (i) the associated Rights, as such Rights may be adjusted pursuant to the terms of the Rights Agreement, and (ii) shares of Company Common Stock (including the associated Rights) which may be acquired after the date hereof by such Shareholder, including shares of Company Common Stock issuable upon the exercise of Rights or Company Stock Options (as the same may be adjusted as aforesaid), being collectively referred to herein as the "Shares"; and 2 WHEREAS, as a condition to their willingness to enter into the Merger Agreement, Parent and Sub have requested that the Shareholders enter into this Agreement; NOW, THEREFORE, to induce Parent and Sub to enter into, and in consideration of their entering into, the Merger Agreement, and in consideration of the premises and the representations, warranties and agreements contained herein, the parties agree as follows: 1. Purchase and Sale of Shares. (a) Each Shareholder hereby severally and not jointly agrees that it shall tender its Shares into the Offer and that it shall not withdraw any Shares so tendered (it being understood that the obligation contained in this sentence is unconditional, subject to Section 8). In addition, each Shareholder hereby severally and not jointly agrees to sell to Sub, and Sub hereby agrees to purchase, all such Shareholder's Shares at a price per Share equal to $15.50, or such higher price per Share as may be offered by Sub in the Offer, provided that (i) such obligation to purchase is subject to Sub having accepted Shares for payment under the Offer and the Minimum Condition (as defined in Exhibit A to the Merger Agreement) having been satisfied, which conditions may be waived by Sub in its sole discretion, and (ii) such obligation to sell is subject to the Minimum Condition having been satisfied or a Takeover Proposal (as defined in the Merger Agreement) having been made. (b) Subject to the satisfaction or waiver of the requirements of the second sentence in paragraph (a) above, (i) if a Takeover Proposal shall have been made and the Minimum Condition shall not have been satisfied, Shares shall be purchased within three business days of the delivery by Sub to the Shareholder of notice of Sub's intention to so purchase such Shareholder's Shares, which notice may be given by Sub at any time following the time such Takeover Proposal shall have been made and shall specify the place, time and date for the closing of the purchase by Sub pursuant to this paragraph (b), or (ii) if Sub shall have accepted Shares for payment in the Offer and the Minimum Condition shall have been satisfied, Shares shall be purchased under the Offer. 3 2. Representations and Warranties of the Shareholders. Each Shareholder hereby, severally and not jointly, represents and warrants to Parent and Sub as follows: (a) Authority. The Shareholder has all requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Shareholder. This Agreement has been duly executed and delivered by the Shareholder and constitutes a valid and binding obligation of the Shareholder enforceable against the Shareholder in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. Except for the expiration or termination of the waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and informational filings with the Securities and Exchange Commission, neither the execution, delivery or performance of this Agreement by the Shareholder nor the consummation by the Shareholder of the transactions contemplated hereby will (i) require any filing with, or permit, authorization, consent or approval of, any federal, state or local government or any court, tribunal, administrative agency or commission or other governmental or regulatory authority or agency, domestic, foreign or supranational, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Shareholder is a party or by which the Shareholder or any of the Shareholder's properties or assets, including the Shareholder's Shares, may be bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Shareholder or any of the 4 Shareholder's properties or assets, including the Shareholder's Shares. (b) The Shares. The Shareholder's Shares and the certificates representing such Shares are now and at all times during the term hereof will be held by such Shareholder, or by a nominee or custodian for the benefit of such Shareholder, and the Shareholder has good and marketable title to such Shares, free and clear of any pledges, claims, liens, charges, encumbrances, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances of any kind or nature whatsoever, except for any such encumbrances or proxies arising hereunder. The Shareholder owns of record or beneficially no shares of Company Common Stock other than such Shareholder's Shares and shares of Company Common Stock issuable upon the exercise of Company Stock Options. (c) Brokers. No broker, investment banker, financial advisor or other person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of such Shareholder. (d) Merger Agreement. The Shareholder understands and acknowledges that Parent is entering into, and causing Sub to enter into, the Merger Agreement in reliance upon the Shareholder's execution and delivery of this Agreement. 3. Representations and Warranties of Parent and Sub. Parent and Sub hereby jointly and severally represent and warrant to the Shareholders as follows: (a) Authority. Parent and Sub have the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Parent and Sub and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Sub. This Agreement has been duly executed and delivered by Parent and Sub and constitutes a valid and binding obligation of Parent and Sub enforceable in accordance with its 5 terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. (b) Securities Act. The Shares will be acquired in compliance with, and Sub will not offer to sell or otherwise dispose of any Shares so acquired by it in violation of any of, the Securities Exchange Act of 1934, as amended, or the registration requirements of the Securities Act of 1933, as amended. (c) Financing. Sub has, or will have at the time that any payment is required to be made to any Shareholder hereunder, the funds necessary to make such payment to such Shareholder. 4. Covenants of the Shareholders. Each Shareholder severally and not jointly agrees as follows: (a) The Shareholder shall not, except as contemplated by the terms of this Agreement, (i) sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option or other arrangement (including any profit sharing arrangement) or understanding with respect to the sale, transfer, pledge, assignment or other disposition of, the Shares to any person other than Sub or Sub's designee, (ii) enter into any voting arrangement, whether by proxy, voting agreement, voting trust, power-of- attorney or otherwise, with respect to the Shares or (iii) take any other action that would in any way restrict, limit or interfere with the performance of its obligations hereunder or the transactions contemplated hereby. (b) Until the Merger is consummated or the Merger Agreement is terminated, the Shareholder shall not, nor shall the Shareholder permit any investment banker, financial adviser, attorney, accountant or other representative or agent of the Shareholder to, directly or indirectly (i) solicit, initiate or encourage (including by way of furnishing information), or take any other action designed or reasonably likely to facilitate, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to 6 lead to, any Takeover Proposal or (ii) participate in any discussions or negotiations regarding any Takeover Proposal. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding sentence by an investment banker, financial advisor, attorney, accountant or other representative or agent of the Shareholder shall be deemed to be a violation of this Section 4(b) by the Shareholder. 5. Grant of Irrevocable Proxy; Appointment of Proxy. (a) Each Shareholder hereby irrevocably grants to, and appoints, Lee A. Dayton, Donald D. Westfall and Archie W. Colburn, and any other individual who shall hereafter be designated by Parent, and each of them, such Shareholder's proxy and attorney-in-fact (with full power of substitution), for and in the name, place and stead of such Shareholder, to vote such Shareholder's Shares (not including the Rights; such Shares not including the Rights, the "Proxy Shares"), or grant a consent or approval in respect of such Proxy Shares, at any meeting of shareholders of the Company or at any adjournment thereof or in any other circumstances upon which their vote, consent or other approval is sought, against (i) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantial assets, reorganization, joint venture, recapitalization, dissolution, liquidation or winding up of or by the Company and (ii) any amendment of the Company's Amended and Restated Articles of Incorporation or Bylaws, as amended and restated, or other proposal or transaction (including any consent solicitation to remove or elect any directors of the Company) involving the Company which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify, or result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under or with respect to, the Offer, the Merger, the Merger Agreement or any of the other transactions contemplated by the Merger Agreement. (b) Each Shareholder represents that any proxies heretofore given in respect of such Shareholder's Proxy Shares are not irrevocable, and that any such proxies are hereby revoked. (c) Each Shareholder hereby affirms that the irrevocable proxy set forth in this Section 5 is given in connection with the execution of the Merger Agreement, and 7 that such irrevocable proxy is given to secure the performance of the duties of such Shareholder under this Agreement. Such Shareholder hereby further affirms that the irrevocable proxy is coupled with an interest and may under no circumstances be revoked, subject to Section 8. Such Shareholder hereby ratifies and confirms all that such irrevocable proxy may lawfully do or cause to be done by virtue hereof. Such irrevocable proxy is executed and intended to be irrevocable in accordance with the provisions of Section 23B.07.220 of the Washington Business Corporation Act. 6. Further Assurances. Each Shareholder will, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further transfers, assignments, endorsements, consents and other instruments as Parent or Sub may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement and to vest the power to vote such Shareholder's Proxy Shares as contemplated by Section 5. Parent and Sub jointly and severally agree to use reasonable efforts to take, or cause to be taken, all actions necessary to comply promptly with all legal requirements that may be imposed with respect to the transactions contemplated by this Agreement (including legal requirements of the HSR Act). 7. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties without the prior written consent of the other parties, except that Sub may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect wholly owned subsidiary of Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Each Shareholder agrees that this Agreement and the obligations of such Shareholder hereunder shall attach to such Shareholder's Shares and shall be binding upon any person or entity to which legal or beneficial ownership of such Shares shall pass, whether by operation of law or otherwise, including without limitation such Shareholder's heirs, guardians, administrators or successors. 8. Termination. This Agreement, and all rights and obligations of the parties hereunder, shall terminate upon the earliest of (a) the date upon which the Merger 8 Agreement is terminated pursuant to Section 9.01(a), Section 9.01(b)(ii) or Section 9.01(f) thereof, (b) the date that is 10 business days after the later of (i) any other termination of the Merger Agreement and (ii) the date on which all waiting periods under the HSR Act applicable to the purchase of Shares pursuant to Section 1 shall have expired or been terminated and (c) the date that Parent or Sub shall have purchased and paid for the Shareholders' Shares pursuant to Section 1. 9. Stop Transfer. The Company agrees with, and covenants to, Parent and Sub that the Company shall not register the transfer of any certificate representing any Shareholder's Shares unless such transfer is made in accordance with the terms of this Agreement. 10. Company Stock Options. Each Shareholder that is a director of the Company severally and not jointly agrees that all Company Stock Options held by such Shareholder (other than Company Stock Options granted under the Edmark Corporation Stock Option Plan (Restated as of July 14, 1995)) which have not been exercised and which remain outstanding at the time Sub accepts Shares for payment in the Offer shall be canceled and be of no further force or effect, and such Shareholder shall have no rights after such time with respect to Company Stock Options which have not been exercised. 11. General Provisions. (a) Payments. All payments required to be made to any party to this Agreement shall be made by wire transfer of immediately available funds to an account designated by such party at least one trading day prior to such payment. (b) Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. (c) Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto. (d) Notice. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is 9 confirmed), sent by overnight courier (providing proof of delivery) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Parent, to International Business Machines Corporation Old Orchard Road Armonk, NY 10504 Attention: Mr. Lee A. Dayton Telecopy No: (914) 765-7803 with a copy to: Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, NY 10019-7475 Attention: Allen Finkelson, Esq. Telecopy No: (212) 474-3700 and (ii) if to a Shareholder, to the address set forth under the name of such Shareholder on Schedule A hereto with a copy to: Lane Powell Spears Lubersky LLP 1420 Fifth Avenue, Suite 4100 Seattle, WA 98052 Attention: Michael E. Morgan, Esq. Telecopy No: (206) 223-7107 (e) Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way 10 the meaning or interpretation of this Agreement. Wherever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". (f) Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. (g) Entire Agreement; No Third-Party Beneficiaries. This Agreement (including the documents and instruments referred to herein) (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. (h) Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York without regard to any applicable conflicts of law. (i) Publicity. Except as otherwise required by law, court process or the rules of a national securities exchange or the Nasdaq National Market or as contemplated or provided in the Merger Agreement, for so long as this Agreement is in effect, neither any Shareholder nor Parent shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement or the Merger Agreement without the consent of the other parties, which consent shall not be unreasonably withheld. 12. Shareholder Capacity. No person executing this Agreement who is or becomes during the term hereof a director or officer of the Company makes any agreement or understanding herein in his or her capacity as such director or officer. Each Shareholder signs solely in his or her capacity as the record holder and beneficial owner of, or the trustee of a trust whose beneficiaries are the beneficial owners of, such Shareholder's Shares and nothing 11 herein shall limit or affect any actions taken by a Shareholder in its capacity as an officer or director of the Company to the extent specifically permitted by the Merger Agreement. 13. Performance by Sub. Parent covenants and agrees for the benefit of the Shareholders that it shall cause Sub to perform in full each obligation of Sub set forth in this Agreement. 14. Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto waives any right to trial by jury with respect to any claim or proceeding related to or arising out of this Agreement or any of the transactions contemplated hereby. 12 IN WITNESS WHEREOF, each of Parent and Sub has caused this Agreement to be signed by its officer thereunto duly authorized and each Shareholder has signed this Agreement, all as of the date first written above. INTERNATIONAL BUSINESS MACHINES CORPORATION By /s/ Lee A. Dayton ------------------------------ Print Name: Lee A. Dayton Title: Vice President, Corporate Development & Real Estate INDIGO ACQUISITION CORP. By /s/ Lee A. Dayton ------------------------------ Print Name: Lee A. Dayton Title: President SHAREHOLDERS /s/ Frances M. Conley ---------------------------------- Frances M. Conley /s/ Allan Epstein ---------------------------------- Allan Epstein /s/ Harvey N. Gillis ---------------------------------- Harvey N. Gillis /s/ Allen D. Glenn, Ph.D. ---------------------------------- Allen D. Glenn, Ph.D. 13 /s/ Douglas J. Mackenzie /s/ Douglas J. Mackenzie - - ------------------------------ ------------------------------ Douglas J. Mackenzie and on behalf of Kleiner Perkins Caufield & Byers VI /s/ Timothy Mott ------------------------------ Timothy Mott /s/ Sally G. Narodick ------------------------------ Sally G. Narodick /s/ W. Hunter Simpson ------------------------------ W. Hunter Simpson /s/ Richard S. Thorp ------------------------------ Richard S. Thorp /s/ Donna G. Stanger ------------------------------ Donna G. Stanger /s/ Paul N. Bialek ------------------------------ Paul N. Bialek /s/ Daniel P. Vetras ------------------------------ Daniel P. Vetras /s/ John R. Moore ------------------------------ John R. Moore 14 ROANOKE INVESTORS' LIMITED PARTNERSHIP BY ROANOKE CAPITAL LTD., GENERAL PARTNER By /s/ Frances M. Conley ------------------------------ Frances M. Conley Its Principal ROANOKE CAPITAL LTD. By /s/ Frances M. Conley ------------------------------ Frances M. Conley Its Principal KLEINER PERKINS CAUFIELD & BYERS VI, L.P. BY KPCB VI ASSOCIATES, L.P., GENERAL PARTNER By /s/ Brook H. Byers ------------------------------ Brook H. Byers Its General Partner KPCB VI FOUNDERS FUND, L.P. BY KPCB VI ASSOCIATES, L.P., GENERAL PARTNER By /s/ Brook H. Byers ------------------------------ Brook H. Byers Its General Partner IRONWOOD CAPITAL By /s/ Timothy Mott ------------------------------ Timothy Mott Its General Partner 15 ACKNOWLEDGED AND AGREED TO AS TO SECTION 9: EDMARK CORPORATION By /s/ Donna G. Stanger -------------------- Donna G. Stanger Vice President - Product Development Schedule A Number of Shares Number of Underlying Name and Address Record and Options (Exercise Price of Shareholder Beneficial Shares below $15.50) Sally G. Narodick 9,721 225,000 4513 - 54th Avenue N.E. Seattle, WA 98105 Frances M. Conley 11,500 2,000 c/o Roanoke Capital, Ltd. 1111 Third Avenue, Suite 2220 Seattle, WA 98101 Timothy Mott - 0 - 2,000 c/o Ironwood Capital LLC 2241 Lundy Avenue San Jose, CA 95131 Douglas J. Mackenzie 1,832 2,000 c/o Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025 Allan Epstein - 0 - 9,500 Orthopedic Systems, Inc. 30031 Ahern Avenue Union City, CA 94587-1234 Allen D. Glenn 1,900 8,000 University of Washington College of Education Miller Hall, Room 222 P.O. Box 353600 Seattle, WA 98195 Harvey N. Gillis 11,250 5,750 13608 N.E. 36th Place Bellevue, WA 98005-1412 Number of Shares Number of Underlying Name and Address Record and Options (Exercise Price of Shareholder Beneficial Shares below $15.50) W. Hunter Simpson 21,360 17,000 2012 Faben Drive Mercer Island, WA 98040-2002 Richard S. Thorp 381,487 2,000 c/o Shannon Industries 18646 - 68th Avenue S. Kent, WA 98032 Donna G. Stanger 3,000 180,000 17121 N.E. 29th Place Bellevue, WA 98008 Daniel P. Vetras - 0 - 48,000 17226 S.E. 46th Street Issaquah, WA 98027 Paul N. Bialek - 0 - 78,500 19819 - 134th Place S.E. Renton, WA 98058 John R. Moore 2,499 45,750 30019 Second Place S.W. Federal Way, WA 98002 Ironwood Capital LLC 38,377 - 0 - 2241 Lundy Avenue San Jose, CA 95131 Roanoke Investors' Limited 396,000 - 0 - Partnership c/o Roanoke Capital, Ltd. 1111 Third Avenue, Suite 2220 Seattle, WA 98101 Kleiner Perkins Caufield & 387,566 - 0 - Byers VI, L.P. 2750 Sand Hill Road Menlo Park, CA 94025 KPCB VI Founders Fund, L.P. 59,454 - 0 - 2750 Sand Hill Road Menlo Park, CA 94025 2 -----END PRIVACY-ENHANCED MESSAGE-----