Edmark Corporation - Company Profile, Information, Business Description, History, Background Information on Edmark Corporation

6727 185th Avenue Northeast
Redmond, Washington 98052

Company Perspectives:

Edmark's goal is to develop products that encourage children to discover and believe in the power of their own minds.

History of Edmark Corporation

Edmark Corporation is a developer and publisher of educational software for the consumer and education markets. Engaged in the development of multimedia educational software since 1992, Edmark has garnered over 340 important industry design awards heralding the company's innovative approach and its software's educational value. Edmark's software products, targeting students in grades K-12, are sold to a customer base largely made up of software distributors and retailers and educational institutions. Along with more than 50 software titles, the firm manufactures hardware and software products for children with special needs, as well as products that restrict access to certain web sites. Edmark's products are found in 46,000 schools throughout the United States.

Origins and Expansion

Edmark was founded in 1970 as a developer and publisher of school print materials and established its headquarters in Redmond, Washington. During its first 15 years, Edmark focused its operations on print materials for the special education market, and became well regarded within its niche despite its slow sales growth, which did not break the $1 million mark until 1985.

During the latter half of the 1980s, Edmark made several moves to diversify its product line and enhance its revenues. In 1985, the company began developing and publishing Apple II software programs for special education students, and soon afterwards the company entered the preschool market. In 1986, with the company expanding its product range, Edmark went public. As part of the company's expansion into computer-based educational materials, Edmark's chief executive, Tom Korten, orchestrated the acquisition of the TouchWindow product line in 1988. Often referred to as the 'Touchscreen,' the product sat atop a computer monitor and for all practical purposes replaced a computer's keyboard, making it much easier for students who could not use the keyboard to use a computer. Having acquired the TouchWindow from the Personal Touch Corporation for $126,500, Edmark expanded on its new product by developing TouchWindow software for Apple computers.

In 1988, Edmark hired Sally G. Narodick to serve as a consultant and help develop a new strategic plan for the company. Narodick, who had started her own consulting firm a year earlier after relinquishing a senior vice-president's post at Seattle's largest bank, Seafirst, held advanced degrees in both business and education. She suggested that Edmark become an educational technology business that made learning fun and embark on a gradual entrance into the consumer software market. She based her recommendation on three trends: a rising birth rate (due to baby boomers having babies), increasing numbers of home computers, and a slow-growing special education market in which sales to schools would not support substantial company growth.

With multimedia software as its targeted product of the future, between 1989 and 1991, Edmark made several moves to finance its entrance into the preschool and early childhood consumer and education markets and to build a software development team that could produce quality products. At Narodick's suggestion, Edmark restructured its corporate board to bring on Seattle investor W. Hunter Simpson, and in early 1989, both Simpson and Narodick became directors. After serving as a consultant for Edmark for less than two years and a director for six months, Narodick was named chairman and chief executive of Edmark in October 1989, signaling the beginning of the company's transformation from a special education print materials publisher to a multimedia educational software publisher.

A New Strategic Plan: Early 1990s

Narodick took over the helm of Edmark at a time when its revenues were $2.5 million, and the company was principally a publisher of special education workbooks for schools. In 1990, Edmark began expanding its management and development teams in order to initiate a new strategic plan centered around multimedia software. To that end, in October 1991, Narodick hired a Minnesota educator and award-winning software developer, Donna Stanger, as vice-president of product development. Stanger brought to Edmark 20 years of experience as a teacher and more than a dozen years as a developer of computer-based curriculum materials and educational software. She placed Edmark in the fairly rare position as a software company with two females in lead executive roles. The Minnesota teacher insisted that she be accompanied by a team of three younger male programmers--with whom she had worked since those programmers were in high school. (Stanger referred to herself as the team's 'den mother.') Although Edmark's balance sheet included $1.9 million in recently generated equity capital, only a year earlier the company had been forced to reduce staff and salaries because of a cash shortage. Nonetheless, Narodick took the financial risk and hired the four-person team, although they had never developed a consumer product before, and their salaries increased Edmark's 25-person payroll by 20 percent.

For the 1992 fiscal year (ending June 30, 1992, and thus including the previous 1991 holiday season), Edmark earned $364,000 on sales of $6 million, compared to earnings of $265,000 a year earlier on sales of $4.3 million. As Edmark was closing its books on its 1992 fiscal year, the company debuted two consumer demonstration products: Millie's Math House, a preschool numbers and math program targeting a market niche with little competition, and KidsDesk, a desktop utility program that safeguarded the files of parents (making them feel more secure about investing in children's software) and allowed children to open their own setup folder and files.

In 1992, Edmark secured distribution or sales arrangements for its new products with Egghead Software, Ingram Micro (the industry's largest distributor), and a handful of other computer software retailers and catalogs. In October 1992, Edmark released KidsDesk and Millie's Math House, the two of which, combined, received 29 important industry design awards during the next three years and an initial highly favorable review from the Wall Street Journal prior to the 1992 holiday season.

For the 1993 fiscal year ending in June of that year, Edmark earned $125,000 on sales of $8.7 million. To enhance sales and distribution efforts, in 1993 Narodick hired Daniel Vetras as vice-president of consumer sales and Paul Bialek as vice-president of finance and administration. Vetras was a native of the same Massachusetts town as Narodick and a sales veteran who had worked for both Digital Equipment and Lotus Development Corporation. Bialek's experience included work as a senior audit manager for the international accounting firm KPMG Peat Marwick, which served as Edmark's independent auditors.

For the 1993 holiday season, Edmark doubled its software product line with the release of Bailey's Book House, a reading skills program, and Thinkin' Things Collection 1, which introduced a critical thinking product line. The company also released an updated version of KidsDesk. However, Edmark entered the 1993 holiday season with several factors working against it: a limited marketing budget, only four software products appearing in fewer than than 2,000 outlets, and an insufficient sales tracking system that resulted in sold-out shelves in some retail outlets and products stuck in storerooms in other outlets.

Expanding Distribution Channels and Brand Recognition: 1994--95

Edmark entered 1994 seeking additional financing to expand distribution channels and gain a presence in superstores and mass-merchandising outlets, as well as to fund stepped-up product development. As a result, in February 1994 Edmark--for the third consecutive year--returned to investors for capital. Narodick courted Doug Mackenzie, a partner in the venture capital firm Kleiner Perkins Caufield & Byres, who agreed to lead an equity investment of $5.5 million, paying the going market price of $10 a share. (Mackenzie later joined the company's board.) Despite the increased funding, the company braced for an annual loss stemming from increased development and marketing expenses, and it lost $1.9 million on sales of $11.6 million in the 1994 fiscal year.

For the 1994 holiday season Edmark doubled its product line for the second straight year. The company's four new releases included Sammy's Science House, a program designed to build fundamental science skills and the third program in the company's early-learning family, and Thinkin' Things Collection 2. Edmark also expanded its age market through the debut of a new family of interactive story-writing programs for 6-to-12-year-olds, the Imagination Express Series. That year the company released the first two titles in the series, Destination: Neighborhood and Destination: Castle. Destination: Neighborhood featured materials for children to create interactive stores, poems, and journals describing their real and make-believe experiences; Destination: Castle provided children with a medieval kingdom setting for the same.

To enhance name recognition of Edmark products, in mid-1994 Narodick hired Mark McNeely--a former chairman of a leading Seattle advertising agency that was known for building brand names&mdashø lead an expanded marketing program. Entering the 1994 holiday season, Edmark's distribution channel had more than doubled, having expanded to 5,000 outlets that included book stores, toy stores, office superstores, and mass-merchandisers, such as Wal-Mart and the Price Club. Edmark also added a much-coveted distributor, CompUSA, the computer superstore chain, which signed a purchase order for Edmark's entire line and agreed to fund jointly marketing programs and Edmark's presence at industry expositions.

In 1994, Edmark also took steps to improve its product visibility in stores and to address stock outages. A new tracking system was initiated, and Vetras hired part-time field merchandisers, mothers with young children, in ten major metropolitan areas to help with in-store demonstrations. Edmark also initiated a holiday promotion in which KidsDesk was packaged as a free bonus with all other Edmark products. The package contained registration cards for a $10,000 savings bond contest that expanded the company's customer mailing list to more than 150,000 user names.

In December 1994, Edmark entered into a strategic alliance with Harcourt Brace School Publishers, a division of Harcourt Brace & Company. The publisher of educational materials agreed to collaborate on the development of educational software and to develop new lines of multimedia software, including products based in part on technology used in Edmark's Imagination Express software. Harcourt agreed to pay Edmark a one-time $1 million licensing fee as well annually co-fund research and development costs, beginning with a $347,500 contribution in 1994.

During the 1995 fiscal year Edmark doubled its work force and its number of software titles (after more than doubling its development funding to $4.6 million, up from $2.1 million in 1994 and $450,000 in 1993), in addition to nearly doubling its distribution outlets to 9,000. These efforts translated into sales that also nearly doubled, rising 95 percent to $22.7 million and generating record earnings of $2 million. The largest jump in Edmark's revenues came from multimedia software, with sales to the consumer market growing from $3.3 million in 1994 (and $1.5 million in 1993) to $10.9 million in 1995. Slightly more than half of all consumer sales were of CD-ROM products, with the majority of those released just prior to the 1994 holiday season. Sales of multimedia software to the education market also rose dramatically, from $934,000 in 1994 (and $130,000 in 1993) to $3.4 million in 1995. Sales of special education products for 1995 were $7.1 million, a slight decrease from the previous year and nearly the same as 1993 sales.

Edmark attributed much of its increasing success to a healthy market for its products and that the company was well positioned to capitalize on a growing industry. In 1995, Edmark qualified for listing on the NASDAQ National Market, and between mid-1994 and mid-1995 the company's stock value mushroomed 800 percent from a first quarter 1994 low of $6.50 to more than $50 a year later. The value in Edmark's stock signaled Wall Street's increasing interest in companies producing CD-ROM software, particularly children's educational programs. Edmark's success did not go unnoticed in business publications; between May and August 1995 the small but growing company was the subject of feature articles in Business Week, Inc., and the Wall Street Journal. With its stock value rising, in August 1995 Edmark split its common stock three-for-two and completed a secondary public offering of 1.1 million shares (639,000 of which were sold by the company), generating $22.5 million in proceeds. Following the offering Edmark's management and board members owned approximately 36 percent of the company. The proceeds from the public offering, along with a $2 million line of available credit, were expected to be sufficient to meet the company's financial outlays through fiscal 1996.

For the 1995 holiday season, Edmark released new versions of most of its multimedia titles for Microsoft Corporation's Windows 95 operating system. Edmark also planned to have products from its collaboration with Harcourt released before the close of 1995 and a total of 13 titles on retail shelves. New offerings anticipated to make their first holiday season appearance included Trudy's Time & Place House, a new early learning series program to build time-telling, mapping, and direction skills; Thinkin' Things Collection 3, the third in Edmark's critical thinking skills series of programs; and two new interactive story-making programs offering new landscapes, Destination: Rain Forest and Destination: Ocean.

As it moved through the 1996 fiscal year, Edmark management hoped to add 5,000 new outlets for its software (including more book stores, mass-merchandisers, and toy stores) and to expand its work force by about one-third. With only 3 percent of the $600 million educational software market in 1995, the company recognized it had room to grow, and analysts were suggesting sales could reach $40 million for the 1996 fiscal year.

The market for educational software also held potential for significant growth, with home computer ownership expected to continue to increase for the foreseeable future. Edmark anticipated that its partnership with Harcourt would generate an expanded share of the educational software market, which was growing increasingly competitive with such companies as Microsoft and Disney moving into the field. That field's landscape was also being modified in the mid-1990s with new exclusive distribution agreements that were placing distribution firms in a position to dictate what chains would pay for products and how products would be displayed, with larger players able to exert more leverage than smaller ones.

As it entered 1996, Edmark maintained its goal of publishing high-quality educational products and was banking on distinguishing itself from larger competitors through its award-winning products. Given that repeat business in the educational software market required upgrading software and expanding product lines, Edmark continued its strategy of introducing consumers to its families of software at a young age in hopes that customers would progress from one title and one product series to the next.

Edmark Is Acquired by IBM: 1996

In the mid-1990s, however, a shakeout in the growing industry appeared inevitable, and Edmark recognized it was increasingly being viewed as an attractive acquisition target. Although entertainment and education software titles accounted for a large portion of software sold at retailers, the average price had fallen from $60 in 1995, to $40 in 1996. There was also an increasing number of titles competing for shelf space, and the cost related to product development and marketing was rising dramatically. By the fall of 1996, Edmark stock had fallen to $12 per share as competition increased throughout the industry. Its sales were unremarkable, and it had recorded losses in the previous two quarters. Its competitors were being acquired left and right by larger firms, leaving the smaller Edmark in an unfavorable position when competing for shelf space. In September of that year, Narodick left the firm suddenly due to stress-related health problems. Stanger was elected to act as interim CEO.

Edmark, like many others in the industry, was left with few options. In December 1996, the firm agreed to be acquired by IBM Corporation for $80 million. Stanger stated in a December 1996 PC Week article that, 'we had to decide if we were going to stay an independent company and do acquisitions ourselves to grow, or if we were going to be a part of a larger entity. Since our stock was declining steadily, unfortunately, we decided to look for a partner.' IBM, looking to break into the consumer market, planned to market Edmark's educational software products to PC buyers.

Under the leadership of IBM, Edmark continued to see falling sales in the retail sector, but sales to educational institutions increased. Although the education software market grew by 50 percent in 1994, its growth was slowing to an average rate of around 4 percent by 1997. In response, the firm focused heavily on customer research, began to repackage its product line, and forged ahead in creating a new brand image with hopes that it would secure new customers.

In 1998, Edmark's parent decided to exit both the consumer and publishing business and focus on selling computers to educational institutions. IBM targeted the marketing of Edmark's products to K-12 schools, and its sales to schools increased to $20 million by 1999.

Edmark Is Sold to Riverdeep: 2000

Edmark's relationship with IBM lasted only four years. As part of the IBM's exit from the consumer business, it decided to sell Edmark to Riverdeep Group plc in 2000 for $85 million. As part of the deal, IBM took a 14 percent stake in Riverdeep, a growing curriculum-based Internet and CD-ROM software company. According to a Puget Sound Business Journal article, 'the deal boosts Riverdeep's sales considerably and gives the company many products aimed at younger children.'

After the deal was completed, Riverdeep began to reorganize Edmark's product offerings, planning to compile them into a comprehensive courseware package available on the Internet by subscription. Edmark's product line included critical thinking, early learning, language arts, math, science, social studies, and desktop security categories. Under new ownership once again, Edmark was poised to remain a player in the ever-changing software industry.

Principal Competitors: Renaissance Learning Inc.; Scholastic Corporation; Vivendi Universal Publishing.


Additional Details

Further Reference

Baker, M. Sharon, 'Edmark Has High Hopes for New Holiday-Season Offerings,' Puget Sound Business Journal, November 4, 1994, p. 6.------, 'Edmark Pressured as CEO Quits,' Puget Sound Business Journal, September 13, 1996, p. 1.------, 'Edmark Ready for Reawakening,' Puget Sound Business Journal, August 29, 1997, p. 1.------, 'IBM Sells Edmark to Irish Firm for $85 M,' Puget Sound Business Journal, August 4, 2000, p. 4.Baker, Molly, 'Edmark Charms the Kids and the Street,' Wall Street Journal, May 30, 1995, pp. C1, C7.Browder, Seanna, 'The Disappearing CD-ROM Players,' Business Week, December 16, 1996.Erickson, Jim, 'Edmark's Earnings Up but Stock Goes Down,' Seattle Post-Intelligencer, October 20, 1995, pp. D1, D5.Geballe, Bob, 'Edmark: Software Killer with a Woman's Touch,' Seattle Weekly, October 18, 1995, pp. 23--27.Guglielmo, Carrie, 'Romping Room,' PC Week, December 23, 1996, p. 1.'IBM Buys Troubled Edmark,' Software Industry Report, November 18, 1996, p. 3.Murphy, Anne, 'The Link,' Inc., June 1995, pp. 58--66.Yang, Dori Jones, 'The Pied Piper of Kids' Software,' Business Week, August 7, 1995. pp. 70--71.

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