Educate, Inc. Announces Second Quarter 2006 Profits

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Educate (NASDAQ:EEEE)
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- Provides Update on Business Transition BALTIMORE, July 27 /PRNewswire-FirstCall/ -- Educate, Inc. (NASDAQ:EEEE), a leading pre-K-12 education company delivering supplemental education services and products to students and their families, today reported financial results for the quarter and year-to-date periods ended June 30, 2006. Highlights for the Quarter Ended June 30, 2006: -- Revenues increased 11% to $102.5 million. -- Online tutoring delivered through Sylvan Online and NCLB Online increased to over 129,000 sessions from 31,000 in 2005. -- Continued focus on integration of Sylvan Learning acquired territories and hiring/training center management team. -- Introduction of new Hooked on Phonics learning programs including Hooked on Spanish, Super Activity Kits, workbooks, and the first Sylvan branded product - Sylvan School Success. -- Acquired Emmy-Award winning Reading Rainbow production rights and program library. Highlights for the Six-Month Period Ended June 30, 2006: -- Revenues increased 12% to $195.4 million. -- Sylvan Learning network grew by 12 territories and 15 centers. -- Online tutoring sessions delivered through Sylvan Online and NCLB Online increased to over 229,000 from 51,000 in 2005. -- Focus on improving Sylvan Learning marketing, inquiry conversion and integration of acquired territories. -- Introduction of new Hooked on Phonics learning programs. Operating Overview "While several leading indicators have turned positive for the business, we have continued to experience challenges in our company-owned centers. Late quarter improvements in marketing in the Learning Center business and continued improvements in conversions provide visibility into restored growth for the overall Learning Center business. However, company-owned center performance remains soft," stated Chris Hoehn-Saric, Educate, Inc. Chairman and Chief Executive Officer. "Overall positives in our franchise business, our products business and our school business indicate strengthening of the company's numbers. We remain optimistic about our opportunities and growth potential for 2007 and beyond." Financial Overview: Revenues from continuing operations for the second quarter were $102.5 million, an increase of 11% over the 2005 period. Revenue increases were driven by a greater number of company-owned territories resulting from 2005 acquisitions and the opening of new Sylvan Learning locations combined with expanded Online sessions and growth in Catapult Learning. Operating income from continuing operations declined in the period due to: lower operating margins experienced in company-owned centers, expenses related to the development of new service offerings to address market opportunities in premium tutoring and homework support, additional costs in the development of infrastructure for product creation, introduction and distribution of Hooked on Phonics products and additional sales and contract service costs in Catapult. Learning Center segment revenues increased 12% to $75.9 million for the second quarter of 2006. This revenue growth was driven by the addition of 32 company-owned territories over the past year through acquisitions and openings combined with expansion of Online service delivered through Sylvan Online and NCLB Online. Same territory revenues increased 3% due to increased Online sessions which offset reductions in student length of stay in the company-owned learning centers. Product sales declined from the prior year due to fewer new franchise learning program introductions in 2006 and delays in Hooked on Phonics sales due primarily to shifts in retailer orders in conjunction with the introduction of a wide array of new Hooked on Phonics products in the second half of 2006. Learning Center operating expenses increased over the prior year due to a number of factors including the costs related to operating company-owned centers and delivering online services, costs associated with hiring and training new center management personnel which delayed the integration process, expenses related to beginning operations in newly opened centers, expenses related to researching and developing premium and homework support tutoring programs for the Sylvan Learning network. Additional product related expenses were also incurred to develop an expanded set of Hooked on Phonics programs and to create an operating infrastructure to develop, produce and distribute new product offerings to an expanded distribution channel. The result of these additional expenses has been reduced operating profits and operating margins during this transition period in 2006. Catapult Learning revenues increased by 6% over the prior year, driven by additional public and non-public school contracts which offset the loss of revenues from closed Gulf Coast schools. Additional business development expenses and start-up costs for new contracts resulted in lower Catapult operating margins for the period. Discussions continue to progress on the sale of our discontinued Education Station business which delivers site-based NCLB services. Completion of the sale of the Education Station business is expected prior to the 2006-2007 school year enrollment period. Corporate expenses increased in response to requirements to support revenue expansion and business line development. Non-operating expenses reflected increased borrowings under the Company's credit facility as well as increases in variable interest rates. Year to date operating results have been restricted by the same business trends evidenced in the second quarter performance. Revenue growth was driven primarily by expansion of the company-owned territories and growth of Online sessions. Operating expenses increased over the prior year due to additional expenses of supporting company-owned operations and delivery of Online sessions. Delays in integration of additional company-owned territories, such as hiring and training center management, combined with the learning curve of efficient sales and operations resulted in increased operating costs and lower margins in the company-owned territories in comparison to the prior year. Product sales revenues declined due to fewer new franchise programs and customer order patterns which shifted delivery dates to the back half of 2006. Hooked on Phonics expenses have increased in 2006 as additional infrastructure has been added to focus on product development, manufacturing and supply chain management. Catapult has demonstrated revenue growth in 2006 even after absorbing the loss of New Orleans contracts due to hurricane related school closings. Additional marketing and operational expenses on the new Catapult contracts have caused margins to decline. Full Year 2006 Outlook: The operating challenges of the first half of 2006 will continue to impact financial performance in the second half of 2006. Despite these challenges, management expects second half EPS to exceed 2005 results. Full year EPS will be down from 2005 levels due to territory integration expenses and the costs of business transformation in the first half of 2006. Management believes the benefits of the current business changes will result in significant earnings growth in 2007 and beyond. Educate management will host a conference call to review these results and the business strategy for future growth at 10:00 AM (EDT) today, July 27, 2006. Interested parties may listen to the webcast by accessing http://www.educate-inc.com/ and clicking on Investor Relations on the Internet or by dialing 1-877-502-9274 (International 1-913-981-5584) access code 4506253. The call will also be available through replay on the Educate website through August 4, 2006. About Educate, Inc. Educate, Inc., (NASDAQ:EEEE) is a leading pre-K-12 education company delivering supplemental education services and products to students and their families. Educate's consumer services businesses, including Sylvan Learning, North America's best-known and most trusted tutoring brand, operates the largest network of tutoring centers, providing supplemental, remedial and enrichment instruction and its Educate Products business delivers educational products including the highly regarded Hooked on Phonics early reading, math and study skills programs. Catapult Learning, its school partnership business unit, is a leading provider of educational services to public and non-public schools. In its 25-year history, Educate has provided trusted, personalized instruction to millions of students improving their academic achievement and helping them experience the joy of learning. More information on Educate, Inc. can be found at http://www.educate-inc.com/. Forward-looking Statements This release includes information that could constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the Company's actual results could differ materially from those described in the forward-looking statements. The following factors might cause such a difference: the development and expansion of the Sylvan Learning franchise system; changes in the relationships among Sylvan Learning and its franchisees; the Company's ability to effectively manage business growth; increased competition from other educational service providers; changes in laws and government policies and programs; changes in the acceptance of the Company's services and products by institutional customers and consumers; changes in customer relationships; acceptance of new programs, services, and products by institutional customers and consumers; the seasonality of operating results; global economic conditions, including interest and currency rate fluctuations, and inflation rates. Additional information regarding these and other risk factors and uncertainties are set forth from time to time in the Company's filings with the Securities and Exchange Commission, available for viewing on the Company's website http://www.educate-inc.com/. (To access this information on the Company's website, click on "Investor Relations" and then "SEC Filings".) All forward-looking statements are based on information available to the Company on the date of this Release. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Educate, Inc. & Subsidiaries Consolidated Statements of Operations Three and Six Months Ended June 30, 2006 Three Months Ended June 30, (Dollar amounts in thousands, except per share data) 2006 2005 $Variance %Variance Revenues Franchise Services $11,379 $13,892 $(2,513) -18% Company-Owned centers 54,953 45,483 9,470 21% European 9,535 8,167 1,368 17% Total Learning Center 75,867 67,542 8,325 12% Total Catapult Learning 26,624 25,193 1,431 6% Total Revenues 102,491 92,735 9,756 11% Expenses Learning Center 62,854 48,028 14,826 31% Catapult Learning 21,503 18,854 2,649 14% Total Segment Operating Costs (1) 84,357 66,882 17,475 26% Corporate Expenses (1) 5,172 3,580 1,592 44% Operating Income 12,962 22,273 (9,311) -42% Non-Operating Items Interest expense, net (3,013) (1,843) (1,170) 63% Other financing costs - (1,506) 1,506 -100% Foreign exchange gains and other non-operating (130) (8) (122) N/A Total Non-Operating Items (3,143) (3,357) 214 -6% Income Before Income Taxes 9,819 18,916 (9,097) -48% Income Tax Expense (3,950) (7,188) 3,238 -45% Income from Continuing Operations 5,869 11,728 (5,859) -50% Income (loss) from discontinued operations, net of tax (1,590) (1,750) 160 -9% Net Income $4,279 $9,978 $(5,699) -57% Weighted Average Shares - Diluted 43,758 44,010 (252) -1% Diluted Earnings Per Share $0.10 $0.23 $(0.13) -57% Diluted Earnings Per Share from Continuing Operations $0.13 $0.27 $(0.14) -52% Diluted Earnings Per Share from Continuing Operations, as adjusted (2) $0.13 $0.29 $(0.16) -55% Segment Operating Margin Learning Center 17% 29% -12% Catapult Learning 19% 25% -6% Six Months Ended June 30, (Dollar amounts in thousands, except per share data) 2006 2005 $Variance %Variance Revenues Franchise Services $23,045 $26,829 $(3,784) -14% Company-Owned centers 101,211 81,821 19,390 24% European 18,341 16,343 1,998 12% Total Learning Center 142,597 124,993 17,604 14% Total Catapult Learning 52,819 50,237 2,582 5% Total Revenues 195,416 175,230 20,186 12% Expenses Learning Center 123,742 94,490 29,252 31% Catapult Learning 42,991 38,310 4,681 12% Total Segment Operating Costs (1) 166,733 132,800 33,933 26% Corporate Expenses (1) 9,806 7,536 2,270 30% Operating Income 18,877 34,894 (16,017) -46% Non-Operating Items Interest expense, net (5,572) (3,601) (1,971) 55% Other financing costs (1,066) (1,506) 440 -29% Foreign exchange gains and other non-operating (191) 68 (259) -381% Total Non-Operating Items (6,829) (5,039) (1,790) 36% Income Before Income Taxes 12,048 29,855 (17,807) -60% Income Tax Expense (4,819) (11,345) 6,526 -58% Income from Continuing Operations 7,229 18,510 (11,281) -61% Income (loss) from discontinued operations, net of tax 383 (1,039) 1,422 -137% Net Income $7,612 $17,471 $(9,859) -56% Weighted Average Shares - Diluted 43,802 44,016 (214) 0% Diluted Earnings Per Share $0.17 $0.40 $(0.23) -58% Diluted Earnings Per Share from Continuing Operations 0.17 $0.42 $(0.25) -60% Diluted Earnings Per Share from Continuing Operations, as adjusted (2) $0.18 $0.44 $(0.26) -59% Segment Operating Margin Learning Center 13% 24% -11% Catapult Learning 19% 24% -5% (1) Segment operating costs and Corporate expenses include share-based compensation expense of $138 and $147, respectively, in three month period ended June 30, 2006; $239 and $235, respectively, in the six month period ended June 30, 2006; $94 and $54, respectively, in the three month period ended June 30, 2005; $188 and $109, respectively, in the six month period ended June 30, 2005. On January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" using the modified prospective transition method. (2) Diluted earnings per share from continuing operations, as adjusted, exclude the net of tax effect of other financing costs for the three and six month periods ended June 30, 2006 and 2005. Management believes this non-GAAP financial measure allows for a better comparison of earnings per share (EPS) for the periods presented. See Table 1 for a reconciliation of income from continuing operations, as reported, to income from continuing operations, as adjusted, and the diluted per share amounts. Three Months Three Months Ended Ended June 30, June 30, Business Metrics 2006 2005 Learning Center Same Territory Revenue Growth (3) 3% 6% June 30, December 31, Number of Territories 2006 2005 Franchise 732 725 Company-owned 176 171 Total 908 896 June 30, December 31, Number of Sylvan Learning Centers 2006 2005 Franchise 882 876 Company-owned 254 245 Total 1,136 1,121 Balance Sheet Data: June 30, December 31, 2006 2005 Cash and cash equivalents $13,335 $2,414 Working capital 28,043 8,394 Total assets 492,039 451,888 Long-term debt, less current portion 171,759 160,114 Six Months Six Months Ended Ended June 30, June 30, Business Metrics 2006 2005 Learning Center Same Territory Revenue Growth (3) 4% 7% June 30, Number of Territories 2005 Franchise 735 Company-owned 144 Total 879 June 30, Number of Sylvan Learning Centers 2005 Franchise 889 Company-owned 214 Total 1,103 Balance Sheet Data: Cash and cash equivalents Working capital Total assets Long-term debt, less current portion (3) Same Territory" amounts include the results of territories for the identical months for each period presented in the comparison, commencing with the 13th full month each territory has been operating. Same territory growth is presented as the aggregate Educate revenue growth (as adjusted for franchise acquisitions) for franchised and company-owned territories during the period. A territory reflects the geographically-specified area where an operator controls rights to provision of services under the Sylvan franchise agreement. Same territory amounts include revenue from additional centers opened in existing territories and online revenues, including NCLB online revenues. Consolidated Summarized Statements of Operations Three Months Ended June 30, (Dollar amounts in thousands) 2006 2005 $Variance %Variance Revenues Company-Owned Centers $58,023 $45,395 $12,628 28% Franchise Services 11,095 12,039 (944) -8% Product Sales 6,749 10,108 (3,359) -33% Total Learning Center 75,867 67,542 8,325 12% Total Catapult Learning 26,624 25,193 1,431 6% Total Revenues 102,491 92,735 9,756 11% Expenses Instructional and franchise operations costs (4) 69,920 53,763 16,157 30% Marketing and advertising 8,985 7,675 1,310 17% Cost of goods sold 3,807 4,233 (426) -10% Depreciation and amortization 2,087 1,612 475 29% General and administrative expenses (4) 4,730 3,179 1,551 49% Total costs and expenses 89,529 70,462 19,067 27% Operating Income 12,962 22,273 (9,311) -42% Total Non-Operating Items (3,143) (3,357) 214 -6% Income Before Income Taxes 9,819 18,916 (9,097) -48% Income Tax Expense (3,950) (7,188) 3,238 -45% Income from Continuing Operations 5,869 11,728 (5,859) -50% Income (loss) from discontinued operations, net of tax (1,590) (1,750) 160 -9% Net Income $4,279 $9,978 $(5,699) -57% Six Months Ended June 30, (Dollar amounts in thousands) 2006 2005 $Variance %Variance Revenues Company-Owned Centers $109,224 $83,712 $25,512 30% Franchise Services 21,601 23,126 (1,525) -7% Product Sales 11,772 18,155 (6,383) -35% Total Learning Center 142,597 124,993 17,604 14% Total Catapult Learning 52,819 50,237 2,582 5% Total Revenues 195,416 175,230 20,186 12% Expenses Instructional and franchise operations costs (4) 138,002 106,498 31,504 30% Marketing and advertising 17,537 15,577 1,960 13% Cost of goods sold 7,962 8,149 (187) -2% Depreciation and amortization 4,101 3,387 714 21% General and administrative expenses (4) 8,937 6,725 2,212 33% Total costs and expenses 176,539 140,336 36,203 26% Operating Income 18,877 34,894 (16,017) -46% Total Non-Operating Items (6,829) (5,039) (1,790) 36% Income Before Income Taxes 12,048 29,855 (17,807) -60% Income Tax Expense (4,819) (11,345) 6,526 -58% Income from Continuing Operations 7,229 18,510 (11,281) -61% Income (loss) from discontinued operations, net of tax 383 (1,039) 1,422 -137% Net Income $7,612 $17,471 $(9,859) -56% (4) Instructional and franchise operations costs and Corporate expenses include share-based compensation expense of $138 and $147, respectively, in three month period ended June 30, 2006; $239 and $235, respectively, in the six month period ended June 30, 2006; $94 and $54, respectively, in the three month period ended June 30, 2005; $188 and $109, respectively, in the six month period ended June 30, 2005. On January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" using the modified prospective transition method. Three Months Ended June 30, Table 1 (Dollar amounts in thousands, except per share data) 2006 2005 $Variance %Variance Income from Continuing Operations, as reported $5,869 $11,728 $(5,859) -50% Add: Other financing costs (5) - 1,506 (1,506) -100% Tax impact of items added back above - (572) 572 -100% Income from Continuing Operations, as adjusted $5,869 $12,662 $(6,793) -54% Weighted Average Shares - Diluted(2) 43,758 44,010 (252) -1% Diluted Earnings Per Share from Continuing Operations, as adjusted (2) $0.13 $0.29 $(0.16) -55% Six Months Ended June 30, (Dollar amounts in thousands, except per share data) 2006 2005 $Variance %Variance Income from Continuing Operations, as reported $7,229 $18,510 $(11,281) -61% Add: Other financing costs (5) 1,066 1,506 (440) -29% Tax impact of items added back above (426) (572) 146 -26% Income from Continuing Operations, as adjusted $7,869 $19,444 $(11,575) -60% Weighted Average Shares - Diluted (2) 43,802 44,016 (214) 0% Diluted Earnings Per Share from Continuing Operations, as adjusted (2) $0.18 $0.44 $(0.26) -59% (5) Other financing costs are debt issuance costs charged to earnings upon the refinancing of debt. DATASOURCE: Educate, Inc. CONTACT: Kevin E. Shaffer of Educate, Inc., +1-410-843-8000 Web site: http://www.educate-inc.com/

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