Losses test Sylvan's mettle, but it still earns good grades


Douglas L. Becker stood at the corner of Fleet and Central in East Baltimore two years ago and envisioned his nationally known tutoring company, Sylvan Learning Systems Inc., creating its own "city within a city."

He foresaw the renovated loft at one corner of the intersection becoming an incubator for businesses that would develop education technologies using the Internet and handheld computers.

That dumpy warehouse over on another corner might be filled with similar high-tech companies.

And behind him rose the new headquarters for his corporation, a glass tower overlooking the bistros and church steeples of Little Italy.

Today, after more than $100 million in after-tax losses for those start-up companies, the renovated loft has space left by a Sylvan corporate-training spin-off that went bankrupt. The adjacent warehouse is still a warehouse, still for sale. And the headquarters that bears Sylvan's name in blue letters visible from the Inner Harbor is quieter than Becker envisioned.

Fleet Street and Central Avenue may forgive Becker, Sylvan's chairman and chief executive officer.

Will Wall Street?

Stock in one of the region's best-known companies has lost nearly a quarter of its value since Wednesday, after Sylvan reported bigger-than-expected losses last year. The shares closed down $1.44 at $12.74 on the Nasdaq stock market yesterday, the second consecutive day with a double-digit percentage drop. The stock value was more than double that a year ago.

Sylvan reported a loss of $6.1 million for the fourth quarter of last year, seven times the loss in the comparable period a year earlier. The loss for the year was $96 million, compared with $4 million in 2001.

Gains in tutoring and in college enrollments in Latin America and Europe were wiped out by losses in the seven companies of its ventures unit, including one that develops education management software and one that verifies job applications.

Analysts were disappointed that the company hadn't shed Sylvan Ventures, something Becker indicated last fall that he would do. Even as he has built one of the world's most successful for-profit providers of educational services, Becker has been criticized occasionally for the company's complex accounting, something that has become unforgivable since the Enron Corp. and WorldCom Inc. scandals.

"In today's environment, investors want transparency and simplicity," Becker said in an interview yesterday. "Sylvan is still a complicated business."

Sylvan may be digging out, however.

Becker told analysts during a conference call Thursday that the company is working on quickly solving the problems with the ventures unit.

Later that day, Apollo Management LP, an investment company that is Sylvan's partner in the ventures unit, filed notice with the U.S. Securities and Exchange Commission of its intent to possibly sell its 5 million shares of Sylvan. Analysts speculate that Apollo is preparing to sell back stock to Sylvan to begin extracting itself from the partnership, to which it pledged $100 million.

Sylvan started the ventures pool with $300 million of its gains from the $775 million it received when it sold Prometric, a computer-testing business, to Thomson Corp. in 2000.

Becker said yesterday that he couldn't provide details about "the ultimate solution to this jigsaw puzzle" or a timetable for it. He said only that Sylvan is working on it.

The 37-year-old chief executive, who made his first million dollars with a digital identification card invention before he was old enough to buy beer, expressed frustration that Sylvan's successes in tutoring and in the colleges it has purchased overseas have been swamped by the venture's downturn.

He noted that the company's stock prospered in 2001 and into last year, when the ventures unit was the poorest performing, but that investors have become more anxious about losses since the dot-com collapse.

Becker and R. Christopher Hoehn-Saric, his boyhood friend and business partner who leads Sylvan Ventures, were swept up in the Internet investing mania in 1999. They have said they wouldn't have started a ventures fund had they known then what they know now.

But Becker and others outside the company point out that the ventures unit has conceived of or nurtured companies that could become profitable for the parent someday. They include eSylvan, which tutors students in their homes over the Internet, and Walden University, a college that operates exclusively online.

"There are good things that have come out of this, and there are some turkeys that will probably be shut down," said Alexander Paris Jr., director of research for Barrington Research in Chicago.

He said the company is a sound investment even though he dropped his year-ahead target for the stock price yesterday to $20 from $33.

With $130 million in cash reserves, low debt and a $100 million line of credit, Sylvan might begin buying back its stock soon, a maneuver that has boosted the stock in the past, Paris pointed out.

"Sylvan has one of the best brand names in education," he said. "I think it's a great buy."

Even investment analysts downgrading the stock had good things to say.

"I think it's still pretty solid. Some type of resolution will be reached," Fred McCre said, a day after he dropped his outlook for Sylvan to "market perform" from "buy" for Thomas Weisel Partners in San Francisco.

Sylvan's franchisees, who pay about $200,000 to start one of the company-brand tutoring centers, also see the ventures collapse as a distraction that hasn't impaired their businesses. With education often in the headlines, it's a great time to be in the education business, they say.

"Do I follow the stock price? Yeah, but from a franchise perspective, the company has been doing very well," said Victor Peirce, a former president of the Sylvan Franchise Owners Association. His three centers in Michigan charge $36 an hour for tutoring, up from $25 several years ago, and revenue is rising by almost 20 percent a year.

"We seem to be somewhat insulated from what's going on with the ventures," said Barry Miller, an 18-year franchisee in Cleveland who led the association for most of the past decade. The tutoring business is much better than in the early 1990s, before Becker and Hoehn-Saric bought it from the day-care chain Kindercare, Miller said.

"We've gone through bad times when we didn't know whether we'd exist the next day or not," he said. "Even with all the negative publicity on ventures, we're miles ahead of where we were."

Sylvan received low-interest loans of $3 million from the state and $1 million from the city to help it move one block to its new quarters, with great expectations for ventures.

Mayor Martin O'Malley called getting Sylvan Ventures for Baltimore one of the city's most overlooked triumphs of his first year as mayor.

Sylvan could still meet the employment goal required for its seven-year state loan, in spite of the ventures unit's problems. The agreement calls for the company to have 438 employees by June and 732 by the summer of next year. The company says it employs more than 500 downtown and hundreds more in tutoring centers statewide.

Becker chose his hometown, Baltimore, over Northern California and New York to set up Sylvan Ventures. When he moved Sylvan's corporate headquarters to Baltimore from Howard County in 1996, he was saluted from City Hall to the Clinton White House because Sylvan was the first national company to locate in downtown Baltimore in 20 years.

Becker led the creation of the Port Discovery children's museum, and he received an award this week from the environmental group 1000 Friends of Maryland for his company's Smart Growth practices.

With or without the vision for the ventures unit fulfilled, Becker said, his company has more than met his and the region's aspirations.

"If the city or state is concerned, we would gladly give them their money back," Becker said. "But Sylvan has got to be one of the city's greatest successes in decades. I'd like to think that city and state leaders still think of Sylvan as a tremendous engine of growth."

It's too early to judge the company or himself, Becker said.

"It wouldn't be fair to sum up my performance the day after we sold Prometric for that huge gain or to sum up my performance the day after the stock hits a low," he said. "It's a long-term business we're developing."

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