Educate losses expand in 4Q

Poor product sales, tutoring woes lead to $11 million gap

February 27, 2007|By Hanah Cho | Hanah Cho,Sun reporter

Poor product sales, including that of its Hooked on Phonics brand, and more struggles at its Sylvan tutoring centers widened Educate Inc.'s loss during the last three months of 2006, executives reported yesterday, highlighting the challenges facing the Baltimore company as it works to go private in a management-led buyout.

Educate reported an $11 million loss in the fourth quarter. It came a month after executives announced that it had agreed to be acquired by management, including Chief Executive Officer R. Christopher Hoehn-Saric and other investors. That group has offered $8 per share for the company. Including assumed debt, Educate's transaction is worth $535 million.

If the deal is approved by shareholders, Educate would become a private company, more than two years after going public. Analysts say the buyout would allow the company to turn around its business away from the critical eye of Wall Street. But the company's financial struggles remain: Educate said yesterday that it posted an $11.9 million net loss for all of 2006.

Shares of Educate opened and closed yesterday at $7.84 on Nasdaq.

The disappointing earnings mark the company's second consecutive shortfall, after an $8.5 million loss in the third quarter. They also reflect struggles that have beset corporate-owned Sylvan tutoring centers for the past year, including lower student enrollment, a decline in customer inquiries and students enrolling in programs for a shorter period of time.

The company said the latest results also reflected higher costs for expanding its product business, including selling the once-infomercial brand Hooked on Phonics directly to consumers. Company executives see that business as an area of growth, but distribution and production delays in the fourth quarter hampered sales of the educational learning materials, including books and software.

Fourth-quarter loss was $11 million, or 26 cents a share, in the three months ending Dec. 31, compared with a shortfall of $4.7 million, or 11 cents a share, in the fourth quarter of last year.

Revenue rose nearly 2 percent to $77.9 million, up from $76.6 million a year ago, primarily due to expansion of Educate's school-based supplemental education and therapy businesses, and European operations.

But sales at its corporate-owned Sylvan centers dropped 7 percent to $26.8 million in the quarter, from $28.9 million in the year-ago period. The company attributed the decline to weaker marketing and shorter student tenures.

In the past year, Educate has been struggling to integrate dozens of franchised tutoring centers bought by the company, resulting in staff turnover and lower performance. The company has 1,134 franchise and corporate centers.

The company saw revenue decline in its products business, dropping 22 percent to $3.8 million in the fourth-quarter from $4.8 million in the comparable period last year.

The products business was hurt by higher costs, which more than doubled to $10.8 million in the quarter. Those expenses included increased costs in developing new products and expanding production and distribution infrastructures.

For the full year, product sales declined 23 percent to $18.2 million, from $23.6 million the previous year.

Company executives did not hold a conference call with analysts, and Chief Financial Officer Kevin Shaffer could not be reached for comment yesterday.

In the past two years, Educate has undergone a series of changes to focus more on consumer services and products.

Educate was spun off in 2003 from Sylvan Learning Systems Inc., which renamed itself Laureate Education and focuses on for-profit universities. Baltimore-based Laureate announced last month that it also agreed to be acquired in a management-led buyout in a deal worth $3.8 billion.

Educate bought Hooked on Phonics in 2005 and began selling products at national retailers.

Last year, it shed its unprofitable business that caters to troubled schools trying to improve student performance. The company also entered into an agreement to co-produce the PBS children's series Reading Rainbow.

Educate and its production partner, Western New York Public Broadcasting Association (WNED) in Buffalo, are in pre-production for new episodes. But the show will not feature actor LeVar Burton, who is leaving after serving as the series host for more than 20 years.

The company's full-year loss of $11.9 million, or 28 cents per share, compared with a profit of $15.4 million, or 35 cents per share, in 2005.

Revenue increased 7 percent to $354.7 million in 2006, from $330.4 million in 2005.

hanah.cho@baltsun.com

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