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Sylvan sets education Web fund; $500 million incubator expected to hatch profits; 'It has a very good chance'; Lackluster results are upstaged by news of subsidiary; E-commerce


Sylvan Learning Systems Inc., the Baltimore teaching and training company that has been struggling, said yesterday that it's creating a $500 million venture fund to "incubate" Internet-related education businesses.

The company also announced a flurry of management changes related to the new endeavor and, separately, detailed financial results for the fourth-quarter and full year of 1999, which executives conceded were decidedly lackluster.

But it was the news of the half-billion-dollar venture fund that clearly carried the day with investors. Sylvan Learning's shares increased $2.7969, or 22 percent, to close at $15.7344 in heavy trading.

"It's a very exciting time," said Douglas Becker, who assumes the role of chairman and sole chief executive officer of Sylvan Learning.

Sylvan's new subsidiary seeks to apply to the education market a business and financing model that has worked well in other sectors of the Internet.

It's creating a big war chest that can be used to develop new technology, start new firms, or even purchase start-ups or existing companies.

The investments will concentrate on three key markets in which Sylvan Learning has both a significant expertise and a strong brand name: Tutoring students from kindergarten through high school, offering college-type courses for "distance-learning" students, and helping companies boost the knowledge and skills of their workers.

Other e-commerce firms -- such as CMGI Inc. of Andover, Mass., and Internet Capital Group Inc. of Wayne, Pa. -- have notably succeeded in turning themselves into publicly traded venture capital funds in the business and consumer arenas.

Sylvan Learning's subsidiary is the first such Internet venture fund in the education market, said analyst Peter L. Martin, who follows the company for Jeffries & Co. Inc. in San Francisco.

"It has a very good chance of generating -- over the next 10 to 15 years -- true value for the company," Martin said.

The Internet venture was a big reason Sylvan Learning announced plans to sell its Sylvan Prometric college-testing unit in a deal that should leave the parent company with an estimated $600 million -- or about $12 per share -- in cash after taxes and transaction fees.

The sale, which leaves Prometric's headquarters in Baltimore, should be completed by the end of the first quarter.

Sylvan is committing about $300 million in cash and assets to its Internet incubator, whose chairman and chief executive officer will be Christopher Hoehn-Saric, who was co-CEO of Sylvan Learning with Becker for nine years.

Hoehn-Saric was in a large part responsible for building Prometric from a $3 million company in 1993 into the $219 million firm that's being sold for $775 million, the company said.

Sylvan Learning is putting the talent in place to give the incubator company the best chance of success, according to analyst Martin.

CFO joining venture

Sylvan Learning's chief financial officer, Lee McGee -- whom Martin said is perhaps the best chief financial officer in the education-services marketplace -- will join Hoehn-Saric at the new venture.

What's more -- like CMGI and ICGE -- Sylvan Learning is taking on outside investors. Apollo Management LLP, which has invested $10 billion in various enterprises, is placing $100 million into the Sylvan venture, giving the project significant credibility, said Martin, the analyst.

Rare Medium Group Inc., an Internet professional services firm, is investing an undisclosed amount, and Sylvan Learning said it will seek an additional $100 million from a diverse group of outside investors.

The company's earnings report was muddied by a number of one-time charges, write-offs and an accounting reclassification that removes the soon-to-be sold Prometric business from the overall financial results.


Becker also said that short-term results were sacrificed to get Sylvan Learning in shape to start the new Internet venture.

For the fourth quarter, which ended Dec. 31, the company said losses from continuing operations totaled $20 million, or 39 cents per share, compared with earnings from operations of $12.9 million, or 24 cents per share, for the corresponding period in 1998.

However, revenue rose to $99.7 million, a 15 percent increase from the $86.4 million recorded in the fourth-quarter of 1998.

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