Educate Inc.

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Educate Inc.

1001 Fleet Street
Baltimore, Maryland 21202-4346
U.S.A.
Telephone: (410) 843-8000
Toll Free: (888) EDUCATE
Fax: (410) 843-8000
Web site: http://tutoring.sylvanlearning.com

Public Company
Incorporated: 1979 as Sylvan Learning Corporation
Employees: 9,486
Sales: $330.41 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: EEEE
NAIC: 611691 Exam Preparation and Tutoring; 61163 Language Schools; 611699 All Other Miscellaneous Schools and Instruction; 61171 Educational Support Services

Educate, Inc., is a leading provider of tutoring services for school-age children. Its predecessor, Sylvan Learning System, Inc., began with a small network of U.S.-based learning centers in 1979; in 2003 the K–12 operations were split off from the original business (renamed Laureate Education) to form Educate, Inc.

Educate has about 1,200 centers (mostly franchised) across North America and more than 900 Schülerhilfe locations in Europe. Another segment, Catapult Learning, provides tutoring services through school systems. Educate also owns the Hooked on Phonics brand of reading instruction materials.

ORIGINS

The first Sylvan Learning Center was opened in Portland, Oregon, in 1979 by W. Berry Fowler, who started a business tutoring students of all ages and skill levels. His business grew over the next six years to include franchises across the country, where students seeking to bolster their classroom abilities, from ages four and up, typically attended one-hour classes, twice weekly, in small classes of about three. In the mid-1980s, Fowler sold his private company to KinderCare Learning Centers, an Alabama-based chain of child-care facilities that was expanding the scope of its business. Under the KinderCare system, Sylvan languished, as diversifying beyond its means had dragged down KinderCare’s profits until it was forced to file for bankruptcy in 1992.

Sylvan was a bargain when it was purchased from KinderCare for $8 million the following year by the young team of Douglas Becker and Christopher Hoehn-Saric. Becker and Hoehn-Saric were friends at preparatory school and had both worked at a ComputerLand store in the Baltimore area; when they graduated, both decided to skip college in favor of heading straight into the business world. Together with a couple of partners they invented a small, computerized, medical records– storing device called Lifecard, which they were able to sell to Blue Cross and Blue Shield of Maryland, funding further businesses ventures. They next acquired KEE, Inc., an educational software and computer firm, where they gained expertise in software development and were able to land a deal with International Business Machines (IBM). Casting about for new opportunities, Becker and Hoehn-Saric were attracted to the Sylvan Learning Center concept, which at the time had 483 centers nationwide, and, through KEE, they purchased a 50 percent interest in the company from KinderCare.

By 1993, they had acquired the other half. At age 23, Becker became Sylvan’s chairman and CEO, while Hoehn-Saric, then 27, served as president (a title he held until 1999, when he became chairman and CEO of the new Sylvan Ventures Internet concern).

The two entrepreneurs were already millionaires by the time they took over Sylvan. According to a 1992 article in the Baltimore Business Journal, the team’s goal was “to make the word ‘Sylvan’ synonymous with educational services, just as IBM is with computers or World Book with encyclopedias.” At the time, a self-assured Becker told the journal, “There’s no recognized brand name in this area, and I see no reason why it shouldn’t be Sylvan.” Hoehn-Saric told Fortune in 1994 that “We thought education as an industry was going through pretty dramatic changes. We saw a parallel between education and what health care was like, that the private sector had a greater role to play.”

Ambitiously predicting 30 to 40 percent growth for the company each year for the next three to five years, Decker and Hoehn-Saric set about raising Sylvan’s profile, running advertisements in People, Newsweek, and Good Housekeeping that touted Sylvan’s track record in helping students improve their schoolwork. Actress Sandy Duncan was featured in a radio ad campaign, and Marvel designed a marketing comic book for the company.

From the onset, Decker and Hoehn-Saric recognized a need for greater technology in their learning centers. The company installed computers and testing software that helped the centers pinpoint areas in which a student could use further tutoring. Moreover, the company began installing entire computer labs at Sylvan centers and offering adult computer training courses.

At the same time, Sylvan won a contract from the nonprofit Educational Testing Service that allowed for students to take a computerized version of the Graduate Record Examination (GRE) at Sylvan Centers. “Before, we were just a tutoring firm. Now, we’re viewed more as partners by public educators,” Becker told U.S. News & World Report.

PRIVATE COMPANY, PUBLIC EDUCATION

To further Sylvan’s push into public education, and effect a spirit of cooperation between Sylvan and public schools, the company initiated a program under which Sylvan centers or teachers were established in a few Baltimore public schools. Decker believed in his company’s ability to help students learn more and faster, and he also believed that his company could provide a service to the public schools for less than they were already spending on remediation programs. By 1994, Sylvan was providing programs and teachers for disadvantaged children in several school systems across the country: ten in Baltimore, four in the District of Columbia, and more in Pasadena, Texas. By 1995, the company was serving more than 4,000 students in 38 schools in the three cities and had also moved into St. Paul, Minnesota, where it tutored about 750 students. “Because Sylvan is not trying to take over public schools outright, teachers unions and other privatization critics have been more receptive to its role,” a 1995 Education Week article stated. The in-school tutoring arm of Sylvan had begun just as the company went public in December 1993 at $11 a share.

Sylvan effected successful results for stockholders. In the third quarter of 1994, the first year after it went public, the company posted a net income of $1.42 million, or 15 cents a share on revenue of $12.1 million, record high earnings for the company and more than double 1993’s figures.

In 1995, Sylvan acquired Remedial Education and Diagnostic Services, Inc., a Philadelphia-based company providing tutoring to parochial schools, 233 in all, in Pennsylvania, Florida, Ohio, Delaware, Maryland, New Jersey, and the District of Columbia.

COMPANY PERSPECTIVES

It’s easy to see why more parents turn to Sylvan than to any other tutor. For more than 25 years, Sylvan has been helping millions of students learn to read, write, calculate, and organize themselves to be successful in school. But more importantly, Sylvan has helped these children develop a love of learning and confidence for life. Sylvan is more than just a tutor; we provide the individual attention, personalized lesson plans and positive reinforcement students need to achieve their goals and get on the road to success.

At the same time, Sylvan’s public school tutoring program had expanded to several Maryland counties, as well as to Chicago, Newark, and Broward County, Florida. In all, Sylvan’s School Services programs were serving 7,900 students in 58 public schools.

Another new venue for Sylvan services was found in providing educational services to employees in large workplaces. Through a wholly owned subsidiary called the Pace Group, and using a proprietary program called Sylvan At-Work, Sylvan began serving such corporate clients as Martin Marietta and Texas Instruments.

Sylvan’s role as a testing service was enhanced when the company inked a deal with Novell, Inc., at the time one of the world’s largest software companies. Novell agreed to have Sylvan conduct certification testing of professionals users of Novell’s computer programs. However, the testing side of Sylvan’s business also met with some challenges during this time. Competitor Kaplan Educational Service sent 20 of its employees to take the GRE at a Sylvan center. The undercover examinees discovered a way to compromise the security of the computer version of the GRE. Educational Testing Service suspended computer administration of test, and Sylvan’s stock dropped from $19.75 to $17.50 after the news.

Nevertheless, Sylvan forged ahead with its testing services and by 1995 Sylvan had entered into a $140 million deal to acquire Minnesota-based Drake Prometric LP, a company with nearly the same amount of annual sales, $42 million, as Sylvan. With that acquisition, Sylvan secured its niche in providing computerized testing services to government agencies, technology companies, and scientific institutions. It renamed the company Sylvan Prometric.

By 1996, Sylvan had outgrown its Columbia, Maryland, headquarters (midway between Washington, D.C., and Baltimore) and had moved into a new facility in downtown Baltimore, erected on 11 acres of land and costing an estimated $350 million. Also during this time, the company became something of a media darling with its founders appearing in stories on all three major network newscasts, as well as on the NBC program television Nightline. Sylvan’s successful operations as a franchiser also garnered attention, and the company was named among the top ten on the Franchise Times 1996 list of Top 200 Franchises, a list that included McDonald’s and General Nutrition Centers. Moreover, Becker and Hoehn-Saric were named Maryland Entrepreneurs of the Year for 1996 by accounting firm Ernst and Young. In a rather dubious endorsement from Theodore Kaczynski (an American anarchist responsible for several mail bombings before his capture in the 1990s), Sylvan was referred to in the 35,000-word manifesto of the so-called Unabomber, as having had “great success” in controlling the minds of children. “I guess this means we’ve become a household name,” Becker quipped to the Baltimore Sun.

Sylvan continued to launch several new ventures. The National Association of Securities Dealers (NASD) hired the company to provide computerized testing for the country’s 500,000 registered brokers. Ten months later, however, Sylvan was sued by the American College Testing Service over charges that Sylvan had illegally obtained the NASD deal. Sylvan prevailed in court, and also that year won a $10 million contract to provide computer-based testing for National Council of Architectural Registration Boards.

KEY DATES

1979:: Sylvan is founded by W. Berry Fowler.
1985:: Fowler sells Sylvan Learning to KinderCare Learning Systems.
1990:: KinderCare enters into a joint venture with Douglas Becker and R. Christopher Hoehn-Saric in which the two acquire a 50 percent share of the company.
1991:: Sylvan enters into a deal making the company the only commercial testing partner for Educational Testing Service.
1993:: Becker and Hoehn-Saric buy out the other half of Sylvan and take the company public.
2000:: Sylvan sells its Prometric testing services and refocuses on teaching rather than testing.
2003:: Sylvan Learning Systems is renamed Laureate Education, Inc.; company sells K–12 assets to newly formed Educate, Inc.
2004:: Educate, Inc., goes public.
2005:: Educate acquires parent of the Hooked on Phonics brand.

GOING GLOBAL

A joint venture with MCI Communications Corporation (later renamed MCI WorldCom) helped Sylvan develop an international distribution network of adult professional education services. The company, called Caliber Learning Network, Inc., opened about 50 centers in 1997. International expansion was also pursued through the 1996 acquisition of Wall Street Institute, a provider of English-language instruction in Europe and Latin America. Sylvan was thus able to realize its global goals while also making inroads into the adult education marketplace. Of the 170 Wall Street Institute centers, nearly half were in Spain. Sylvan’s computerized testing services went abroad during this time as well, to China, where testing centers were developed throughout the vast country. Michael Moe, an analyst who followed Sylvan for Montgomery Securities in San Francisco, called the move a “significant expansion of Sylvan’s testing franchise,” and observed that Sylvan was rapidly being recognized as a brand name in education internationally.

In 1997, contracts with public school districts were realized in Charleston, South Carolina; Oklahoma City; New Orleans; and Richmond, Virginia. That year, Sylvan also acquired Canter & Associates, a provider of professional development and graduate degree programs for educators with an enrollment of 4,500 students in a master’s level distance learning program. At this time, there were nearly 700 Sylvan Learning Centers throughout the United States, and the company also provided tutoring services to 38,000 students in 625 private and parochial schools. Sylvan Prometric had become the largest network of computer-based testing centers in the world, with about 2,000 testing sites servicing 105 countries. The company launched a new ad campaign with the slogan “Success is learned.” “I’d like to make Baltimore almost a Silicon Valley for corporations in the education business,” Becker told the Baltimore Sun.

Sylvan’s hectic pace of activity growth had a price. In the midst of rapid expansion and product development, some problems in customer service had developed. When Sylvan rolled out a computerized version of the GMAT test for students applying to medical schools, the Manhattan site ran short on computer terminals, leaving some test-takers stranded. NASD complained about software glitches, and competition from the Kaplan Educational Centers, a division of the Washington Post Company, began to heat up. “Sylvan hasn’t faced a lot of competition from well-funded competitors,” Kaplan President and CEO Jonathan Grayer told Business Week.

If challenges were surfacing, they were not necessarily affecting profits, which soared from about $5 million in 1994 to $28 million in 1997. Stock was at a high of $45, and the accolades kept coming, as Becker was named 1998 Businessperson of the Year by the Baltimore Business Journal.

In 1998, the company acquired Schülerhilfe, a tutoring business with more than 900 centers across Germany, Austria, and Italy. Sylvan pushed further into Europe in 1999 with plans for a network of overseas colleges. For $29 million, Sylvan acquired a controlling interest in University Europea of Madrid, a private, forprofit university in Spain with an enrollment of over 7,000. Sylvan planned to expand its university network in Europe and Latin America in 2000. “There is an enormous opportunity for university-level programs in international markets with a rising middle class,” said Raph Appadoo, president and CEO of Sylvan International Universities, adding “People want their children to succeed. They want degree programs at the university level. But in many international markets, the slots just aren’t available in public universities. That’s where private universities come in.”

While Sylvan was growing internationally, problems continued to plague its testing services, and the company decided to jettison that part of its holdings. In 2000, Sylvan finalized the sale of Prometric to the Thomson Corporation, a Canadian firm, for about $775 million. “It required management capabilities beyond what we were able to bring to the table,” Becker explained in a Baltimore Sun interview. He explained, “We could take that same time and those same resources and use them to grow 10 companies. The opportunity to transform the company back into an entrepreneurial vehicle makes me feel much more comfortable.”

As an “entrepreneurial vehicle” Sylvan lost no time in launching a $500 million Internet venture capital unit designed to invest in and “incubate” companies that bring Internet technology solutions to the education and training marketplace. “We are a big believer in the bricks and clicks economy,” Becker told the Baltimore Sun, signaling the company’s move into the realm of the Internet.

Apollo Advisors, which had invested $200 million in both Sylvan and the new Internet ventures, welcomed Sylvan’s move. “There are just dozens of educational Internet companies,” said Larry Berg, a partner in the New York-based Apollo Advisors, “But there are no blockbusters yet. What I love about Sylvan is that they are very targeted. They have one of the best brands in the business and an entrepreneurial culture.”

In 2001 Sylvan created a new division to manage its postsecondary and continuing education offerings. These included the Canter & Associates distance education unit, online graduate school Walden University, certification specialist Sylvan Teachers Institute, and newly acquired Online.Learning.net.

2003 SPLIT-UP

After losing $96 million in 2002, Sylvan Learning Systems posted a $46 million profit for 2003 as revenues rose from $336 million to $476 million. During the year, the company’s K–12 assets, including the Sylvan Learning Center brand and the ESylvan online tutoring business, were sold to Educate, Inc., for about $300 million. Sylvan Learning Systems was renamed Laureate Education, Inc. the next year. Led by Sylvan cofounder Douglas L. Becker, it retained the higher education business.

Educate was a holding company newly formed by Sylvan executives including Christopher Hoehn-Saric and the New York buyout firm Apollo Advisors, L.P. Both Laureate Education and Educate remained headquartered in the same building in Baltimore’s Inner Harbor district.

The reason for the restructuring, according to Christopher Hoehn-Saric, was to increase the company’s growth rate, which had stagnated at about 12 percent a year. The businesses that formed Educate together accounted for $220 million in annual sales in 2002, or about a third of their former parent company’s revenues.

Educate, Inc., went public on the NASDAQ in September 2004. The initial public offering raised $165 million, much of it to repay debt Apollo Advisors had taken on in buying the business from Sylvan Learning Systems.

Educate’s service to K–12 schools was renamed Catapult Learning in 2004. This area was growing thanks to legislation such as the No Child Left Behind Act, which provided funds for tutoring services at underperforming schools. Educate was aiming to make its services to schools an entirely Internet-based business and sold its Education Station LLC subsidiary to Portland’s Knowledge Learning Corporation (owner of KinderCare centers) for about $6 million in 2006.

In 2005 Educate, Inc., acquired Gateway Learning Corporation in a deal worth at least $8 million. Based in Santa Ana, California, Gateway was best known for the Hooked on Phonics reading courses pitched via the radio and TV infomercials. It had also set up 600 reading centers at child-care facilities. Gateway had about four dozen employees and annual sales around $50 million.

Educate soon moved to give Hooked on Phonics a presence in retail stores. It had also, in collaboration with educational toy manufacturer LeapFrog Enterprises Inc., begun a pilot program to open learning centers inside big-box stores such as Wal-Mart. The services offered here were geared toward a mass market and were less costly than at traditional Sylvan sites.

Revenues were up to $330 million by 2005. Educate had a total of 9,486 employees: in North America there were 2,302 working full time and 6,451 part-timers. An additional 733 people were employed at Schülerhilfe in Europe, most of them on a part-time basis.

According to Hoehn-Saric, Sylvan Learning Centers commanded a 13 percent share of the $4 billion tutoring market, making it the largest competitor by far. The company was adding programs for preschoolers at all of its tutoring centers. It was also introducing online sessions with live teachers conducted over the Internet.

In September 2006 Educate’s management proposed taking the company private again in a $344 million buyout offer. In the two years since the holding company had gone public, its share price had slumped as profits fell in the face of increased competition. Laureate Education was also undergoing a management buyout.

Barbara Ruben
Updated, Frederick C. Ingram

PRINCIPAL SUBSIDIARIES

Catapult Learning LLC; Catapult Online LLC; Dorana Einundvierzigste Verwal tungsgesellschaft mbH (Germany); Educate Group LLC; Educate Operating Company LLC; Education Station LLC; eSylvan, Inc.; HOP LLC; L&S Education, Inc.; MLS Education, Inc.; Progressus Therapy, Inc.; Schuelerhilfe Promotion GmbH (Germany); Schulerhilfe Gesellschaft fur Nachhilfeunterricht GmbH & Co. KG (Germany); SLC California LLC; Sylvan Canada, Inc.; Sylvan Germany GmbH; Sylvan Germany, Inc.; Sylvan Learning Canada, Ltd.; Sylvan Learning Centers, LLC; Sylvan Learning, Inc.; ZGS Zentrale Gelsenkirchener Schuelerhilfe GmbH (Germany).