United States

In-depth Report Education and Training

9 April 1999

7KH%RRNRI.QRZOHGJH
Michael T. Moe, CFA
Director of Global Growth Research
(1) 415 954-8410
Kathleen Bailey
(1) 415 954-8414 Investing in the Growing Education and Training Industry
Rhoda Lau
(1) 415 954-8416

²7KLQN'LIIHUHQWO\

• Knowledge Economy Provides Powerful Tailwind for For-Profit Education Sector

• Six Megatrends Impacting Market: Globalization, the Internet, Outsourcing,
Consolidation, Demographics and Branding

Merrill Lynch & Co.

Global Securities Research & Economics Group
Global Fundamental Equity Research Department
#1939
The Book of Knowledge – 9 April 1999

2

Introduction to the Two Trillion Dollar
Global Education and Training Industry
The two trillion dollar global education and training
industry is going through radical changes. Market forces
are providing a catalyst to alter the traditional ways
education is delivered. Megatrends such as demographics,
the Internet, globalization, branding, consolidation, and
outsourcing all play major roles in this transformation. In
the U.S., the focus of this report, education and training is
a $740 billion dollar market.
Technology and specifically the Internet will
“democratize” education, providing greater access at lower
cost. Ubiquitous PCs combined with high-speed
bandwidth will facilitate engaging anytime, anywhere
learning. We predict that “educational portals” providing a
gateway to the Internet, the world’s greatest library, will
emerge in K-12, postsecondary and corporate training
markets.
In the knowledge economy, the pay gap between those
who have a college education and those who don’t has
widened from 50% in 1980 to an estimated 111% today.
A thirty year old male with a high school diploma earns
just two-thirds what he earned twenty-five years ago. Yet
only 21% of American adults over the age 25 have a
bachelor’s degree or better. These factors continue to
propel the postsecondary education market forward.
Corporate training has become a business imperative,
migrating from an expense to an investment. Eleven
percent or 55 of the Fortune 500 have a Chief Knowledge
Officer today, up from virtually none five years ago.
Motorola calculates that every $1 it spends on training
translates to $30 in productivity gains within three years.
We see the opportunity for the creation of several multi-
billion dollar companies in this highly fragmented market
where the largest training company today has training
revenues of just $200 million.
The $360 billion K-12 segment is the largest in the
education industry, but is the most difficult to invest in.
Impediments to change include the entrenched status quo
that argues for more time and more money to improve the
current dismal situation. Studies showing U.S. students
finishing at the bottom in international education
comparisons have united parents, politicians and
businesses in saying that 200 years is enough, and change
Cover: Albert EinsteinTM represented by Roger Richman Agency, Beverly Hills, CA 90212.
The Book of Knowledge – 9 April 1999
and competition are happening. Charter schools, which
didn’t exist six years ago, now total more than 1,200.
There are well over one million children in home school.
It is our prediction that 10% of the publicly-funded K-12
school market will be privately managed ten years from
now, implying a market of over $30 billion in today’s
dollars.
The ratio of students per PC in public schools has
improved from 17 to one in 1993 to seven to one today.
Still, when compared to the 50% of capital expenditures
that corporations spent on information technology (IT), the
2% of total spending schools commit to technology is
relatively small. Computer literacy is the second language
of the new economy. This, plus increased accountability
and assessment in schools will accelerate the need for
Learning Information Systems and other technology
solutions to improve education. With two million new
teachers to be hired in the next ten years, teacher training
will be an important aspect of ensuring that technology is
implemented in our schools.
Changing demographics have created huge opportunities
in the $34 billion child care industry where the largest 50
companies hold less than 5% of the overall market. Eighty
percent of families in America are now either dual income
or single parent. Sixty percent of mothers with children
under six work outside the home compared to 19% in
1960. A major trend to watch in this market is
accreditation. In addition, we predict that child care will
become a standard corporate benefit over the next 10-15
years, similar to the way corporations provide health care
coverage.
The compelling dynamics of the education industry have
not been lost on investors. The sector has attracted
significant interest from leading financiers, venture
capitalists and visionary business leaders. Since 1994, 38
IPOs and 30 follow-on offerings have been completed,
raising $3.4 billion of equity. Education is nearly 10% of
GDP, yet just 0.2% of U.S. capital markets. We see this,
coupled with strong industry fundamentals, causing
demand imbalances for education shares to persist for the
foreseeable future. In our view, this will result in
sustainable high P/E ratios in the sector and significant
opportunity for investors.
3
The Book of Knowledge – 9 April 1999
Just the Facts –
The Good, The Bad and The Ugly
• The U.S. currently spends $740 billion per year on
education, more than we spend on national defense
and more than the GDPs of Spain, Canada or Brazil.
• Since 1994, education and training companies have
raised more than $3.4 billion of equity capital through
38 initial public offerings and 30 follow-on offerings.
• In today’s knowledge-based economy, the pay gap
between those who have a college education and those
who don’t has widened from 50% in 1980 to an
estimated 111% today. Yet only 21% of American
adults over age 25 have a bachelor’s degree or better.
• Forty three percent of our fourth-graders can’t pass a
basic reading test
• Nearly half of all high school graduates have not
mastered seventh-grade arithmetic. One-third of 17-
year-olds cannot place France on a map of the world.
Only about one in 10 high school graduates can write
a reasonably coherent paragraph.
• Approximately 50% of all students entering the
California State University system are not ready for
college-level English and math.
• 42 million adults in this nation are functionally
illiterate.
• Illiteracy costs U.S. businesses about $250 billion per
year in lost productivity.
• 90% of prisoners can’t read.
• Nationally, all teachers – public and private – are 50%
more likely than the general public to send their
children to private schools.
• 34 states, the District of Columbia and Puerto Rico
have charter school laws, and there are over 1,200
charter schools operating in 27 states and D.C., up
from essentially zero six years ago.
• The number of students in home school today is
estimated to be 1.2 million. Another 5 million
children attend private schools.
4
• Only half of school budgets are spent on regular
classroom instruction. No service business in the
world could exist where 50% of every dollar is spent
outside where the service is being rendered.
• The U.S. Department of Education reports that one-
third of high school math teachers, nearly one-quarter
of high school English teachers and nearly one-fifth of
high school science teachers are teaching without a
college major or minor in their subjects.
• Results of the Third International Mathematics and
Science Study for Eighth Grade Students ranked U.S.
students 28th in science and 17th in math compared to
students in other countries. The situation worsens by
the twelfth grade, when our advanced students
performed at the bottom of international
comparisons.
• Over 60% of married mothers with children under age
6 are working outside the home compared to 19% in
1960.
• In 2000, skilled jobs will constitute 65% of the jobs,
up from 20% in 1950.
• A thirty-year-old man with a high school diploma
earns just two-thirds what he earned twenty-five years
ago.
• Adults age 25 and over represent nearly 50% of all
postsecondary enrollments, up from 28% in 1970.
• Approximately 92% of college students have access to
a PC at school. Moreover, approximately 55% of
students own personal computers.
• 2.2 million students are expected to enroll in
distributed learning classes in 2002, up from 710,000
today, representing a compound annual growth rate of
33%
• 11% or 55 of the Fortune 500 companies have Chief
Knowledge Officers today, up from virtually none five
years ago.
 The Book of Knowledge – 9 April 1999

CONTENTS
n Section Page

Executive Summary and Thesis 1. Introduction to the $2 Trillion Global Education and Training Industry 6

The Changing U.S. Economy 2. Human Capital in the Knowledge Economy 16

Size of Market and Financial 3. The Big Investment Opportunity in Education and Training 22
Characteristics

Megatrends 4. Six Forces Impacting Education and Training 37

Elementary and Secondary 5. Monopoly Gives Way to Competition 57

Education

Education Technology 6. Powerful School Tool 95

Postsecondary Education 7. Meeting the Needs of the New Economy 109

Distributed Learning 8. Schools Without Walls 120

Corporate Training 9. Lifelong Learning in the Global Marketplace 134

Information Technology 10. Keeping Up with the Fast Pace of Technological Change 142
Training

Technology-Based Training 11. What the HTML is Going On Here!?! 149

Early Education and Child Care 12. The Beginning of Learning 160

Education Products and Services 13. Gaining An Edge 171

for Consumers

Contact Information 14. Merrill Lynch Education and Training Team Members 182

Appendix A Company Index 183

Appendix B Education Bookmarks 192

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The Book of Knowledge – 9 April 1999
1. Executive Summary and Thesis
By way of background, we
published our first white paper
on education nearly four years
ago.
Since that time, much has
happened in the sector.
Many of our ideas which were
just a thesis at that time has
materialized into events that are
nothing less than remarkable.
We believe even more exciting
developments are to come.
“Big Ideas” that we expect to
transform the landscape of the
education and training industry
over the next decade include
distributed learning, education
portals, accountability and
assessment in schools, private
school management and
charter schools and teacher
training.
6
We published our first report on the education and training industry nearly four
years ago. It was our view then that we were at the dawn of a new age, where
human capital would be more vital than physical capital. Indeed, in the global
marketplace and knowledge-based economy we are now in, education makes the
difference in not only how an individual does, but how a company does, and for
that matter how well a country does.
Since our first report much has happened in the sector. Many of our ideas, which
were just theses at the time, have materialized into reality. Consider:
• The University of Phoenix, a subsidiary of Apollo Group, has become the
largest private university in the United States with over 61,000 students, of
which 9,000 are enrolled in its distributed learning programs.
• The World Wide Web, which was only known by “NetHeads” in 1995, is
now the fastest growing technology in our history, achieving 25% penetration
in less than seven years. 700,000 students are now taking some form of
distributed learning courses, including online classes.
• Charter schools, which were once thought of by some as another reform
gimmick is becoming a core component of the new education system, with
over 1,200 throughout the United States, serving as a major catalyst for
education reform. The Edison Project, the largest education management
operator in the country, now operates 51 schools serving 24,000 students in
24 cities and 11 states.
• Child care, historically viewed as providing “custodial care” is now viewed as
providing a critical foundation for learning, with accreditation being an
endorsement of these standards.
• Since 1994, education and training companies have raised more than $3.4
billion of equity capital through more than 38 initial public offerings and 30
follow-on offerings.
We believe even more exciting developments are to come. “Big Ideas” that we
expect to transform the landscape of the education and training industry over the
next decade include:
• Distributed Learning: The power of technology will “democratize”
education, providing greater access at a lower cost, enabled by growing
access to PCs and the Internet as well as expanding bandwidth.
• Education Portals: With 55 million children in K-12 schools, 14 million
students in postsecondary institutions and 136 million working adults,
creating an education focused gateway to the Internet, the world’s greatest
library, will be a big opportunity.
• Accountability and Assessment in our Schools: Trends are towards high-stakes
tests (assessment with consequences) as in the 19 states that require seniors to
pass a test before graduating from high school. The need for better information
on how students are progressing before these tests will lead to growth in demand
for enterprise software for schools. These Learning Information Systems (LIS)
will become critical to the effective performance of schools.
• Private school management and charter schools: Choice, competition and
greater accountability all are drivers that will cause education management
organizations (EMOs) to grow and prosper. It is our prediction that 10% of
the publicly-funded K-12 school market will be privately managed ten years
from now, implying a market of over $30 billion in today’s dollars.

Four years ago, the investors
who were interested in
education were the ones who
were always early and usually
right.
We see the education industry
today as the health care
industry of nearly 30 years ago,
both industries deliver a highly
critical, human essential
service.
30 years ago the healthcare
market was huge, 8% of GDP,
but a highly fragmented cottage
industry.
Fast-forward the clock to today,
healthcare is an even larger
market, upwards of 14% of
GDP. The industry is segmented
by category, is technologically
advanced, and has generally
strong management controls
and accountability.
The Book of Knowledge – 9 April 1999
• Increased Teacher Training: Our schools will hire two million new teachers
over the next ten years. Given that computer literacy is the second language of
the new economy, these teachers as well as most of the 1.5 million that
remain will need to become proficient in technology. Still others will need to
become certified. We expect significant opportunities in this market segment.
Four years ago, the investors who were interested in education were the ones who
were always early and usually right - many of whom had a background investing
in the healthcare industry. This is no coincidence, as we see the education
industry today as the health care industry of nearly 30 years ago. Health care and
education are both critical human services, but even beyond that, the similarities
are striking. While the comparison is not perfect, it is instructional and helps
provide perspective on the opportunity for the education and training industry.
In 1970, health care was a huge market, 8% of GDP, but a highly fragmented
cottage industry. Critics questioned not only whether you could make money, but
whether you should make money. Characterized by limited professional
leadership, low technology and high cost, the industry had few large companies.
From an investor’s standpoint, while healthcare was a large component of GDP,
the market capitalization of the sector represented just a fraction of total U.S.
Capital Markets. Wall Street firms that covered the sector typically had just one
analyst who was responsible for writing research on the group, everything from
medical devices to health care services and pharmaceuticals.
Table 1: Health Care, In 1970 and Today
Healthcare in 1970 Healthcare in 1999
Huge Market - 8% GDP Huge Market – 14% GDP
Highly Fragmented - Cottage Industry Segmented by Category
High Cost Consolidating
Low Technology Strong R&D and Technology Focus
Lack of Professional Management Strong Management Controls & Accountability
Negligible Market Capitalization (3% of total) 14% of U.S. Capital markets
Human Essential Service Human Essential Service
Source: Merrill Lynch.
Fast-forward the clock to today. Healthcare is an even larger market, upwards of
14% of GDP. The industry is segmented by category (medical devices,
pharmaceuticals, biotechnology, health management organizations, etc.), is
technologically advanced due to significant capital investments, and has generally
implemented strong management controls and accountability. The influence of
market forces in health care since 1970 have created a dynamic industry, one that
is the most technologically advanced in the world. While not a perfect system, if
you were sick, the U.S. is where you would want to be. From an investment
standpoint, the healthcare industry represents 14% ($1.5 trillion) of U.S. capital
markets.
7
The Book of Knowledge – 9 April 1999
The health care industry
represents 14% ($1.5 trillion) of
U.S. capital markets.
Similarly, the education and
training industry today is a
huge market, a highly
fragmented cottage industry,
inefficient, with limited
professional management, and
makes almost no use of
technology.
8
Chart 1: Market Capitalization of the Health Care Sector Has Grown Dramatically
Health Care Industry % of U.S. Capital Markets
National Health Expenditures as % of U.S. GDP
16%
14.3%
14%
13.5%
12%
10%
8%
7.1%
6%
4%
3.2%
2%
0%
Source: Health Care Financing Administration.
Similarly, the education and training industry in 1998 is a huge market (nearly
10% of GDP, second only to health care in size), a highly fragmented cottage
industry, inefficient, with limited professional management, and characterized by
almost no use of technology. Debate in some circles questions whether for-profit
enterprises have a role in education. In addition, education and training
companies account for approximately 0.2%, or just $15.9 billion of the $10 trillion
U.S. capital market.
Table 2: Education Industry Today
Huge Market – Nearly 10% of GDP
Highly Fragmented – Cottage Industry
Human Essential Service
Very Inefficient
Low Technology
Lack of Professional Management
Total Market Capitalization: $15.9 Billion - Out of a $10 Trillion U.S. Capital Market
Source: Merrill Lynch.
Education has become critical for both individuals and employers. In today’s
economy a four-year degree is just a prerequisite to participating in the industries
of the future. As the result of technology innovations such as the Internet, video-
conferencing and satellite systems, a New Economy has emerged driven by
knowledge and information.
Table 3: New View of Education in Our Knowledge-Based Economy
Old Economy New Economy
Four-Year Degree Forty-Year Degree
Training As Cost Center Training as #1 Source of Competitive Advantage
Learner Mobility Content Mobility
Distance Education Distributed Learning
Correspondence & Video High-Tech Multimedia Centers
One-Size Fits All Tailored Programs
Geographic Institutions Brand Name Universities & Celebrity Professors
Just-in-Case Just-in-Time
Isolated Virtual Learning Communities
Source: Merrill Lynch

The needs of the knowledge
economy contrasted with the
current system’s inability to
fulfill those needs provide
innovative companies open-
ended opportunities for growth.
In 1980, the pay difference
between someone who had a
high school education and a
college education is 50%.
Today it is over 100% and
growing.
The Book of Knowledge – 9 April 1999
The educational needs of the knowledge economy, contrasted with the current
system’s inability to fill those needs provide innovative companies with open-
ended opportunities for growth. The classic ‘big investment opportunity’ is a
company that has a solution to a problem; the more significant the problem, the
larger the investment potential. There is not, in our view, a bigger problem in the
U.S. today than the need to better educate our populace and hence, we think the
investment potential in this sector is tremendous.
If you think education is expensive, try ignorance.
—Derek Bok
Former President of Harvard University
Businesses are saying they can’t employ the students that come out of our schools
– graduates can’t read or write. Corporations are spending billions of dollars on
remedial education, tens of billions on corporate training and are making large
contributions to education reform.
Americans need look no further than their own paychecks to see the importance of
education in today’s economy. In 1980, the pay difference between someone who
had a high school education and a college education was 50%. Today it is over
100% and growing.
Chart 2: Widening Pay Gap Between High School and College Graduates
111%
120%
100%
50%
80%
60%
40%
20%
0%
1980 1998
Source: 198/0: U.S. Census Bureau. 1999: ML Growth Stock Research.
“Education will become the center of the knowledge society, and the school
its key institution”
—Peter F. Drucker
Put another way, a 30-year-old male with only a high school degree makes less
than two-thirds what he made in the 1970’s. This becomes even more striking
when you take into account that only 21% of U.S. adult population has a
bachelor’s degree or better.
9
The Book of Knowledge – 9 April 1999
Only 21% of the US adult
population has a bachelor’s
degree or better.
The “push” from employers
demanding relevant skills and
the “pull” from employees
seeking better jobs has created
a fertile growth environment
for postsecondary providers.
Twenty-five years ago, 25% of
the students in postsecondary
schools were 25 years older.
Today nearly 50% are 25 years
or older.
The problem is most colleges
and universities are set up to
serve 18 to 22 year old students,
totally irrelevant to now nearly
50% of the student population.
10
Chart 3: Only 21% of Adults 25 and Older with Bachelor’s or Higher Degree
Adult with
Bachelor’s or
Higher Degree
21%
Adult without
Bachelor’s or
Higher Degree
79%
Source: Department of Education.
The “push” from employers demanding relevant skills and the “pull” from
employees seeking better jobs has created a fertile growth environment for
postsecondary providers, as well as redefined who the students are. Twenty-five
years ago, 25% of the students in postsecondary schools were 25 years older.
Today nearly 50% are 25 years or older.
Chart 4: Adult Students Represent Nearly 50% of the Student Body
72%
80%
70% 57%
60%
43%
50%
40% 28%
30%
20%
10%
0%
2 5 a n d O ld e r 2 4 a n d Y o un ge r
1970 1995
Source: Department of Education.
The problem is, most colleges and universities are set up for 18 to 22 year old
students—classes during the day, semesters or quarters starting two or three times
a year, no parking, dormitories, football team, marching bands—totally irrelevant
to now nearly 50% of the student population.
The mindset of traditional universities, coupled with needs in the marketplace
have allowed companies like Apollo Group (APOL; $24 1/4 C,1,1,9), DeVry Inc.
(DV; $31 1/8 C,1,1,9), Education Management ( EDMC; $25 5/8 D,2,1,9) and ITT
Educational Services (ESI; $36 1/8 C,2,1,9) to prosper. University of Phoenix, a
subsidiary of Apollo Group, has now become the largest private university in the
country with approximately 61,000 students of which over 9,000 are distributed
learning students. The company has taken the most basic business principle —
listen to your customer — and applied it to higher education by offering working
adults relevant education in the evenings, conveniently located by major
thoroughfares or freeways close to where people work and live.

Technology has the opportunity
to “ democratize education”
and provide smarter access.
As a head of training at a major
telecommunications company
said, corporations are “done
putting people on airplanes.”
The Book of Knowledge – 9 April 1999
“We’re trying to build a university our football team can be proud of.”
—George L. Cross
President of Oklahoma University
An unfortunate irony is that at precisely the time that education has become
crucial to economic success, it has also become unaffordable to many people.
Technology has the opportunity to “ democratize” education. With broadband
delivery, technology can lower the cost, improve the access and in some cases,
even improve the quality of a college education.
In this new world of anytime, anywhere education, “content providers” need to
find ways to facilitate the needs of the market. During a panel discussion in which
we participated on recently, the head of training at a major telecommunications
company told the audience of content providers (universities like Wharton,
Stanford, University of Minnesota),“We spend $150 million a year on training and
I’ve got a message for all of you – We’re done putting people on airplanes. You
have to figure out a way to deliver the content we desperately want and need when
we want it and where we want it.”
In an economy with 4.2% unemployment, an under-degreed adult population and
65% of new jobs created requiring higher skills, corporate training has never been
more important. A half century ago, a man could learn how to drive a tractor and
have that job skill for 40 years or more. Today, a person learns a software
program and has that current skill for, maybe, 18 months.
I was recently on a tour of Latin America, and the only regret I have is that I
didn’t study my Latin harder in school so I could converse with those people.
—Former Vice President Dan Quayle
The $98 billion highly fragmented corporate and government training market
provides huge opportunity. The corporate training market is going through
dynamic changes as education and training is becoming increasingly critical in our
knowledge-based global economy and as in-house training falls to the megatrend
of outsourcing. We believe companies such as PROVANT ( POVT; $12 3/4
D,1,1,9) is extremely well positioned to provide corporations with the critical
training needed for survival in today’s new economy.
IT training, a subsector of the corporate training market, is a $19 billion market
growing rapidly. Technology is the driver of the new economy and has changed
the way we work, live and play. IT has become so important to businesses that it
represents nearly 50% of capital expenditures today, up from 5% in 1970. The
personal computer has become the automobile of 1990s, except that every year it
gets better, cheaper and faster. Moore’s Law, under which the power of a
computer chip doubles every 18 months, makes ongoing IT training crucial for
every organization participating in the new economy. Thus, we see opportunity in
the corporate training market through increased use of technology.
11
The Book of Knowledge – 9 April 1999
Technology has become so
essential to corporations that
tech expenditures have grown
from 5% of total capital
spending by corporations in
1970 to nearly 50% today.
The K-12 market is the largest
segment of the education
industry with approximately
$360 billion spent annually or
over $6,500 per year per child.
Despite the size, the K-12
market is the most difficult to
invest in today.
Far too many children are not
receiving the education they
need, which in our knowledge-
based economy is the equivalent
of an economic death sentence.
12
Chart 5: Technology Expenditures Dominate Capital Spending











         
         
         
Source: Bureau of Economic Analysis.
The K-12 market is the largest segment of the education industry with
approximately $360 billion spent annually or over $6,500 per year per child.
Despite the size, the K-12 market is the most problematic to invest in today.
Entrenched bureaucracies and personal and political interests contribute to the
challenges facing this sector. Parents, alarmed by studies that show that this
generation of children will be less educated than the previous one for the first time
in this country’s history are demanding change. Businesses are increasingly
recognizing that without systematic education reform, their competitive positions
will look dim ten years in the future. Politicians from both sides of the aisle are
acknowledging that the education status quo is unacceptable and are beginning to
pass dramatic legislation enabling charter schools, school choice, vouchers and
state takeovers. The entrenched status quo says give us more time, give us more
money and we’ll fix it. The good news is the American people are saying that 200
years is long enough, we need to fix the system today. Increased accountability
and parental involvement has created significant demand for supplemental tutoring
for kids, increased testing and teacher training. Sylvan Learning Systems
(SLVN; $25 1/8 C,1,1,9) is a leading provider of services in this area. Moreover,
dramatic reforms are being initiated throughout the country.
Think of the two most asked questions in the history of man: ‘Have your bags
been in your possession at all times since you packed them?’ And, ‘Have any
persons unknown to you given you any items to carry on board?’ Now let’s say
that instead of those questions you were asked the following: ‘Sir, the FAA has
asked that we inform you that your chances of surviving this flight are good,
about 80%. Only 20% of our flights don’t make it. Would you like a window or
an aisle?’
Under those conditions there would be no air travel in the United States. No
one would get on a flight. And yet in education we are submitting our children
to odds very similar to those. Most American children get through reasonably
good schools in reasonably good shape. But some meaningful percentage, and
you pick it—15, 20, 25 — leave our schools, before or after graduation, unable
to read satisfactorily, unable to do math at levels that success in our society
absolutely requires, and unaware of critical cultural information that binds us
as a country.
—Chris Whittle
Founder, The Edison Project
 The Book of Knowledge – 9 April 1999

Social reform is underway.
Seven years ago, there weren’t
any charter schools, today there
are over 1,100.
Charter schools are leading the way. Seven years ago, there wasn’t one charter
school. Today there are over 1,200. Charter schools, school choice, private
management of public schools and voucher initiatives all contribute to the
dynamic opportunities in the K-12 school market.
Chart 6: Explosion in Charter Schools

1,400 1,207
1,182
1,200

1,000
781
800

600 481
400 267
200 96
1 2 37
0
1991 1992 1993 1994 1995 1996 1997 1998 Mar-99

Source: Center For Education Reform

Of the $360 billion or $6,500
per student spent on K-12, only
about 50% of the money is
spent in the classroom.
The key to understanding both the problems and opportunities in the K-12 area is
to understand how the money is spent. Of the $360 billion or $6,500 per student,
only about 50% of the money is spent in the classroom. We can’t think of another
service industry that exists where 50% of the money is spent outside of where the
service is rendered.

Table 4: Only $0.50 of every $1.00 Is Spent in the Classroom

Revenue (17 Kids * $6,650) $113,000 (a)
We can’t think of another
Teacher Salary 37,000 (a)
service industry that exists Books and Supplies @ 3% 3,400 (b)
where 50% of the money is Maintenance, Utilities and Transportation @ 18% 16,100 (b)
spent outside of where the
service is rendered Classroom Expenses 56,500

Other Expenditures $56,500

(Where does it all go?!)

(a) Department of Education

(b) Local School Budget Profile: A Comparative Analysis, 1993-1994, Educational Research Service.

Technology can take American
schools into the 21st century,
but first we need to bring our
schools into the 20th century.
Technology can take American schools into the 21st century, but first we need to
bring our schools into the 20th century. While technology has become so
important to American business that is IT captures nearly 50% of capital
expenditures, in schools, IT spending only represents approximately 2% of total
spending.

. . . New technology will play a big role in learning both inside and outside the
classroom. The return on investment will be profound.

—Bill Gates
The Road Ahead

13
The Book of Knowledge – 9 April 1999
Is it any wonder that kids who
shoot down space ships with
their Nintendo games all
weekend are bored in a
classroom equipped only with a
blackboard and chalk?
You can’t solve the k-12
problem, until you solve the
“0-5” problem.
In 1960, only 19% of married
mothers with children under
age six worked outside the
home. Today that figure is over
60%.
The learning a child has
historically received in the
home is being “outsourced” to
child care providers. Thus, the
need for educationally
enriched, quality, affordable
childcare has never been more
important.
14
While schools have been slow to add computers, there is a landslide of public
support for technology in the classroom. To us, this makes perfect sense. Is it any
wonder that kids who shoot down space ships with their Nintendo games all
weekend are bored in a classroom equipped only with a blackboard and chalk?
The fact that technology uses a highly engaging, interactive format to help
children learn is a big part of its appeal to kids, teachers and their parents. This,
coupled with the fact that the charter school down the street has a computer in
every classroom (or in the case of The Edison Project, a computer in every home)
has increased commitment to technology in schools.
What’s more, schools are only starting to use technology in the way that
businesses have been doing for years—to automate operations, manage
information, and improve (or even customize) service to customers. Just as
Management Information Systems (MIS) have become essential to the efficient
functioning of successful businesses, Learning Information Systems (LIS) have
the potential to become permanent fixtures in schools and classrooms, providing
teachers and administrators with tools to improve their performance and, in the
process, student learning. We believe these trends bode well for companies such
as National Computer Systems (NLCS; $24 C,2,1,7) and Advantage Learning
Systems (ALSI; $24 1/8 D,2,1,9).
Last, although it probably should be first, is early education. Early childhood
education and childcare are at the foundation of the education puzzle. When
looking at how we can solve the problems in our education system, one comes to
the conclusion you can’t solve the K-12 problem, until you solve the “0-5”
problem. In today’s society, 80% of families are dual income or single family
homes. Sixty percent of married mothers with children under the age of six now
work outside the home compared with 19% in 1960.
Chart 7: 60% of Married Mothers With Children Work, Up from 19% in 1960
70%
60%
50%
40%
30%
20%
10%
0%
1960 1965 1970 1975 1980 1985 1990 1996
Source: U.S. Bureau of the Census.
Studies now empirically show, however, that what children learn when they are
one, two and three years old is linked to how they do when they enter school. And
how a child does in the first grade is correlated with his or her success in the 11th
grade, and from the 11th grade, in life. The concern is that the learning a child has
historically received in the home is being “outsourced” to a child care provider.
Thus, the need for educationally enriched, high quality and affordable childcare,
such as that provided by companies such as Bright Horizons Family Solutions
(BPAM; $21 1/2 C,1,1,9), has never been more important.
Conditions are in place for a boom in the demand for education and training as
well as a rethinking of the way in which that education is delivered. In developing
our view of how, where and why the education and training industry will grow
over the next several years, we have identified six megatrends that we expect will
propel growth and change in the industry:
 The Book of Knowledge – 9 April 1999

We believe the transformation Table 5: Megatrends Shaping the Education & Training Industry
to a knowledge-based economy Demographics
driven by and coupled with six Technology
megatrends is creating a fertile Globalization
environment for for-profit Branding
companies in the education and Consolidation
Outsourcing/Privatization
training industry.
Source: Merrill Lynch.

We believe the transformation to a knowledge-based economy driven by and

coupled with these six megatrends is creating a fertile environment for for-profit
companies in the education and training industry and for the investors that support
them looking out both in the near term and into the next 10 – 15 years.

Table 6: Merrill Lynch Education and Training Universe

Ticker Price Market Cal EPS P/E Multiple 5-Year P/E/G LTM Price/
Companies Symbol Rating 7-Apr-99 Value 1998A 1999E 1998 1999 Growth 1998 1999 Sales Sales
Advantage Learning Sys ALSI D,2,1,9 $22.75 $777.1 $0.39 $0.52 58.3 43.8 35% 167% 125% $54.8 14.19
Apollo Group, Inc. APOL C,1,1,9 $26.19 2,029.8 $0.63 $0.80 41.6 32.7 30% 139% 109% $412.7 4.92
Bright Horizons Family Sol. BFAM C,1,1,9 $21.75 271.3 $0.47 $0.60 46.3 36.3 30% 154% 121% $209.4 1.30
CBT Systems CBTSY D,3,2,9 $11.80 525.1 $0.46 $0.41 25.7 28.8 25% 103% 115% $162.2 3.24
DeVry Inc. DV C,1,1,9 $30.25 2,130.8 $0.49 $0.57 61.7 53.1 20% 309% 265% $383.0 5.56
Education Management EDMC D,2,1,9 $26.94 826.0 $0.55 $0.64 49.0 42.1 20% 245% 210% $240.6 3.43
ITT Educational Services ESI C,2,1,9 $36.00 979.2 $0.85 $1.02 42.4 35.3 20% 212% 176% $291.4 3.36
Learning Tree LTRE D,3,2,9 $9.19 202.2 $0.54 $0.54 17.0 17.0 15% 113% 113% $187.2 1.08
National Computer Systems NLCS C,2,1,7 $23.31 767.7 $1.00 $1.15 23.3 20.3 20% 117% 101% $505.4 1.52
PROVANT POVT D,1,1,9 $13.88 170.7 $0.59 $0.70 23.5 19.8 28% 84% 71% $97.6 1.75
Sylvan Learning Systems SLVN C,1,1,9 $25.06 1,335.7 $0.87 $1.20 28.8 20.9 40% 72% 52% $440.3 3.03
Average 38.0 31.8 26% 156% 133% 3.94

15
The Book of Knowledge – 9 April 1999
2. Human Capital in the Knowledge Economy
The advent of the personal
computer, the Internet and the
electronic delivery of
information have transformed
the world from a
manufacturing, physically-
based economy to an electronic,
knowledge-based economy.
In this “new economy”,
knowledge workers form the
cornerstones of successful
businesses, emerging
industries, and economic
growth. However, in this new
environment, the labor force is
presented with an
unprecedented challenge as it
must now gain and
continuously upgrade its skills.
In today’s economy, companies’
earnings power rises due to
returns on human capital.
Companies, in turn, are
rewarding employees with their
“productivity wages”, or risk
losing them to competitors.
16
Throughout history, whether in pre-industrial or industrial times, great nations
developed based on their access to physical resources or their ability to surmount
physical barriers: England and Spain crossed the oceans, Germany turned coal and
iron into steel, and the United States exploited a wealth of agricultural and
industrial resources to become the world’s breadbasket and industrial superpower.
The advent of the personal computer, the Internet and the electronic delivery of
information have transformed the world from a manufacturing, physically-based
economy to an electronic, knowledge-based economy. Whereas the resources of
the physically-based economy are coal, oil and steel, the resources of the new,
knowledge-based economy are brainpower and the ability to acquire, deliver and
process information effectively.
“Today with the emergence of the information age, the strength of a country
is based on knowledge. National greatness will arise not from our natural
resources or our factories, but from our people – people with new ideas and
skills.”
—Michael Milken Fueling America’s Growth, Education,
Entrepreneurship and Access to Capital
With some of the greatest developments in new technologies arriving late in the
current century, widespread optimism surrounding the coming century has yielded
futurists predicting a period of rapid growth the magnitude of the industrial
revolution, if not greater, with the advent of the “Knowledge-based economy”. In
this “new economy”, knowledge workers form the cornerstones of successful
businesses, emerging industries, and economic growth. However, in this new
environment, the labor force is presented with an unprecedented challenge as it
must now gain and continuously upgrade its skills.
While the future possibilities of the knowledge economy look both exciting and, at
the same time, daunting, the transformation to a knowledge economy is already
evident.
• Most striking—the dramatic pay gap between those with education and
those without has more than doubled in less than 20 years.
• Also significant—our analysis illustrating a seismic shift in how the market
values companies, discounting traditional analysis of earnings derived from
physical capital and replacing it with analysis of earnings power derived
from human capital.
• Finally, the structural economic changes that have occurred such that new
jobs being created are service and skill-based jobs versus manufacturing
jobs.
Growing Pay Gap As Knowledge Workers Are
Rewarded
In today’s economy, companies’ earnings power rises due to returns on human
capital. Companies, in turn, are rewarding employees with their “productivity
wages”, or risk losing them to competitors. When this happens, the earnings
power of knowledge employees rises in the job market. Those without the
necessary education, however, do not reap similar benefits. Accordingly, we have
seen the income gap between those with a bachelor’s or higher degree and those
with just a high school education widen significantly, and we expect this trend to
continue as long as the marketplace continues to reward knowledge-intensive
companies.

In 1980, the pay difference
between someone who had a
high school education and a
college education was 50%.
Today it is over 100% and
growing.
Those companies that have
created growth by leveraging
their “off balance sheet”
human capital assets, have, in
turn, seen their share prices
rewarded with higher
valuations.
The Book of Knowledge – 9 April 1999
Chart 8: Widening Pay Gap Between High School and College Graduates
111%
120%
100%
80% 50%
60%
40%
20%
0%
1980 1998
Source: 198/0: U.S. Census Bureau. 1999: ML Growth Stock Research.
Moreover, the computer is replacing many “left brain” task oriented jobs, as it
performs these functions faster, cheaper and better. A significant challenge and
opportunity is the necessity to create knowledge workers form today’s existing
labor pool.
“My father worked for the same firm for twelve years. They fired him. They
replaced him with a tiny gadget this big. It does everything that my father
does, only much better. The depressing thing is my mother ran out and
bought one.”
—Woody Allen
Recognition of Human Capital Driving Market
Valuations of Knowledge Companies
Growth companies today are dependent on human capital. Those companies that
have created growth by leveraging their “off balance sheet” human capital assets,
have, in turn, seen their share prices rewarded with higher valuations. It is
illustrative to look at valuations of the largest ten companies in the old economy
and compare them with the largest ten companies in the new economy.
17
The Book of Knowledge – 9 April 1999

Chart 9: Human Capital is Replacing Physical Capital as the Primary Productive Asset

10 Largest Companies by Market Capitalization

Median Price-to-Book
13x 12.3x
In the old economy, price-to- Top 10 - 1980 Top 10 - 1999
book was a useful valuation 11x
1. IBM (2.4x) 1. Microsoft (17.4x)
2. AT&T (0.7x) 2. General Electric (8.8x)
measure. What matters in the 3. Exxon (1.4x) 3. Intel (9.2)
new economy, however, is 4. Schlumberger (6.9x) 4. Merck (15.3x)
9x 5. Mobil (1.3x) 5. WalMart (9.7x)
human capital. 6. Chevron (1.5x) 6. Pfizer (19.8x)
7. Atlantic Richfield (2.1x) 7. Exxon (3.7x)
7x 8. General Electric (1.7x) 8. IBM (8.6x)
9. General Motors (0.8x) 9. Coca-Cola (20.0x)
10. Royal Dutch Petroleum (0.8x) 10. Cisco Systems (19.3x)
5x

3x

1.2x
1x

Source: Compustat, ML Growth Stock Research

In the old economy, price-to-book was a useful valuation measure, as it was

physical capital that companies leveraged into earnings power. What matters in
the new economy, however, is human capital. In 1980, the price-to-book of the
largest companies in the U.S. was 1.2x. Today the price-to-book is 12.3x or ten
times greater. The correlation between the productivity of a company’s intangible
assets—its human capital—and the need to pay those assets a competitive wage is
well demonstrated by the close relationship between rising price-to-book ratios
and the rising income gap.
Chart 10: The Power of “Human Capital”
The correlation between the
13x 175%
productivity of a company’s
intangible assets and the need P-Book Income Gap

to pay these assets a competitive 11x

150%
wage is demonstrated by the
close relationship between 9x
rising price-to-book ratios and 125%
the rising income gap.
7x
111% (Est.)

100%
96.3%
5x

75%
3x

1x 50%

Source: U.S. Census Bureau, Compustat, ML Growth Stock Research

18
 The Book of Knowledge – 9 April 1999

We believe rising price-to-book
ratios reflect, in large part, that
fact that the productive assets
driving growth are increasingly
“off balance sheet” assets.
Based on this analysis, we predict that when the U.S. government figures come in
for 1999, the wage gap will have widened from 96.3% in 1997 to 111% in 1999.
This relationship probably best exemplifies how great corporate focus has shifted
to human capital, versus financial and physical capital. Given the intangible
nature of human capital, it simply cannot be “line-itemized” on a balance sheet as
with tangible assets. We believe rising price-to-book ratios reflect, in large part,
that fact that the productive assets driving growth are increasingly “off balance
sheet” assets.

The four engines of the new economy—computers and semiconductors;

medicine and health care; communications and telecommunications; and
instrumentation—employ 48.9 knowledge workers per 100 employees,
compared with 18 per 100 employees by the four engines of the old,
petroleum-based economy. This “knowledge ratio” can help quantify a
company’s financial prospects.
—Nuala Beck
Shifting Gears: Thriving In the New Economy

“Human capital liquidity” will As the rise of the knowledge economy accelerates, and knowledge-employment
continue to push up the wage within industries experiences exceptional growth, “human capital liquidity” will
become an increasingly important factor to employers. We expect that this will
gap between the highly
continue to push up the wage gap between the highly educated and the less
educated and the less educated. educated. In addition to competitive compensation, we anticipate that growing
“human capital liquidity” will also encourage companies to provide other benefits
such as child care and specialized education and training, benefits that increase
worker loyalty, encouraging them to continue to apply their creativity and
brainpower to growing these companies.
Human Capital Liquidity—Workers Protect their Human Capital
For a quick study of how these intricate relationships play out, it is instructive to note the reactions of Hong Kong residents
to the transition of Hong Kong to Chinese rule from British rule in 1997. Hong Kong residents protected the value of their
assets by selling off some of their local financial and physical assets in order to invest in relatively safer foreign securities
and property. At the same time, however, the highly-skilled and educated, such as computer experts, managers and
professionals were leaving Hong Kong to seek citizenship elsewhere in order to protect their human capital. Since it’s not
possible to diversify human capital, knowledge workers must go where their capital goes. (Becker, 1993)

Growth Jobs Are Knowledge and Service Jobs

By 1950, forty percent of the
American workforce was
employed in the manufacturing
sector and from this increased
productivity fifty-fold.
During the industrial revolution, the labor force was already equipped with the
skills to enter into manufacturing sector employment, where the assembly line
merely required the theory of work organization to be put into practice. Workers
were required to do no more than perform specific tasks, and later operate
specialized machinery that performed the actual work. Nonetheless, the changes
that this innovation brought were enormous. By 1950, forty percent of the
American workforce was employed in the manufacturing sector and from this
increased productivity fifty-fold. Workers accrued the majority of the benefits —
half, in the form of sharply reduced working hours, and the other half in a twenty-
five-fold increase in real wages.

19
The Book of Knowledge – 9 April 1999
Since 1950, employment in the
manufacturing sector has fallen
from nearly 40% of total
employment to less than 18%
currently, while service sector
employment has risen from less
than 14% to more than 35% -
essentially flip-flopping from
where it had been in 1950.
While service sector job growth
has been growing generally, it
is the more technically intensive
industries that are experiencing
the most rapid growth, 3-6
times as fast as economy-wide
job growth.
20
Chart 11: Flip-Flop From Manufacturing Economy to Service Economy
(% of Total Employment)
45%
38.9%
Services Manufacturing
40%
35%
35.4%
30%
25%
20%
17.7%
13.7%
15%
10%
5%
0%
Source: Bureau of Labor Statistics
The rise of the knowledge worker, those succeeding the industrial worker, began
fifty years ago with roots in the GI Bill, the “Management Revolution” and the
rise of the services sector. Since 1950, employment in the manufacturing sector
has fallen from nearly 40% of total employment to less than 18% currently, while
service sector employment has risen from less than 14% to more than 35% —
essentially flip-flopping from where it had been in 1950. During this period,
demands for an educated workforce grew. Increased competition from abroad,
and particularly emerging economic regions, has resulted in continued substitution
in the manufacturing sector away from workers and toward technology, increasing
the productivity of remaining workers. Domestically, the service sector has
attracted the more highly skilled workers away from the manufacturing sector.
Lower skilled factory jobs have been absorbed by less developed countries.
“Human skills are subject to obsolescence at a rate perhaps unprecedented in
American history.”
— Alan Greenspan
Chairman, Federal Reserve Board
Just as gains in manufacturing productivity, greater access to higher education and
an affluent middle-class fueled the transition from a manufacturing to a services-
based economy, the extensive adoption of information technology is now creating
the need for a highly skilled knowledge-based economy. While service sector job
growth has been growing overall, the more technically intensive industries have
experienced the most rapid growth. In fact, traditional services sector
employment—retail and wholesale trade, financial services, and leisure services—
has experienced slower job growth than the total job market. Knowledge jobs
such as IT services, health and business services, on the other hand, are growing
3-6 times as fast as economy-wide job growth.

The resulting demand for an
educated workforce, brought
about by the pervasiveness of
technology in today’s
businesses, presents a sizeable
challenge for today’s workers.
Coming generations of workers
must accomplish far more in
terms of educational attainment
and companies will have to
invest heavily in training if “the
greatest boom in history” is to
become a reality.
The Book of Knowledge – 9 April 1999
Chart 12: Industry Job Growth 1988-1998, CAGR
Computer & Data Processing Services 8.2%
Personnel Supply Services 8.1%
Management & Public Relations Services 6.8%
Residential Care Services 6.2%
Business Services 5.7%
Social Services 4.9%
Motion Pictures 4.7%
Child Day Care Services 4.5%
Offices & Clinics of Medical Doctors 3.8%
Engineering and Management Services 3.4%
Educational Services 3.2%
Engineering & Architectural Services 2.1%
Private Nonfarm Payrolls 1.7%
Retail & Wholesale Trade 1.4%
Hotels and Lodging Services 1.3%
Finance, Insurance and Real Estate 0.9%
Manufacturing -0.3%
-10% -5% 0% 5% 10% 15%
Source: Bureau of Labor Statistics
The growth of the knowledge work force heralds the potential for far greater
opportunities for today’s workers, companies, and the economy. However, the
resulting demand for an educated workforce also presents a sizeable challenge for
today’s workers. With rapid increases in technological advances, the continued
proliferation of computers and the numerous applications that are required to be
mastered, employers are demanding more from their current and prospective
employees.
Chart 13: Projected Employment by Educational Level Required, 1996-2006
Postsecondary vocational training
Moderate-term on-the-job training
Long-term on-the-job training
Work experience in related occupation
Short-term on-the-job training
Master’s degree
Work experience plus bachelors or higher
First professional degree
Doctoral degree
Associates degree
Bachelor’s degree
All occupations
0% 5% 10% 15% 20% 25% 30%
Source: Bureau of Labor Statistics
The challenge to workers, companies, and economies in realizing this practically
open-ended economic growth opportunity (where we are limited only by “grey
matter”, that is, brain power) is in preparing today’s workforce for tomorrow’s
jobs. Coming generations of workers must accomplish far more in terms of
educational attainment and companies will have to invest heavily in training if
“the greatest boom in history” is to become a reality. As a consequence, we
believe this will be accompanied by a significant growth in the education and
training industry, creating tremendous growth opportunities for investors.
21
The Book of Knowledge – 9 April 1999

3. Big Investment Opportunity In Education &

Training Industry
The U.S. education and training market is huge, at $740 billion per year, more than
The U.S. currently spends more we spend on social security or national defense and more than the GDP’s of Spain,
than $670 billion per year on Canada or Brazil. Increasingly, this market is becoming accessible for investors.
education, more than we spend We calculate the for profit component of the market at 10% of the total, or
on national defense and more approximately $70 billion. This growing market has been a very attractive place for
than the GDP of Spain, Canada investors, a phenomenon we expect to continue for the foreseeable future.
or Brazil.
Table 6: US Education Spending is Second Only to Healthcare
$ Billions % of GDP
Health $1,212 14%
Education and Training $740 8%
Social Security $412 5%
Defense $340 4%
Total GDP $8,511

In looking at the size of this opportunity, we define five major sectors in the
education and training market: Early Education and Child Care, K-12 Education,
Postsecondary Education, Corporate and IT Training and Consumer Products and
Services, each of which we believe presents investors with tremendous investment
opportunities.

Table 7: Five Major Sectors of Education and Training Industry

1998 Estimated 2001E
($ Billions) Growth Rate ($ Billions)
Early Education and Child Care $34 6% $41
K-12 Education $358 6% $426
Postsecondary Education $237 6% $280
Corporate and Government Training $98 6% $116
Consumer Products and Services $13 10% $17
Total $740 6% $880
Source: Merrill Lynch

“Never make forecasts, especially about the future”

—Samuel Goldwyn, American motion-picture producer

22
 The Book of Knowledge – 9 April 1999

Chart 14: Huge $740 Billion Education and Training Market

Consumer Products and

Corporate and Services
Government Training $13 Billion
$98 Billion Child Care
$34 Billion

Postsecondary
Education
$237 Billion
K-12 Education
$358 Billion

Source: Merrill Lynch

The U.S. spends more money on
education than any country on an
absolute basis and is second on a
percentage-of-GNP basis.
The disconnect between our
current education system and
its customer’s (students) needs
has created tremendous
opportunities for for-profit
companies.
While the U.S. spends more money on education than any country on an absolute
basis and is second on a percentage-of-GDP basis, our return on this enormous
educational investment is unacceptable. US school children, for example, score at or
near the bottom in international academic comparisons. Approximately 75% of the
$740 billion education market is publicly-funded and controlled by a bureaucratic
monopoly that, like most monopolies, has stopped serving its customers, operates in
the interest of the bureaucrats and employees and is managed much less efficiently
than its private sector counterparts. In fact, on average only 50% of public school
funds go to classroom instruction and only 3% is spent on books and materials. To
the best of our knowledge, there is not another service industry that exists in the
world today where 50% of every dollar is spent outside of where the service is being
rendered — unless the service is subsidized by the government.
The disconnect between our current education system and its customers’
(students) needs has created tremendous opportunities for for-profit companies
that have innovative, customer service oriented education solutions to gain market
share. Currently we estimate that the for-profit education market is approximately
$70 billion in size, representing approximately 10% of the total education
industry.

Table 8: Large and Growing For-Profit Education and Training Industry

1998 Estimated 2001E
($ Billions) Growth Rate ($ Billions)
Early Education and Child Care $11.5 10% $15.4
K-12 Education $18.5 15% $27.8
Postsecondary Education $8.0 15% $12.1
Corporate and Government Training $19.0 13% $27.6
Consumer Products and Services $13.0 10% $17.1
Total $70.0 13% $100.0
Source: Merrill Lynch

23
The Book of Knowledge – 9 April 1999

Table 9: Breakdown of the Education and Training Industry ($ Billions)

FOR-PROFIT MARKET TOTAL MARKET
Market Size Growth Market Size Growth
Currently we estimate that the Early Education and Child Care
for-profit education market is Community/Residential Care (a) $ 9.5 8% $ 32.0 5%
approximately $70 billion in Corporate-sponsored Care 2.0 20% 2.0 20%
Subtotal 11.5 10% 34.0 6%
size, representing
approximately 10% of the K-12 Education
education industry. Public School Expenditures (b) NA NA 277.1 6%
Private Management of Public Schools 0.5 100% 0.5 100%
Teacher Training 0.5 20% 3.0 10%
Supplemental Instruction 0.2 25% 1.0 10%
Before/After School Programs 0.3 20% 1.5 15%
Supplemental Materials 3.6 14% 3.6 14%
Textbooks 3.0 5% 3.0 5%
Technology 4.8 12% 4.8 12%
Special Education 2.0 5% 32.0 5%
At-Risk/Alternative Education 1.0 5% 4.0 5%
Private Education 2.6 5% 27.5 5%
Subtotal 18.5 15% 358.0 6%

Postsecondary Education
Public - - 148.0 6%
Private/Not-For Profit - - 80.0 5%
For-Profit 5.0 15% 5.0 15%
Distributed Learning 0.5 50% 1.5 35%
Textbooks 2.5 4% 2.5 4%
Subtotal 8.0 15% 237.0 6%

Corporate & Government Training

Performance Skills (Traditional) 5.0 6% 40.0 4%
Performance Skills (Tech-Based) 1.0 40% 1.0 40%
IT Training (Traditional) 7.0 8% 17.0 8%
IT Training (Tech-Based) 2.0 40% 2.0 40%
Government Training 4.0 4% 38.0 4%
Subtotal 19.0 13% 98.0 6%

Consumer Products and Services

Tutoring/Test-Prep 2.5 12% 2.5 12%
Test Delivery 1.5 8% 1.5 8%
Language Instruction 1.0 5% 1.0 5%
Software 1.5 14% 1.5 14%
Supplemental Materials 2.5 14% 2.5 14%
Toys 1.0 5% 1.0 5%
Books 3.0 5% 3.0 5%
Subtotal 13.0 10% 13.0 10%

TOTAL 70.0 13% 740.0 6.0%

Source: National Center for Education Statistics, Industry Associations Market Research Firms, and ML estimates.
(a) Includes after-school care for school-aged children provided by child care companies.
(b) Includes most purchased services from outsourced providers of food, janitorial and transportation services, etc. As
these are not strictly education companies, we have not broken out those services here.

24

Chart 15: $70 Billion For-Profit Education and Training Market
Publicly Funded and Not-For Profit Education
$670 Billion
Source: National Center for Education Statistics, Industry Associations Market Research Firms, and ML estimates.
With nearly 10% of GDP spent
each year on education
products and services and an
increasing trend toward
technology-based learning, the
potential for significant private
enterprise exists, even if a
sizable portion of services
remain publicly delivered.
The Book of Knowledge – 9 April 1999
Child care - $11.5
BB
K-12 Education -
$18.5 BB
For-Profit
Education
$70 Billion
Postsecondary - $8.0 BB
Corporate &
Government Training
- $19.0 BB
Consumer - $13.0 BB
The education industry represents, in our opinion, the final frontier in private
participation in public programs. By this, we mean that it is one of the last of a
number of sectors once under public control that have generally failed to achieve
the standards of quality, cost effectiveness or technological innovation that were
originally intended. These industries have either voluntarily opened or been forced
to open (in response to external pressure) themselves up to entrepreneurial
innovation and public/private restructuring, creating significant investor
opportunities. In addition, quantum improvements in the electronic delivery of
education have the potential to transform education, similar to the transformation
that the telephone caused in the communications industry and the automobile in
the transportation industry. Compared to other sectors that have been subject to
massive reform, such as utilities, telecommunications, transportation and health
care, the education industry represents the largest market opportunity for private
sector involvement since health care in the 1970s. With nearly 10% of GDP spent
each year on education products and services and an increasing trend toward
technology-based learning, the potential for significant private enterprise exists,
even if a sizable portion of services remain publicly delivered.
25
The Book of Knowledge – 9 April 1999

Capital Markets Have Responded Favorably to

The market capitalization of the Education
education & training market The market capitalization of the education & training market today is still tiny, at
today is still tiny, at $16 billion, $16 billion, just 0.2% of the $10 trillion total.
just 0.2% of the $10 trillion
total, but is growing fast. Table 10: Market Capitalization of the Education & Training Industry
($millions)
% of Total Market Capitalization
Early Education and Child Care 2% $ 292.6
K-12 Education
Education Management Organizations 1% 95
At-Risk Education 9% 1,368
Education Technology* 23% 3,729
Products and Services* 13% 2,151
Postsecondary 42% 6,638
IT & Corporate Training 11% 1,694
Total $ 15,970
Source: Merrill Lynch.
* Includes consumer purchases

Nevertheless, it has shown considerable growth in the last decade, as the following
chart shows.

Chart 16: Market Capitalization of Education and Training Industry Has Grown Significantly ($ millions)

PROVANT IPO
4/28/98
$20,000

Corporate Family Solutions IPO

8/12/97

$15,000
Education Management IPO
10/30/96

$10,000
Advantage Learning IPO
9/25/97

Apollo Group IPO

12/5/94
First Notable IPO in Education
Education Alternatives
$5,000 4/25/91
DeVry Inc. IPO
6/21/91
CBT Group IPO
Sylvan IPO 4/13/95
12/09/93

$0
12/29/89 7/27/90 2/22/91 9/20/91 4/16/92 11/13/92 6/11/93 1/07/94 8/05/94 3/03/95 9/29/95 4/26/96 11/22/96 6/20/97 1/16/98 8/14/98 3/12/99

Source: Factset, Merrill Lynch.

Note: Includes four publishing companies: Harcourt General, McGraw Hill, Scholastic Corporation and Primedia.

26

Since 1994, education and
training companies have raised
more than $3.4 billion of equity
capital through 38 initial public
offerings and 30 follow-on
offerings.
Education Alternatives was the
first significant education
company to tap the public
equity markets in the1990s,
with its April 1991 IPO and
follow-on offerings in 1992 and
1993.
Many investors who have
participated in the education
and training industry have been
richly rewarded
The Book of Knowledge – 9 April 1999
Strong underlying fundamentals of education and training markets have driven
tremendous investor demand for private and public education and training financial
securities. Since 1994, education and training companies have raised more than $3.4
billion of equity capital through 38 initial public offerings and 30 follow-on offerings.
Chart 17: $3.4 Billion Equity Financing in the Education and Training Industry
$957.9
$1,000
$800
$597.3
$639.7
$ millions
$600 $472.2 $440.6
$400 $246.1
$200
$0
1994 1995 1996 1997 1998 YTD 1999
IPO Follow-ons
Source: Securities Data Corporation.
Education Alternatives (since renamed TesseracT) was the first significant
education company to tap the public equity markets in the l 990s, with its April
1991 IPO and follow-on offerings in 1992 and 1993. Education Alternatives’ early
success opened the doors to the public equity markets for education companies
and introduced many institutional investors to the opportunities within the
education industry.
Those who have followed the industry since know that this pioneer struggled with
the tremendous learning curve that being the leader necessarily required.
Nevertheless it did pave the way for many companies to follow and a majority of
education companies that have raised equity capital since have been extremely
successful. Many investors who have participated in the education and training
industry have been richly rewarded:
• DeVry completed its IPO in June 1991 and since that time its stock price has
increased more than 2260%.
• Sylvan Learning Centers was the only education company to complete an IPO
in 1993. Its stock has appreciated more than 400%.
• During 1994, Apollo Group completed its IPOs despite a volatile equity
market and difficult financing environment. Since then, Apollo shares have
been extremely strong performers with appreciation of more than 1550%.
"Boring” stocks sell at a discount. Buy enough of them and you can cover
your losses in high tech.
—Ralph Wanger
A Zebra In Lion Country
Illustrative of the strength of the education and training sector is the performance of
our Merrill Lynch Education and Training Index, which is up 134% from 1994,
compared to other major indices such as the S&P 500, NASDAQ and Russell 2000
which were up 179%, 217% and 54%, respectively. While 134% appreciation is
impressive on its own, it is even more remarkable when considering the fact that a full
one-third of the stocks in the index are small cap stocks that trade below $10.
27
The Book of Knowledge – 9 April 1999
Illustrative of the strength of the
education and training sector is
the performance of our Merrill
Lynch Education and Training
Index, which is up 134%
As a result of the exceptional
price performance of education
stocks, a strong inflow of
capital into equity mutual
funds, and the emergence of
many high-quality education
companies, we believe there will
be a continued growth in the
number of education companies
seeking private and public
equity.
In this sector, merger and
acquisition activity has been
very strong in the past few
years.
28
Chart 18: Education and Training Index is up a Strong 134% Since 1994
176%
180%
134%
160%
140%
120%
100%
54%
80%
60%
40%
20%
0%
S&P 500 Education and Training Index Russell 2000
Source: Factset
Education and Training Composite includes AEDU, ALSI, AMEP, AMIE, APOL, ARSC, ASYM, BFAM, BTZ, CBTSY,
CECO, CLBR, CLCX, CRN, CSCQ, CTIM, DV, EDIN, EDMC, EDUC, EDUT, ESI, FATS, FC, H, ITCC, KIDQ, KIDS,
LTRE, MATH, MHP, NEWH, NLCI, NLCS, POVT, PRM, QEDC, RSCR, SCHL, SCHS, SLVN, STRA, TLC, TSST, TUTR,
UOLP, VIAX, WAVT, WHC, WIX and YSII.
As a result of the exceptional price performance of education stocks, a strong
inflow of capital into equity mutual funds, and the emergence of many high-
quality education companies seeking capital to expand, we believe there will be a
continued growth in the number of education companies seeking private and
public equity. Likewise, we believe there will be an increasing number of
investors who will assess those opportunities and chose to participate in them.
n Mergers and Acquisitions Heating Up in Education & Training
Industry
In an emerging industry such as education and training, mergers and acquisitions
are a logical growth strategy that enable companies to gain immediate scale,
technology expertise, and/or talent, as well as a way to broaden products and
service offerings. Moreover, companies from other industries, including the
related publishing industry, have used a merger and acquisition strategy to tap into
the fast-growing education and training industry.
As shown on the following page, merger and acquisition activity has been very
strong in the past few years.
 The Book of Knowledge – 9 April 1999

Table 11: Merger and Acquisition Activity Has Been Strong Across All Education and Training Sectors
(Selected Transactions Since 1997)
Date Transaction
Effective Target Acquirer Value ($mm)
Early Education and Childcare
7/27/98 Bright Horizons Corporate Family Solutions $ 123.4
5/11/98 Children’s Discovery Centers Knowledge Universe 91.5
12/18/97 Sunrise Educational Services TesseracT Group 13.6

K-12 Education
12/1/99 Schulerhilfe Sylvan Learning Systems 31.0
4/1/99 Youth Services International Correctional Services Corp. 69.3
12/4/98 Somerset Educational Services Children’s Comprehensive Svcs 10.5
11/27/98 Simon & Schuster Pearson 4,701.7*
9/14/98 Educational Structures National Computer Systems 10.5
9/10/98 Ameris Health Systems Children’s Comprehensive Svcs 12.5
2/3/98 Canter & Associates Sylvan Learning Systems 25.0
6/10/97 Educational Inroads Sylvan Learning Systems 42.4

Consumer Products and Services

1/12/99 Cendant Software Vivendi 985.0
8/31/98 Broderbund Learning Company 299.5
8/28/97 ELS Educational Services Berlitz International 95.0
7/8/98 Sofsource Learning Company 45.0
7/24/96 Davidson & Associates Cendant 1,129.4
7/24/96 Sierra On-Line Cendant 933.7
4/13/98 Aspect Inc Sylvan Learning Systems 65.0
3/27/98 Mindscape Learning Company 150.0
2/3/97 Knowledge Adventure Cendant 86.1
12/11/97 Creative Wonders Learning Company 40.0
1/28/97 Wall Street Institute Int’l Sylvan Learning Systems 26.8

Postsecondary Education
Pending Universidad Europea de Madrid (54%) Sylvan Learning Systems 51.0
3/15/99 Fox Gearty CPA Review DeVry Inc. NA
3/9/99 McIntosh College Career Education 5.0
1/4/99 Harrington Career Education 3.3
7/21/98 Gross-Monette CPA Review DeVry Inc. NA
2/18/98 CHI Institutes Quest Education 11.8
2/7/98 Bassist College Education Management NA
12/19/97 Louise Salinger School Education Management NA
9/23/97 College For Financial Planning Apollo Group 35.1
Source: Securities Date Corporation; Merrill Lynch
* About 56% of Simon and Schuster’s assets are education-related. Bids for these assets alone at the time of sale put their market value at $3.6 billion.

29
The Book of Knowledge – 9 April 1999

Table 11: Merger and Acquisition Activity Has Been Strong Across All Education and Training Sectors
(Selected Transactions Since 1996) — Continued
Date Transaction
Effective Target Acquirer Value ($mm)
Corporate and IT Training
Pending Project Management Services Inc. PROVANT —
2/17/99 Street Technologies 7th Street 21.6
2/16/99 Educational Discoveries PROVANT —
1/26/99 OC Incorporated PROVANT —
12/10/98 Knowledge Well CBT Group 52.0
12/1/98 Executive Perspectives PROVANT 10.7
11/17/98 Gulliver Richie Associates PROVANT 10.0
10/27/98 Strategic Interactive PROVANT 12.0
9/15/98 American Media PROVANT 11.5
9/1/98 GartnerGroup Learning* Harcourt General Inc. —
7/21/98 KC Resources PROVANT 6.0
4/21/98 Mastering Inc Platinum Technology 141.0
7/1/97 McGraw-Hill London House Div. National Computer Systems 29.5
6/10/97 National Education Corp Harcourt General Inc. 835.1
6/2/97 Covey Leadership Center Franklin Quest 155.5
4/1/97 Virtual University Enterprises National Computer Systems 14.6
3/1/97 Premier Agendas Franklin Quest 30.2
Source: Securities Date Corporation; Merrill Lynch
* Division of Gartner Group

30
 The Book of Knowledge – 9 April 1999

n “Smart Money” Finding Its Way into Education

Many financial buyers have Recent high profile private transactions have created heightened awareness of the
entered the scene looking for opportunities available in the education and training space. Many financial buyers
high-return investments. have entered the scene looking for high-return investments.

Table 12: Selected Private Equity and Venture Capital Investments in

Recent high profile private
transactions have also created
heightened awareness of the
opportunities available in the
education and training space.
Many financial and strategic
buyers have entered the scene
looking for high return
investments.
Education & Training Industry
Sector Financial Sponsor Investments Made
Child Care Chase Capital Partners La Petite Academy
Equity Group Children First
KKR KinderCare
Knowledge Universe Children’s Discovery Centers
Lazard Freres Children First
K-12 Education Bain Capital Jostens Learning
Bessemer Advantage Schools
Brentwood Partners Classroom Connect
Chase Capital Partners Advantage Schools
Fidelity Ventures Advantage Schools
GE Capital NetSchools
Investor AB The Edison Project
J.P. Morgan The Edison Project
John Childs The Edison Project
KKR Primedia
Kleiner Perkins Academic Systems/
Advantage Schools/
The Lightspan Project
Lazard Freres Scientific Learning
Leeds Equity Partners The Edison Project
Tribune Ventures Discourse Technologies/ The
Lightspan Project
Vulcan Northwest Academic Systems/
Asymetrix Learning Systems/
NetSchools
Warburg Pincus Scientific Learning
Consumer Products and Services Apollo Advisors Berlitz
Rosewood Partners Gateway Learning
Postsecondary Carlyle Group Blackboard.com
Cherry Tree Learning Ventures
FBR Tech. Venture Partners Varsity Books.com
Mayfield Fund Varsity Books.com
Pritzker Family Real Education
St. Paul Ventures OnlineLearning.net

Corporate and IT Training Adv. Tech. Ventures Docent

Battery Ventures Pensare
Foundation Capital Eloquent
GE Capital Pensare
GeoCapital ILINC
Golder Thoma Training Consolidation
Menlo Ventures Eloquent
Norwest Ventures Docent
Onset Ventures Eloquent
Sequoia Capital SABA Systems
Walden Group Digital Think
Warburg Pincus Skillsoft
Welsh Carson Global Knowledge Network
Source: Public Documents, Merrill Lynch

31
The Book of Knowledge – 9 April 1999

Publishing companies have also been active as they recognize the synergies
between their businesses and other companies in the education and training
industry, including complementary products and distribution channels.

Publishing companies have also

Table 13: Publishers Are Recognizing The Synergies
been active as they recognize
the synergies between their Publishers Investments Made in Education and Training
businesses and other companies Tribune Breakthrough, Discourse, Keats, Landoll Inc., Lightspan, Peter Bedrick
Harcourt General Gartner Learning, ICS Learning Systems, Mosby, NetG
in the education and training Houghton Mifflin Education Place, McDougal Little, OnlineLearning.net,
industry, including McGraw-Hill Princeton Review
complementary products and Primedia American Guidance Systems, Cambridge Research Group
distribution channels. Scholastic Corp. Electronic Book Shelf, Pages Book Fairs
Times Mirror OnlineLearning.net
Washington Post Kaplan, Academic Systems
Wolters Kluwer Blessing/White
Source: Public Documents/Merrill Lynch.

We believe pricing will remain
lucrative and multiples high as
we enter the next century.
We believe financial buyers are willing to pay higher multiples to gain entrance to
this growing industry, and strategic buyers have been afforded with the
opportunity to compete for transactions through the strength of their currency. We
expect both of these factors to contribute to the continued pace of education and
training M&A and investment activity. Premiums are placed on those companies
that can be used as a platform for future acquisitions that possess critical mass, an
attractive customer base, and/or product or service in a particularly attractive
segment of the industry. As a relatively small number of properties currently meet
these criteria, we believe pricing will remain lucrative and multiples high as we
enter the next century.

Table 14: Top Ten Performing Stocks From 1994 to Today

The four top performing stocks Company Ticker Performance
were in the postsecondary Apollo Group APOL 1538%
DeVry DV 743%
market, benefiting from strong
ITT Educational ESI 710%
operating performance and Strayer Education STRA 399%
investor attention. National Computer Systems NLCS 368%
Sylvan Learning SLVN 342%
Wackenhut Corrections Corp WHC 329%
Education Management EDMC 269%
ResCare RSCR 214%
New Horizons NEWH 166%
Source: Factset

32
 The Book of Knowledge – 9 April 1999

Table 15: Comparisons Based on Margins

Top Margins EBIT Margin
Strayer Education Inc. 40%
American Educational Corp. 32%
Leading education companies Advantage Learning Systems 29%
have high relative margins. Ambassadors International 28%
CBT Group PLC 20%
Apollo Group 18%
Sylvan Learning Systems 17%
Aris Corporation 15%
DeVry Inc. 14%
Franklin Covey 14%
Source: Factset.

Table 16: Comparisons Based on P/E Ratios (1999)

The market has handsomely Top P/E Price-to-Earnings
rewarded education companies DeVry Inc. 53.1
that have met or beat Advantage Learning Systems 43.8
Education Management Corp. 42.1
expectations. Corinthian Colleges 36.6
Bright Horizons Family Solutions, Inc. 36.0
Career Education Corp. 35.4
ITT Educational Services 35.3
Viagrafix 33.3
Apollo Group 32.7
CBT Group PLC 28.8
Bottom P/E
Correctional Services Corp. 10.0
Aris Corporation 9.7
Quest Education Corp. 9.5
Franklin Covey 6.3
Children’s Comprehensive Svcs 6.3
Source: Factset. Excludes companies that have no earnings. Prices as of 4/7/99.

Table 17: Comparisons Based on P/E-to-Growth Ratios (1999)

Top P/E/G P/E-to-Growth
DeVry Inc. 2.6
Education Management Corp. 2.1
Visibility of revenues, delivery
Corinthian Colleges 1.8
on expectations and demand Career Education Corp. 1.8
imbalance for equity shares in ITT Educational Services 1.6
this industry contributed to Strayer Education Inc. 1.4
premium P/E to growth rates Viagrafix 1.3
for leading companies. Bright Horizons Family Solutions 1.2
Advantage Learning Systems 1.1
Apollo Group 1.1
Bottom P/E/G
Quest Education Corp. 0.4
Aris Corporation 0.3
Children’s Comprehensive Svcs 0.3
Correctional Services Corp. 0.3
7th Street.com 0.2
Source: Factset. Excludes companies that have no earnings. Prices as of 4/7/99.

33
 Table 18: Comparable Analysis of Education and Training Companies
5-Year Market Cap LTM
Price Market Market P/E Multiple Estimated P/E/G As Multiple of LTM EBIT
Companies Ticker 4/7/99 Value Cap 1999E 2000E Growth (c) 1999E 2000E Sales EBIT EBITDA Margin
Preschool and Childcare
Bright Horizons Family Solutions BFAM $21.63 $260.6 $240.9 36.0x 28.5x 30% 1.2x 0.9x 1.15x 27.6x 19.0x 4.2%
Childtime Learning Centers CTIM 12.50 67.9 68.7 11.9 10.1 18% 0.7 0.6 0.62 8.6 6.4 7.2%
New Horizons KidsQuest KIDQ 2.06 6.8 9.8 NA NA NA NA NA 0.63 33.6 5.1 1.9%
Mean: $111.8 $106.4 24.0x 19.3x 24% 0.9x 0.8x 0.80x 23.3x 10.2x 4.4%
Median: $67.9 $68.7 24.0x 19.3x 24% 0.9x 0.8x 0.63x 27.6x 6.4x 4.2%

K-12 Education Management Organizations (EMOs)

Nobel Learning Communities NLCI $4.69 $27.9 $56.7 15.6x 15.6x 20% 0.8x 0.8x 0.62x 10.1x 6.4x 6.1%
TesseracT Group TSST 2.88 27.5 43.0 NA NA NA NA NA 1.46 NM NM NM
Mean: $27.7 $49.8 15.6x 15.6x 20% 0.8x 0.8x 1.04x 10.1x 6.4x 6.1%
Median: $27.7 $49.8 15.6x 15.6x 20% 0.8x 0.8x 1.04x 10.1x 6.4x 6.1%

Postsecondary Institutions
Apollo Group APOL $26.19 $2,047.8 $1,967.8 32.7x 25.9x 30% 1.1x 0.9x 4.77x 26.3x 22.2x 18.1%
Career Education Corp. CECO 36.50 263.5 299.6 35.4 28.7 20% 1.8 1.4 2.08 27.1 12.9 7.7%
Computer Learning Centers CLCX 4.31 75.2 67.6 11.1 8.8 25% 0.4 0.4 0.49 4.4 3.1 11.2%
Corinthian Colleges COCO 21.94 227.0 267.7 36.6 30.9 20% 1.8 1.5 2.25 32.1 23.1 7.0%
DeVry Inc. DV 30.25 2,099.1 2,069.5 53.1 42.6 20% 2.6 2.1 5.41 37.5 29.0 14.4%
Education Management Corp. EDMC 26.94 789.9 805.3 42.1 35.0 20% 2.1 1.7 3.35 28.1 18.5 11.9%
Edutrek International EDUT 6.94 74.0 80.5 26.7 19.8 35% 0.8 0.6 1.73 46.4 17.5 3.7%
ITT Educational Services ESI 36.00 972.6 856.9 35.3 29.3 20% 1.6 1.3 2.94 25.7 20.2 11.5%
Quest Education Corp. QEDC 7.50 61.4 79.3 9.5 7.6 25% 0.4 0.3 0.97 8.8 6.2 10.9%
Strayer Education Inc. STRA 37.13 583.5 558.5 27.7 22.8 20% 1.4 1.1 8.88 21.3 20.1 41.7%
Whitman Education Group, Inc. WIX 4.44 59.0 69.6 12.0 NA NA NA NA 1.00 29.9 11.2 3.3%
Mean: $659.4 $647.5 29.3x 25.1x 24% 1.4x 1.1x 3.08x 26.2x 16.7x 10.0%
Median: $263.5 $299.6 32.7x 27.3x 22% 1.5x 1.2x 2.25x 27.1x 18.5x 11.0%

At Risk Youth Sector

Children’s Comprehensive Svcs KIDS $5.63 $41.6 $68.9 6.3x 5.1x 25% 0.3x 0.2x 0.68x 6.9x 5.5x 9.8%
Cornell Corrections CRN 18.50 176.7 272.7 21.5 15.9 35% 0.6 0.5 2.21 21.7 16.2 10.2%
Correctional Services Corp. CSCQ 8.13 65.5 76.7 10.0 7.5 33% 0.3 0.2 0.78 NM NM NM
Res-Care Inc. RSCR 20.50 388.1 566.4 17.7 14.1 25% 0.7 0.6 1.08 13.5 10.1 8.0%
Wackenhut Corrections Corp. WHC 17.75 397.3 377.2 17.8 14.0 28% 0.6 0.5 1.21 16.8 14.5 7.2%
Mean: $213.8 $272.4 14.7x 11.3x 29% 0.5x 0.4x 1.19x 14.7x 11.6x 8.8%
Median: $176.7 $272.7 17.7x 14.0x 28% 0.6x 0.5x 1.08x 15.2x 12.3x 8.9%
(a) Earnings Estimates obtained from First Call as of 3/24/99 calendarized and/or grown at IBES when necessary; estimates for BFAM, APOL, DV, EDMC, ESI, SLVN, ALSI, NLCS, CBTSY, LTRE and POVT are Merrill Lynch estimates.
(b) 5-Year Growth Rates taken from I/B/E/S as of 3/24/99, except for Merrill Lynch estimates. (c) Summary multiples exclude numbers that are negative, not available(NA), not meaningful(NM), and (*) numbers.

33
The Book of Knowledge – 9 April 1999
34
Table 18: Comparable Analysis of Education and Training Companies (Continued)
5-Year Market Cap LTM
Price Market Market P/E Multiple Estimated P/E/G As Multiple of LTM EBIT
Companies Ticker 4/7/99 Value Cap 1999E 2000E Growth (c) 1999E 2000E Sales EBIT EBITDA Margin
Specialty Service Providers
Ambassadors International AMIE $14.25 $140.0 $47.4 12.4x 10.3x 21% 0.6x 0.5x 1.18x 5.3x 4.3x 22.5%
American Educational Products AMEP 8.63 8.8 12.6 NA NA NA NA NA 1.19 10.5 6.0 11.3%
Berlitz International BTZ 22.34 212.9 390.2 NA NA NA NA NA 0.89 18.7 8.1 4.8%
Educational Development Corp. EDUC 2.50 12.3 12.5 NA NA NA NA NA 0.72 5.6 5.0 12.7%
Educational Insights EDIN 1.94 13.6 20.6 NA NA NA NA NA 0.52 NM NM 0.3%
School Specialty SCHS 20.38 297.0 469.6 20.4 24.0 25% 0.8 1.0 0.96 13.7 11.2 7.0%
Sylvan Learning Systems SLVN 25.06 1,275.0 1,249.3 20.9 16.2 35% 0.6 0.5 2.84 19.2 12.8 14.8%
Mean: $280.0 $314.6 17.9x 16.8x 27% 0.7x 0.6x 1.19x 12.2x 7.9x 10.5%
The Book of Knowledge – 9 April 1999

Median: $140.0 $47.4 20.4x 16.2x 25% 0.6x 0.5x 0.96x 12.1x 7.1x 11.3%

Publishing Companies
Harcourt General H $45.19 $3,213.4 $5,156.1 18.8x 16.3x 15% 1.3x 1.1x 1.20x 12.8x 7.2x 9.3%
McGraw Hill MHP 56.06 5,538.9 6,056.1 29.8 26.7 12% 2.5 2.2 1.62 8.9 6.2 18.2%
Scholastic Corp. SCHL 49.25 808.4 1,111.0 21.9 19.0 15% 1.5 1.3 1.02 22.4 9.6 4.5%
Primedia PRM 13.56 1,960.9 4,444.2 NA NA 15% NA NA 2.90 48.4 13.8 6.0%
Mean: $2,880.4 $4,191.9 23.5x 20.7x 14% 1.7x 1.5x 1.69x 23.1x 9.2x 9.5%
Median: $2,587.1 $4,800.2 21.9x 19.0x 15% 1.5x 1.3x 1.41x 17.6x 8.4x 7.7%

Education Technology
Advantage Learning Systems ALSI $22.75 $770.7 $762.5 43.8x 32.5x 35% 1.1x 0.8x 13.92x 37.4x 33.9x 37.2%
American Educational Corp. AEDU 1.78 23.9 23.4 NA NA NA NA NA 3.89 13.6 11.4 28.5%
Caliber Learning Network CLBR 3.25 40.0 24.5 NA NA 50% NA NA 1.59 NM NM NM
Educational Video Conferencing EVCI 14.69 61.8 60.9 NA NA NA NA NA NM NM NM NM
MathSoft, Inc. MATH 3.31 32.3 27.3 12.3 9.4 30% 0.4 0.3 1.12 12.6 8.5 8.8%
National Computer Systems NLCS 23.31 729.6 707.5 20.3 17.5 20% 1.0 0.9 1.40 13.5 8.3 10.4%
7th Street.com SEVL 5.75 176.2 166.2 12.8 8.5 70% 0.2 0.1 105.78 NM NM NM
TRO Learning TUTR 5.94 38.1 52.4 13.2 8.7 NA NA NA 1.25 9.2 6.1 13.6%
Mean: $234.1 $228.1 20.5x 15.3x 42% 0.7x 0.5x 18.42x 17.3x 14.9x 19.7%
Median: $50.9 $56.6 13.2x 9.4x 39% 0.7x 0.6x 1.59x 13.5x 9.8x 13.6%
(a) Earnings Estimates obtained from First Call as of 3/24/99 calendarized and/or grown at IBES when necessary; estimates for BFAM, APOL, DV, EDMC, ESI, SLVN, ALSI, NLCS, CBTSY, LTRE and POVT are Merrill Lynch estimates.
(b) 5-Year Growth Rates taken from I/B/E/S as of 3/24/99, except for Merrill Lynch estimates. (c) Summary multiples exclude numbers that are negative, not available(NA), not meaningful(NM), and (*) numbers.
 Table 18: Comparable Analysis of Education and Training Companies (Continued)
5-Year Market Cap LTM
Price Market Market P/E Multiple Estimated P/E/G As Multiple of LTM EBIT
Companies Ticker 4/7/99 Value Cap 1999E 2000E Growth (c) 1999E 2000E Sales EBIT EBITDA Margin
IT and Corporate Training
Aris Corporation ARSC $8.13 $91.6 $79.8 9.7x 6.8x 30% 0.3x 0.2x 0.69x 7.0x 5.2x 9.9%
Asymetrix Learning Systems ASYM 4.38 61.2 39.5 NM 43.8 48% NM 0.9 1.18 NM NM NM
CBT Group PLC CBTSY 11.80 524.8 423.1 28.8 18.1 25% 1.0 0.6 2.61 21.2 15.9 12.3%
Firearms Training Systems FATS 1.03 21.3 89.5 NA NA 30% NA NA 1.49 11.7 9.0 12.7%
Franklin Covey FC 9.13 193.8 253.8 6.3 5.7 10% 0.6 0.6 0.47 3.4 2.2 13.8%
ITC Learning Corporation ITCC 4.38 17.3 19.4 17.5 NA NA NA NA 1.05 NM NM NM
Learning Tree International LTRE 9.19 202.1 131.7 17.0 13.1 15% 1.1 0.9 0.70 8.9 5.4 7.9%
New Horizons Worldwide NEWH 18.00 135.7 117.2 18.8 14.1 28% 0.7 0.5 1.61 13.7 9.4 11.7%
PROVANT POVT 13.88 215.6 192.7 19.8 15.6 28% 0.6 0.5 1.98 11.9 9.4 16.6%
UOL Publishing UOLP 4.00 17.1 37.3 NA NA NA NA NA 2.54 NM NM NM
Viagrafix VIAX 6.00 34.7 21.8 33.3 26.7 25% 1.3 1.1 1.16 19.5 11.8 6.0%
Wave Technologies WAVT 4.88 20.3 21.7 16.3 12.5 30% 0.5 0.4 0.60 NM 12.0 NM
Mean: $128.0 $119.0 18.6x 17.4x 28% 0.8x 0.6x 1.34x 12.2x 8.9x 11.4%
Median: $76.4 $84.7 17.5x 14.1x 30% 0.7x 0.6x 1.17x 11.8x 9.4x 12.0%

Industry Mean: (c) $492.4 $598.6 21.9x 18.6x 27% 1.0x 0.8x 4.01x 18.5x 11.7x 10.8%
Industry Median: (c) $137.9 $103.3 18.8x 16.1x 25% 0.8x 0.6x 1.20x 13.7x 9.6x 10.1%
(a) Earnings Estimates obtained from First Call as of 3/24/99 calendarized and/or grown at IBES when necessary; estimates for BFAM, APOL, DV, EDMC, ESI, SLVN, ALSI, NLCS, CBTSY, LTRE and POVT are Merrill Lynch estimates.
(b) 5-Year Growth Rates taken from I/B/E/S as of 3/24/99, except for Merrill Lynch estimates. (c) Summary multiples exclude numbers that are negative, not available(NA), not meaningful(NM), and (*) numbers.

35
The Book of Knowledge – 9 April 1999

4. Megatrends Impacting Education &
Training Market
Demographics, the Internet and
technology, globalization,
consolidation, branding and
outsourcing are having a
significant impact on how and
why we gain knowledge.
American society has
undergone seismic shifts in the
past few decades, dramatically
changing the nature of our
families, our workplaces and a
myriad other aspects of our
lives.
These fundamental changes
have come in five major areas:
our ages, our families, our
economic status, our ethnic
makeup and our educational
achievement.
The Book of Knowledge – 9 April 1999
Conditions are in place for a boom in the demand for education and training as
well as a rethinking of the way in which that education is delivered. The
transformation to a knowledge-based economy, coupled with six megatrends are
creating a fertile environment for innovation and change in the education industry.
Chart 19: Six Megatrends Impacting Education & Training Market
Conso
Tech
lidatio
nolo
gy
Br
n
an
di ics
ng ph
gra
mo
De
Education & Training
Globalization Industry Outsourcing
Source:
Demographics, the Internet and technology, globalization, consolidation, branding and
outsourcing are having a significant impact on how and why we gain knowledge.
“I skate to where the puck is going to be, not where it has been.”
—Wayne Gretzky
Megatrend #1: Changing Demographics
American society has undergone seismic shifts in the past few decades,
dramatically changing the nature of our families, our workplaces and a myriad
other aspects of our lives. These fundamental changes have come in five major
areas: our ages, our families, our economic status, our ethnic makeup and our
educational achievement.
Table 19: The 20th Century’s Tectonic Shifts in the Demographic Landscape
Demographic Measure Change
Age The Baby Boom is probably the most significant demographic phenomenon of
the 20th century, shaping all aspects of our economic lives. The aging of the
76 million Baby Boomers has major implications not only for them, but for the
following generation of workers who must support them as they retire.
Family Status The “disintegration” of the nuclear family began in 1970 and has only begun to
stabilize. The rise in single parent families has, unfortunately, been a major
factor in rising child poverty rates; over 20% of young children are poor.
Educational Achievement Educational achievement has trailed the demand for knowledge-based skills.
But now adults are heading back to school in record numbers.
Ethnic Makeup Our nation is becoming more diverse—by 2050, “minorities” will represent 40%
of the population.
Economic Status These factors, coupled with the shift to a knowledge-based economy have
widened the gap between the haves and the have-nots.
37
The Book of Knowledge – 9 April 1999

n Aging America
The Baby Boom is probably the most significant demographic phenomenon of the
20th Century, shaping all aspects of our economic lives. This generation of 76
million people born between 1946 and 1964 in many ways built the dynamic
economy we have today, although increasingly that torch is being passed to the
much smaller Generation X.
This generation of 76 million
people born between 1946 and Table 20: Generations of Americans
1964 in many ways built the
Generation Age in 1999 # of People
dynamic economy we have
Baby Boom 35-53 76 Million
today, although increasingly Generation X 23-34 41 Million
that torch is being passed to the Echo Boomers / Generation Y 5-22 72 Million
much smaller Generation X. Source: American Demographics

Chart 20: U.S. Population in 2000, Millions

25,000

20,000

15,000 Echo Boomers

Generation “Y” Generation “X” Boomers
10,000

5,000

-
Under 5-9 10- 15- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65- 70- 75- 80- 85+
5 14 19 24 29 34 39 44 49 54 59 64 69 74 79 84

Source: U.S. Bureau of the Census.

In just four years for the first
time ever there will be more
workers over 40 than there are
workers under 40.
The aging of the Baby Boomers will become a significant economic issue, not
only for them but also for following generations.
Competition for jobs at the top of the hierarchy from older baby boomers and,
for the rest, competing with up and coming Generation Xers: In just four years
for the first time ever there will be more workers over 40 than there are workers
under 40. As Fortune Magazine notes, “At some point after 2010, as baby-
boomers start to retire, companies will get desperate for workers—even older
workers. But until then, there will be too many highly paid boomers competing
for too few top jobs.”
Competing with young and hungry Generation Xers isn’t much easier—“The
harder Gen Xers work, the more they tend to resent all those 44-year olds who put
in half as many hours and earn more money. . . ‘You have to do more for young
people because they are likely to turn over more quickly than older workers.
Consequently, a lot of companies are putting young people on the fast track, so
you have 28-year-olds running entire departments that 20 years ago were run by
55-year-olds,’ explains Joe Gibbons, an H.R. consultant at William M. Mercer.
‘That’s a big change—it’s a sea change.’ (Fortune Magazine, Feb. 1, 1999).

38
 The Book of Knowledge – 9 April 1999

Boomers will begin to retire in
about ten years, and with the
advances of science, will live
longer than any generation
before them.
Extending the working life of Baby Boomers: Boomers will begin to retire in
about ten years, and with the advances of science, will live longer than any
generation before them.
Chart 21: Life Expectancy of U.S. Men

74 Life Expectancy Retirement Age

72
70
68
66
64
62
60 1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995
Source: Statistical Abstract of the United States, 1998

Concerns about our Social Security system are already high on our national
agenda—will there be enough money to pay for a secure retirement for these
people? Should we push back the retirement age? Will older Americans have the
skills and flexibility to work in the new economy, and will they? These questions
are key drivers for the growth in the corporate training market.
Making Generations X and Y Hyper-Productive: Generation X may find itself
stuck between a demographic rock and hard place—in their peak earning years
they have to not only provide for themselves and their children, but also for the
retired Boomers. The fundamental drivers of economic growth are growth in the
labor force and productivity gains. Given that the labor force is not going to grow
in the near term, we need to ensure than both Generations X and Y are as
productive as possible.

Chart 22: More Workers Exiting the Labor Force Than Entering
20%
Working Population Growth, 5-Yr % Change

15%

10%

5% 1998

1962 2005
0%

-5%

-10%

2020
-15%
1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2026

Source: U.S. Census Bureau, ML Growth Stock Research

39
The Book of Knowledge – 9 April 1999

n Family Status
Over the last 30 years, the nature of the American family has dramatically
changed. Today only 7% of families resemble the stereotypical Ozzie-and-Harriet
model of a never-divorced working father and stay-at-home mother. In 1960, only
19% of married mothers with children under age six worked outside the home.
Today that figure is over 60%.

Chart 23: Percent of Married Mothers With Children Under Six Working Outside the Home

In 1960, only 19% of married 70%

mothers with children under
60%
age six worked outside the
50%
home. Today that figure is over
60%. 40%

30%

20%

10%

0%
1960 1965 1970 1975 1980 1985 1990 1996

Source: U.S. Bureau of the Census.

Combined, an almost
unbelievable 80% of U.S.
families are either dual-income
or single-parent households.
Combined, an almost unbelievable 80% of U.S. families are either dual-income or
single-parent households. This has significant implications for children in these
families. Increasingly, a portion of the early education that used to take place at
home with the child’s mother is being outsourced to a relative or child care
provider. Thus, the need for educationally-enriched, high-quality and affordable
childcare has never been greater.

n Economic Status
The new phenomenon of dual income families, coupled with great economic times
has masked a widening gap between the “haves” and “have nots.” And the gap is
now significant for some of our citizens. Over 20% of our children, for example,
live in poverty, far more than in any other developed nation.

Chart 24: Percent of our Children Below the Poverty Line

The new phenomenon of dual
income families, coupled with United States 22%
great economic times has Australia 14%
masked a widening gap between
Canada 14%
the “haves” and “have nots.”
U.K 10%
Italy 10%

Germany 7%
France 7%
Austria 5%
Switzerland 3%

0% 5% 10% 15% 20% 25%

Source: UNICEF. Lee Rainwater & Timothy M. Smeeding, ‘Doing Poorly: The Real Income of American Children in a
Comparative Perspective,’ Luxembourg Income Study, Working Paper No. 126, August 1995. The poverty line is defined
as 50% of national median income. Reflects child poverty after government intervention.

40
 The Book of Knowledge – 9 April 1999

The gap between those with In our knowledge-based economy, intellectual capital one of the few determinants
college degrees and those differentiating employees. As such, the correlation between education and
without has grown compensation has become crystal clear. The gap between those with college
degrees and those without has grown dramatically, from 50% in 1980, to over
dramatically, from 50% in 100% today. Put another way, the purchasing power of a 30-year-old man with a
1980, to over 100% today. high-school diploma has dropped by over one third over the past two decades.

Put another way, the Chart 25: Real Earnings Power Of 30-Year-Old Man With High School Diploma Is Down
purchasing power of a 30-year- 35% Since 1973
old man with a high-school
diploma has dropped by over $40,000 Down 35%

one third over the past two $35,000

decades. $30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$-
1973 1982 1995

Source: Milken Institute.

What has helped compensate for the dramatic reduction of the purchasing power
of the high-school educated breadwinner has been strong economic conditions and
the increase in the workforce participation of women, up 39% since 1970 to 57%
of all women.

Chart 26: Women in the Workforce is up 39% Since 1970

Workforce participation of
60% Up 39% 57%
women is up 39% since 1970 to
57% of all women. 55%
50%
50% 48%

45% 41%
40%
35%
30%
25%
20%
1970 1980 1990 1997

Source: Bureau of Labor Statistics.

n Ethnic Diversity
American history has always been characterized by diversity, and the strength of
new ideas from each waves of immigrants has enriched our economy and our
culture. This process will continue into the next century, which, when combined
with higher birth rates among certain groups results in a much more diverse
population. By 2050, only 60% of the population will be white, down from 77%
in 1990.

41
The Book of Knowledge – 9 April 1999

Chart 27: Growth Rates for White and Non-White Populations

100%
By 2050, only 60% of the 90%
population will be white, down 80%
from 77% in 1990. 70%
60%
White
50%
Non-White
40%
30%
20%
10%
0%
1980 1990 2000 2010 2020 2030 2040 2050

Source: U.S. Census Bureau. 2000, 2010, 2020 and 2050 are Census Bureau estimates; 2030 and 2040 are
extrapolated from that data.

The bulk of the growth in the “minority” population will be the result of a growing
Hispanic presence.

Table 21: The Changing Ethnic Make Up of America

A push for language training, 1990 2050
technology-based education in White 77% 60%
Black 11% 12%
different languages and Hispanic 8% 20%
training in cultural Asian 3% 7%
American Indian 1% 1%
understanding will be important Total 100% 100%
in this environment. Source: U.S. Census Bureau.

California is often a bellwether for the future of the U.S., and in terms of racial
diversity, this is certainly the case. One fourth of California students are limited-
English proficient, and in grades K-3, that percentage is one in three. In many Los
Angeles schools, Spanish is the predominant language. In still others, as many as
sixteen languages may be spoken ahead of English. A push for language training,
technology-based education in different languages and training in cultural
understanding will be important in this environment.

n Educational Attainment
Ironically, at a time when education and training is among the few determinants of
economic success, only 21% of American adults over age 25 have a bachelor’s or
higher degree.

Chart 28: Only 21% of Adults 25 and Older have a Bachelor’s or Higher Degree
Adult w ith
B achelor’s or
Ironically, at a time when H igher D egree
21%
education and training is
among the few determinants of
economic success, only 21% of
American adults over age 25
have a bachelor’s or higher Adult without
Bachelor’s or
degree. H igher Degree
79%

Source: Department of Education

42
 The Book of Knowledge – 9 April 1999

These economic facts are driving “non-traditional” students back to school in

record levels. Adults age 25 and over represent 43% (6.1 million students) of all
postsecondary enrollments, up from 28% in 1970.

Chart 29: Adult Students Represent Nearly 50% of the Student Body
Adults age 25 and over
represent 43% (6.1 million 72%

students) of all postsecondary 80%

57%
enrollments, up from 70%

28% in 1970. 60%

43%
50%

40% 28%

30%

20%

10%

0%
2 5 a n d O lde r 2 4 a n d Y o un ge r

1970 1995

Source: Department of Education

Another shift in our educational goals as a population—teens graduating from

school are going to college at rates higher than ever before, creating great
opportunity for postsecondary educators.
The impact of demographic shifts on the education and training industry are
mammoth and long-lasting, as described in the following table.

Table 22: The Impact of Demographic Shifts on Education & Training

Sector Impact
Early Education The child care sector is growing and professionalizing as more mothers head to
the workforce. Access for children in poverty is still a problem.
K-12 Education Generation Y is working its way through our K-12 institutions. They are more
diverse than ever before, and have the pressures of preparing for a new economy
in old world schools.
Postsecondary Demographics changes create powerful opportunity here. Generation Y is just
Education starting into its college years, more high-school students are heading to school
than ever before, and, faced with cold economic facts, many Gen Xers (and even
Baby Boomers) are going to school in record numbers.
Corporate Training Continual training and retraining will be essential to prolonging the workplace
longevity of the Baby Boomers, and to ensure that Generations X and Y are as
productive as possible to support the lengthy retirement of the Boomers as well as
provide for their own retirements. (Ask any Generation Xer—They aren’t banking
on Social Security in retirement.)
Consumer Parents and, increasingly, grandparents, with money to spend will make
educating children a high priority. Their desire to provide them with every edge in
the new economy will benefit consumer-oriented education products.
Source: Merrill Lynch.

43
The Book of Knowledge – 9 April 1999

Megatrend #2: The Technology Revolution

Technology has transformed our society and economy. The impact on America’s
corporations is profound, and is explicitly evident by the increased investment in
technology over the past three decades. In 1970, approximately 5% of corporate
capital expenditures were for computer and data processing equipment, aimed at
improving the productivity of human capital. By 1997, nearly 50% of capital
expenditures by corporations were high-tech related.
Technology has become so Chart 30: Technology Expenditures Dominate Capital Spending
essential to corporations that
tech expenditures have grown 

from 5% of total capital 
spending by corporations in 

1970 to nearly 50% today. 





         
         
         
         

Source: Bureau of Economic Analysis.

At the corporate level, there is
now one PC for every 1.3
employees.
The PC is as ubiquitous in business as the telephone or filing cabinet. At the
corporate level, there is now one PC for every 1.3 employees. American homes
are also embracing PCs. By 2002, 60% of households are forecasted to have PCs,
up from nearly 50% in 1998. Recent studies have estimated that in families with
children, PC penetration is much higher, perhaps as high as 70% today.

Chart 31: Percent of Homes with PCs (1992-2003)

By 2003, 60% of households 60%

are forecasted to have PCs, up
from just over 50% in 1998. 50%

40%

30%

20%

10%

0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Forrester Research.

Technology can take American schools into the 21st Century, but first we need to
bring our schools into the 20th Century. Our K-12 schools have been slower to
adopt technology, although they are beginning to respond to the opportunity. The
students-per-computer ratio has improved from 16 students for every one
computer to seven students per computer in the last five years.

44
 The Book of Knowledge – 9 April 1999

Our K-12 schools have been
slower to adopt technology,
although they are beginning to
respond to the opportunity.
Table 23: Penetration of Computers into Companies, Homes and Schools
1.3 Workers Per Computer
2.0 Households Per Computer (*)
7.0 K-12 Students Per Computer
(*) Does not account for the fact that some households may have more than one computer.

PCs have achieved remarkable penetration compared to other technological

innovations in the U.S., reaching a 25% market share in 15 years, versus 35 years
for the telephone and 30 years for the microwave. But even more dramatic has
been the wildfire rate of adoption of the Internet, which has reached 25% of the
population in only seven years.
Adoption of the Internet has Chart 32: Years To Attain 25% Market Share
happened at a wildfire rate,
reaching 25% of the population 54 Years
in only seven years. 46 Years
44 Years
35 Years
34 Years
30 Years
26 Years
22 Years
15 Years
13 Years
7 Years
VCR

Cellular
Radio
Household

PC
Microwave
Automobile
Airplane

Television
Electricity

Telephone

Internet
Phone
Oven

Source: Milken Institute

Internet access is forecasted to
grow to 320 million users in
2002, up from 14 million
in 1995.
The explosion in Internet usage, achieving the most rapid rate of technological
adoption ever experienced in this technology-hungry century, will continue.
According to International Data Corporation (IDC), Internet access is forecasted to
grow to 320 million users in 2002, up from 14 million in 1995. Moreover, e-
commerce is expected to reach $400 billion by year 2002 from $8 billion in 1998.

“I don’t set trends. I just find out what they are and I exploit them.”
—Dick Clark
American Bandstand

Technology platforms such as the Internet have created tremendous opportunities

for new business and education paradigms, ushering in a “New Economy” driven
by knowledge and access to information.

45
The Book of Knowledge – 9 April 1999

Table 24: The Emergence of a New Economy

Old Economy New Economy
Technology platforms such as
A Skill Life Long Learning
the Internet have created
Labor vs. Management Teams
tremendous opportunities for Business vs. Environment Encourage Growth
new business and education Security Risk Taking
paradigms, ushering in a “New Monopolies Competition
Economy” driven by knowledge Job Preservation Job Creation
and access to information. Wages Ownership, Options
Plant, Equipment Intellectual Property
National Global
Status Quo Speed, Change
Standardization Custom, Choice
Top-Down Distributed
Hierarchical Networked
Regulation Public/Private Partnerships
Zero Sum Win-Win
Sues Invests
Standing Still Moving Ahead
Source: John Doerr, Kleiner, Perkins, Caufield & Byers

Where the resources of the
physically-based economy were
coal, oil, and steel, the
resources of the new,
knowledge-based economy are
brainpower and the ability to
effectively acquire, deliver and
process information.
Where the resources of the physically-based economy were coal, oil, and steel, the
resources of the new, knowledge-based economy are brainpower and the ability to
effectively acquire, deliver and process information. Those who are effectively
educated and trained will be the ones who will be able to economically survive
and thrive in our global, knowledge-based economy. Those who don’t will be
rendered economically obsolete.
This emerging new economy represents a tectonic upheaval in our
commonwealth . . . It has its own distinct opportunities and its own new rules.
Those who play by the new rules will prosper; those who ignore them will not.
—Kevin Kelly
New Rules for the New Economy

As consequence, education has become critical for both individuals and

employers. In today’s economy a four-year degree is just a prerequisite to
participating in the industries of the future. Lifelong learning is now required for
survival and economic longevity and technology such as the Internet, video-
conferencing and satellite systems makes this possible.

Table 25: New View of Education in Our Knowledge-Based Economy

In the new economy, education
has become critical for both
individuals and employers.
Old Economy New Economy
Four-Year Degree Forty-Year Degree
Training As Cost Center Training as #1 Source of Competitive Advantage
Learner Mobility Content Mobility
Distance Education Distributed Learning
Correspondence & Video High-Tech Multimedia Centers
One-Size Fits All Tailored Programs
Geographic Institutions Brand Name Universities & Celebrity Professors
Just-in-Case Just-in-Time
Isolated Virtual Learning Communities
Source: Merrill Lynch

46

Under Moore’s Law, the
capacity of a computer chip
doubles every 18 months,
enabling more powerful
hardware and software
applications to emerge, and
changing the content of the
typical job.
As new technology-based ways
of doing business, such as e-
commerce, become more
widespread, it will drive
changes at even the most
traditional of companies, and
with it the composition of the
labor force required to produce,
service, and deliver goods and
services.
As Vice President Gore recently
observed, “a Ford Taurus has
more computing power than the
Apollo 11 that took us to the
moon.”
The Book of Knowledge – 9 April 1999
The pace of change is dramatic. Under Moore’s Law, the capacity of a computer
chip doubles every 18 months, enabling more powerful hardware and software
applications to emerge, and changing the requirements of the typical job.
Chart 33: Moore’s Law (Transistors per Microprocessor)
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995
Source: Intel Corporation
Several factors are driving rapid change in the demands on human capital. The
shift is obvious enough in information technology occupations where the focus is
on the design, programming, maintenance and repair of the computing and
communications infrastructure. These positions require a four-year undergraduate
degree, advanced training or a graduate degree in a field such as science,
mathematics or engineering. The changes in human capital demands may not be
as obvious in positions at non-technology companies. However, as new
technology-based ways of doing business, such as e-commerce, become more
widespread, it will drive changes at even the most traditional of companies, and
with it the composition of the labor force required to produce, service, and deliver
goods and services.
Even labor intensive manufacturing jobs are becoming highly automated and
require higher-skilled employees to work sophisticated computerized machinery.
Forty-two percent of production and non-supervisory employees in manufacturing
and service establishments now use computers. Just think, a car mechanic’s job is
no longer as simple as looking under the hood. Mechanics now are required to
understand complex onboard computers systems, as well as operate sophisticated
diagnostic computers. As Vice President Gore recently observed, “a Ford Taurus
has more computing power than the Apollo 11 that took us to the moon.”
The impact of the digital revolution on all sectors of the education and training
industry is significant, as summarized in the following table.
47
The Book of Knowledge – 9 April 1999
The impact of the digital
revolution on all sectors of the
education and training industry
is significant.
Exports plus imports as a
percentage of U.S. GDP were
29.2% in 1998, u p from less
than 10% in 1947.
48
Table 26: The Digital Revolution’s Impact on Education & Training
Sector Impact
Early Education Child care will always require the human touch, although technology has helped
us learn how children’s brains develop, thus enabling us to improve early
education. Also, computers the second language of the New Economy, computer
literacy is increasingly part of the early education equation.
K-12 Education Kids love computers. They help children learn new things in new ways and allow
them to access the resources of the whole wired world. Technology also helps
teachers manage the instruction process so they can tailor each child’s education.
Postsecondary Technology can democratize education, making it accessible and affordable for
Education millions of adults, enabling them to study anywhere, anytime in schools without
walls.
Corporate Training Through technology, training can be integrated into the workday, increasing its
relevance and reducing its costs. Technology-delivered training is being adopted
so quickly that by 2002, 55% of corporate training will take place that way, up
from approximately 20% today.
Consumer 50% of households now have PCs, and the percentage in families with children is
even higher. Educational software is the second most used function of the home
PC (behind games) providing opportunity for educational software and online
services growth.
Source: Merrill Lynch.
Education both sows and reaps the benefits of The Long Boom.
—Peter Schwartz
Wired Magazine, The Long Boom
Megatrend #3: Globalization
Our world is smaller than ever before, creating both stress and opportunity for
corporations and the employees that work for them.
International trade, the volume of international air flights and telephone calls and
the percentage of corporate income that comes from overseas is higher now than at
any time in our history.
Chart 34: Globalization is Here to Stay
35%
Exports plus Imports as Percent of GDP
30%
Average: 1947 - 1983
29.2%
25%
20%
15%
10% 10.1%
5%
0%
Source: Bureau of Economic Analysis
 The Book of Knowledge – 9 April 1999

Information technology has created new opportunities for how business is

Information technology has
created new opportunities for
how business is conducted, with
one of the largest opportunities
allowing businesses to
participate in global commerce.
conducted, with one of the largest opportunities allowing businesses to participate
in global commerce. Businesses can now enter foreign markets virtually
overnight, as well as deploy resources and operations around the world to support
these new markets. Information regarding new product introductions, sales
patterns, input requirements and local market requirements all can be shared with
any other division of the business instantaneously through companies’ information
networks. America’s leading companies earn 30-65% of revenues from
international markets.

Chart 35: Foreign Sales as Percent of Total Sales (1997)

66%
70% 61%
60%
America’s leading companies 60%
56%
51%
56% 58%
48%
earn 30-65% of revenues from 50%

international markets. 40% 31% 31%

30%
20%
10%
0%
Coca-Cola Dow DuPont Ford General Hewlett- IBM Johnson & McDonald’s Motorola
Chemical Electric Packard Johnson

Source: Compustat, as cited by the Milken Institute.

Economies that have an
inefficient supply of skilled
knowledge workers will see
high-skilled, high-paying jobs
lost to countries that can supply
the needed skills.
For workers in these “virtual-global” businesses, this means that traditional in-
store employees who provide sales, inventory and customer services can largely
be replaced by information management systems, with knowledge workers
servicing the “store”. However, with these opportunities come great challenges.
Economies that have an inefficient supply of skilled knowledge workers will see
high-skilled, high-paying jobs lost to countries that can supply the needed skills.
Those that have a surplus will find job opportunities opening up for their workers
in business abroad.
The impact of globalization on the education and training industry will be to create
tremendous opportunity, both here and abroad.

Table 27: Globalization’s Impact on Education & Training

The impact of globalization on
the education and training
industry will be to create
tremendous opportunity.
Sector Impact
Early Education Increasing recognition of the benefits of early education are driving a more
thoughtful approach to early education, getting young children ready for school.
K-12 Education Preparing our kids to compete in a global economy means making our schools
the best in the world. And with our children performing at or near the bottom of
international comparisons, we have a ways to go.
Postsecondary Our postsecondary institutions are the best in the world. They have an
Education opportunity, even responsibility, to ensure that adults in the U.S. (and perhaps
abroad) have access to the ideas that have made our economy so powerful.
Corporate Training Corporations need consistent, multi-lingual training that is accessible globally.
Workers must also take responsibility for their own development, taking
advantage of the training offered by their companies as well as using their own
time to develop skills relevant in a global economy.
Consumer Growing importance of education is universal, providing opportunity for global
brands to evolve, particularly in supplemental products and services for
consumers.
Source: Merrill Lynch.

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The Book of Knowledge – 9 April 1999
Branding will become
increasingly important in the
education industry, just as it
has become a predominant
means of building companies in
other industries.
In the knowledge economy
there is opportunity for brands
to be built through
inclusiveness and accessibility
when coupled with offering
high-quality programs that
have a consistent, positive
impact on educational
achievement.
50
Megatrend #4: Branding
Branding will become increasingly important in the education industry, just as it
has become a predominant means of building companies in other industries. In
the education industry of yesterday, brands were built by delivering an exceptional
education to an exclusive set of students. These brands have a dominant force in
the education industry of today, with names like Harvard, Stanford, Princeton and
Yale carrying significant authority as we enter a new world where education is
delivered in a variety of forms.
In the knowledge economy there is opportunity for education brands to be built
through inclusiveness and accessibility (not exclusivity and inaccessibility) when
coupled with high-quality programs that have a consistent, positive impact on
educational achievement. Educational providers can form very deep, trust-based
relationships with their students (and, when serving young children, their parents
too). Successful providers have intensely loyal customers, providing opportunity
for these companies to extend that relationship through other products and
services. Other “deep” brands include Disney, Nike and Mercedes-Benz. With
Americans busier than ever before (evident by both parents working), we are
increasingly making product decisions based on brands. Branding has become a
short-cut to identify quality and consistency.
Table 28: Brands With Highest Level of Customer Commitment
Apple Computer
Disney
Body Shop
Harley-Davidson
Mercedes-Benz
Nike
McDonalds
Source: “The World’s Greatest Brands,” an international review by Interbrand.
Interbrand describes deep brands as those that “have developed intimate
relationships with their customers, usually on the basis of shared ‘central’ or
‘higher’ values. These brands might not always have dominant market shares, but
they have real power to influence their customers.” We believe in the next several
years we will see a strengthening in educational brands, as well as through
expanding the breadth of educational content along these lines.
Moreover, as lifetime learning becomes a necessity, the value of branded
franchises will increase as students return again and again to the knowledge well.
 The Book of Knowledge – 9 April 1999

Table 29: Branding’s Impact on Education & Training Industry

As lifetime learning becomes a Sector Impact
necessity, their value of Early Education With increased understanding of the importance of early education on a child’s
branded franchises will learning potential, parents are increasingly looking for quality care for their
increase as students return toddlers, identified by a strong education brand or NAECY accreditation.
again and again to the K-12 Education Infusing our schools with the characteristics of the new economy, in particular,
subjecting them to the discipline of the free market, where they provide results or
knowledge well. are not paid, will be a positive change.
Postsecondary As choices proliferate in the postsecondary market, particularly through
Education technology-based programs, students will associate with brands that signify
strength in the areas they plan to develop expertise.
Corporate Training As corporations look to outside organizations to manage their training programs,
branding will be a factor in the early selection process. Companies themselves
are also branding their own training content, whether for internal or external use,
to, for example, extend training to their channel organizations or end-users
around the world.
Consumer Branding has become a short-cut for parents and students to identify quality
educational products and services.
Source: Merrill Lynch.

Megatrend #5: Consolidation

Consolidation is a strong global
trend, as merger and
acquisition activity hit record
levels in 1998.
Consolidation is a strong global trend, as merger and acquisition activity hits
record levels. In 1998, mega-mergers in the financial services, automotive
production, pharmaceuticals and oil industries drove the total volume of M&A to
upwards of $1.7 trillion, or not quite 20% of GDP. The largest seven of last year’s
deals were the seven largest of all time, with nine of the Top 10 largest deals of all
time occurring last year.

Chart 36: Dramatic Growth In M&A Activity Over the Last Four Years
(Completed U.S. M&A Transactions, $ Billions)

$1,400 $1,318

$1,200

$1,000

$800 $724

$600 $536
$409
$400 $319 $312 $282
$200 $180
$148 $125
$200

$-
1998 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Source: Securities Data Company (based on Rankvalue, which includes assumed debt)

Mergers and acquisitions open
up new markets and provide
greater services to customers
and leverage in research &
development and marketing
functions.
These mergers happen for both strategic and financial reasons. They open up new
markets and provide greater services to customers and leverage in research &
development and marketing functions. At the same, time, most seek to reduce
“overhead” costs, everything from top management to backoffice jobs that can be,
for example, more effectively conducted using one merger partner’s IT system.

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The Book of Knowledge – 9 April 1999
In the education industry, scale
matters. The most visible
example of this is Apollo
Group, whose margins shot up
when it hit a critical mass of
revenues of $100 million from
2% in 1993 to nearly 20% in
1997.
A second driver of
consolidation in this sector
specifically is the desire of
large, well-capitalized
companies to enter this fast-
growing and attractive industry.
Mattel’s pending acquisition of
The Learning Company is the
most recent example
52
While consolidation used to be the hallmark of a mature industry, this is no longer
the case, particularly in technology, where small start-up companies are acquired
for technology and as important, talented people. In some cases, acquiring a
competitor is faster and easier than hiring and training scarce computer
programmers, sales people and executive management. The hiring and retention
of human capital is increasingly a priority for companies of all types.
Consolidation can also provide scale, and in the education industry, scale matters.
The most visible example of this is Apollo Group, whose margins shot up from
2% in 1993 to nearly 20% in 1998 starting when revenues hit a critical mass of
$100 million. Sylvan Learning Systems is a second example, with margins
(including pooled acquisitions) expanding from 2% in 1993 to 15% in 1997. ITT
Educational Services is currently enjoying this phenomenon, as well as Bright
Horizons Family Solutions. This scale enables leverage on R&D, curriculum
development, sales efforts and SG&A. Scale can be achieved through organic
growth or acquisitions or both, and expect consolidation in this sector for that
reason.
Table 30: Scale Enables Education Companies to Achieve Leverage
Margins As Revenues Approach Important Thresholds:
$100 million Year $200 million Year
Apollo Group 2.1% 1993 16.3% 1996
Sylvan Learning Systems (*) 2.0% 1993 12.0% 1996
Bright Horizons 2.1% 1996 4.0% 1998
Source: Public documents, except Sylvan, which reflects pooling of acquired companies. Bright Horizons 1996 revenues
were $140 million, a bit larger than the $100 million threshold.
A second driver of consolidation in this sector specifically is the desire of large,
well-capitalized companies to enter this fast-growing and attractive industry.
Mattel’s pending acquisition of The Learning Company is the most recent
example of this phenomenon hoping to expand on owned assets in the education
arena. Publishing, corporate and staffing services and other companies are also
buying into this sector.
Table 31: Impact of Consolidation on the Education & Training Industry
Sector Impact
Early Education As parents shift their children to center-based care, choosing providers with high-
quality educational content and brand names, we believe consolidation will finally
come to the highly fragmented child care industry.
K-12 Education The challenge of developing an effective sales channel into schools will be an
asset and barrier to entry that will drive consolidation in this segment.
Postsecondary The ability to access “best-in-class” education from anywhere at anytime will
Education challenge existing colleges and universities. Look for more specialization and
consolidation as a result.
Corporate Training The ability to offer a complete training solution to corporations taking a more
comprehensive and proactive approach to training will encourage consolidation.
Consumer Competition for retail shelf space and consumer mindshare will drive
consolidation and partnering in consumer products and services.
Source: Merrill Lynch.

Rather than manage all aspects
internally within a corporation,
increasingly companies are
developing a web of suppliers,
customers and outsourcing
partners who can provide the
specific expertise at the
necessary time.
Nearly 90% of multinational
firms outsourced some business
in 1995 versus only 60% in
1992.
Total revenues in the
outsourcing market are
expected to grow from $100
billion in 1996 to nearly $300
billion in 2001.
Deregulation is also creating
competition where none existed
before, increasing requirements
for accountability and results,
customer service and cost
management.
The Book of Knowledge – 9 April 1999
Megatrend #6: Outsourcing and Privatization
Changes in the structure of our organizations are impacting the need for education
and training as well as the emerging education industry itself. The hierarchical
organizational structure of a company is increasingly a relic of the past, falling out
of favor with the ascendance of teams, kiretsus and “business ecosystems.”
Rather than manage all aspects internally within a corporation, increasingly
companies are developing a web of suppliers, customers and outsourcing partners
that can provide specific expertise at the necessary time. Not only are the lines of
authority blurred and changing within many organizations, the exact point at
which a company starts and stops may become fuzzy, with Intranets linking
groups of related people and organizations.
In such an environment, companies are increasingly focusing on what they do
best, partnering with other companies as needed to accomplish business
objectives. Outsourcing may be a bane for workers filling these jobs in these
companies, but it has created tremendous opportunities for other companies (and
their employees). Nearly 90% of multinational firms outsourced some business in
1995 versus only 60% in 1992.
Total revenues in the outsourcing market are expected to grow from $100 billion
in 1996 to nearly $300 billion in 2001. This illustrates the need for workers to
continually update their skills, think strategically about their careers and their
businesses, and in so doing, create value for both.
Privatization and deregulation are also creating competition where none existed
before, increasing requirements for accountability and results, customer service
and cost management. Financial services, airlines, telephone service, gas
distribution and now electric utilities, have all undergone fundamental changes in
their governing structure.
Table 32: Major Industries Have Been Deregulated
Sector Year of Major Deregulation
Airlines 1978
Financial Services 1980
Telecommunications 1982, 1996
Natural Gas Distribution 1992
Cable TV 1996
Electric Utilities 1996
In most cases, the result has been more innovation, better service and lower costs.
There are many, many cases in our economy of how the discipline of the market
has increased the dynamism of and improved the products of an industry. Our K-
12 schools may be one of the few remaining institutions that have not undergone
this change. While it can be wrenching, we believe that a reasoned introduction of
market forces into the education of our children will result in very positive change.
“Capitalism is humanitarianism”
—Margaret Thatcher
Prime minister of Great Britain
53
The Book of Knowledge – 9 April 1999

Table 33: Outsourcing/Privatization’s Impact on Education & Training

Industry
Sector Impact
Early Education As the knowledge worker is increasingly freed from the corporate organization,
companies seeking to attract and retain the mobile knowledge worker by
providing family-friendly benefits such as corporate-child care.
K-12 Education Schools will increasingly look to outsource a portion of services as quality
providers begin to offer measurable educational results at the same cost. Private
management of public schools and charter schools should prompt a rethinking of
what schools must do.
Postsecondary These institutions will need to become more nimble and customer-responsive,
Education perhaps increasing the degree of specialization and partnering with other
universities as well as corporations to develop needed curricula. Students will
increasingly demand relevant work-related skills.
Corporate Training As corporations focus on core competencies, we expect training will be
increasingly outsourced to one or a few high-quality solutions providers.
Consumer Busy working parents are outsourcing a portion of children’s education to private
providers.
Source: Merrill Lynch.

Table 34: The Big Boom — Megatrends At-A-Glance

Early Education and Corporate and IT Consumer Products
Child Care K-12 Education Postsecondary Training and Services
Demographics 60% of moms with Enrollment in K-12 has More high school Continual retraining of More children with more
children work increased 15% this students heading to baby boomers parents—and
decade with Generation Y college than ever before grandparents-concerned
as well as increase in about their educational
working adult students futures
Technology Computer literacy is Kids love computers / Technology can Increasing access and 50% of households have
today's second language Valuable school tool democratize education relevance while reducing PCs-up to 70% of
costs households with kids
Globalization Recognition of Preparing children to Opening our Consistent, multi-lingual Parental concern for
importance of early compete in today’s postsecondary schools to training that is accessible children’s education
education worldwide global economy the international market globally increasingly universal
Branding NAECY accreditation is As charter schools and Best brands will capture Brand name content is Brands enable “short cut”
the hallmark for quality voucher programs mind share king decision making for
proliferate, brands will be parents
serve as a differentiating
factor
Consolidation Leverage on education Need for sales force will Scale matters Convenience of one stop Competition for shelf
programs and brand drive fuel consolidation in the shopping demanded space and marketing
consolidation K-12 industry mind share
Outsourcing Parents increasingly Accountability will push Students need Focus on core Busy parents look to
outsourcing early schools to providers of postsecondary schools to competencies creates outside tutors and
education best practices have effective, career- opportunity for training products to help educate
oriented education providers their children
Source: Merrill Lynch.
In the next nine sections, we discuss investment opportunities, as well as specific
companies, in the following areas of the education industry:
1. K-12 Management
2. Education Technology
3. Postsecondary Education
4. Distributed Learning — Schools Without Walls
5. Corporate Training
6. Information Technology Training
7. Technology-Based Training
8. Early Education and Child Care
9. Consumer Services & Products

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 The Book of Knowledge – 9 April 1999

Case Study – Knowledge Universe

Cradle to Grave Education Solutions
Knowledge Universe, founded by Lawrence Ellison, Michael Milken and Lowell Milken, is an prime example of company
that is trying to capitalize on all six megatrends we see impacting the education industry. Founded in 1996, Knowledge
Universe was created with the goal of providing “cradle to grave” education solutions, serving the needs of individuals,
schools, and corporations. With over $1 billion in revenues, Knowledge Universe is one of the largest education and
training companies in the U.S.
Knowledge Universe seeks to create, build and acquire education-related companies, public and private, in all areas of
education and training including early education, K-12 services, postsecondary education, adult training, IT training,
consulting and publishing. The company has strong relationships with the world's leading entertainment,
telecommunications and technology companies that will provide Knowledge Universe with a significant advantage as it
pursues its objective of becoming a market leader in global education and learning.
As shown below, Knowledge Universe is exploiting opportunities in all sectors in education and training.
n Early Childhood Education
Knowledge Beginnings, Inc. – Formerly known as Children's Discovery Centers and Hildebrandt Learning Centers,
Knowledge Beginnings operates 250 preschools and childcare centers throughout the U.S. At the time of acquisition,
revenues were approximately $95 million.
LeapFrog Toys – LeapFrog is a maker of fun educational products for children. The company is known for its award
winning letter recognition phonics, early reading and language electronic learning products and is one of the fastest
growing brands in the toy industry.
Teacher Universe, Inc. – Formed in January, 1999, Teacher Universe supports educators worldwide by providing
instructional technology planning, professional development, instructional tools, and career and life services. Through the
use of hands-on instruction, Teacher Universe infuses technology into the daily curriculum engaging students in
collaboration, research and expressive activities.

n Postsecondary
Knowledge University – Formed in 1997 to deliver a variety of degree, certificate and continuing education programs to
corporations, businesses, governments and individual learners located throughout the world.

n Corporate Training
Spring – Formerly known as CRT Group and is headquartered in the UK, Spring provides contract personnel and training
through several groups: Spring IT Personnel (formerly Software Personnel) – an IT recruitment company; Harley West
Training – a skills training company; Spring Personnel (LINK Recruitment), supplier of office and industrial personnel;
Spring Skills (LINK Training) – vocational education and training services; and Spring Solutions (SDA) – providing IT
professionals to UK businesses.

n IT Training
Productivity Point International, Inc. – Headquartered in Weston, Florida, provides customized technology learning
solutions. Training over one million students last year, PPI designs and delivers training solutions from desktop to
enterprise-wide applications including local area networks, application development, system migrations and client/server
computing.

n Consulting
Nextera Enterprises – Nextera is a rapidly growing international consulting firm that helps businesses achieve greater
levels of growth and profitability through improvements in strategy development and execution, operational effectiveness,
use of information technology and continuous enhancement of human capital. The Nextera family of companies include:
Pyramid, SiGMA Consulting, Symmetrix, The Planning Technologies Group and Sibson & Company.

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 The Book of Knowledge – 9 April 1999

n Publishing
Knowledge Universe Publishing – KU Publishing creates, distributes and publishes world-class printed and online books,
magazines and educational and training materials for the Knowledge Universe family of companies and the market at large.
MindQ Publishing, Inc. – Established in 1993, MindQ develops and markets multimedia learning systems that turn any
desktop computer into a classroom for professionals.. MindQ provides developers with a technical foundation for real
world application development while offering an interactive learning experience.

n Other
Knowledge Universe Interactive Studio, Inc. – The interactive products and services development arm of the Knowledge
Universe family. It designs and develops compelling learning products utilizing state-of-the-art technologies and modes of
delivery. KU Interactive Studio is the parent company of MindQ Publishing.
TEC Worldwide, Inc. – The Executive Committee (TEC) is an international membership organization composed of CEOs
and company founders. TEC provides programs and meetings which help CEOs become more effective in an environment
of constant change. Members meet monthly in small groups to share ideas and information, experience and expertise.
Bookman Testing Services, Inc. – Under the brand name TeckChek, Bookman has been the leading provider of vendor-
independent IT proficiency tests since 1987. Bookman has a library of over 100 computer-based, adaptive exams in many
advanced technologies. The tests are used by major corporations, IT staffing companies and IT training companies for
screening prospective employees, populating technical skills databases and pre-training and post-training assessment.
TeckChek saves its customers time and money in their technical recruiting, training and resource management functions.

Chart 37: Knowledge Universe Exploiting Opportunities in all Sectors in Education and Training

Knowledge Universe

Founders: Larry Ellison, Michael and Lowell Milken

President and CEO: Tom Kalinske

K-12 Corporate Training Consulting

Teacher Universe, Inc. Spring Nextera Enterprises

Childcare Postsecondary IT Training Other

Knowledge Beginnings Knowledge University Productivity Point KU Publishing
LeapFrog Toys KU Interactive Studio
TEC Worldwide, Inc.
Bookman Testing Services

Source: Merrill Lynch

56
 The Book of Knowledge – 9 April 1999

5. Elementary & Secondary Education:

Monopoly Gives Way to Competition
K-12 Management Statistics • We spend nearly $360 billion on primary and secondary education in the U.S.
On a per pupil basis, we spend far more on public K-12 education than
Size of Market
virtually any other developed country, yet in international comparisons in
Total K-12 Spending: $358.0 billion
math and science, our students perform at or near the bottom. As for reading,
For-Profit Component: 18.5 billion
43% of our fourth-graders can’t pass a basic reading test.
Market Growth Rate
Total K-12 Spending: 6%
• Bringing market forces to schools such as competition, choice and capitalism
For-Profit Component: 15% are at the center of the inevitable change in how education is delivered in
America. The number of charter schools that give parents the ability to choose
Leading Companies which publicly-funded school their kids attend has zoomed from two to 1,200
Edison Project in six years, and 34 states now have charter legislation.
National Heritage Academy • It is our prediction that 10% of the publicly-funded K-12 school market will
Advantage Schools
be privately managed ten years from now, implying a market of over $30
Edison Project
billion in today’s dollars.
The TesseracT Group
Sylvan Learning Systems • Demands for assessment are accelerating; consequences are next. Forty-eight
states have mandatory testing, and 19 states have customized tests to measure
against state standards. Increasingly, states are holding students, teachers and
principals accountable for learning and teaching. For example, nineteen states
have tests that students must pass in order to receive a diploma, and seven
more states will have similar requirements by 2003.
• The market for products and services for schools is visibly expanding,
propelled by schools that are being held more accountable for educational
outcomes even as the populations they serve become more diverse.

Table 35: Megatrends Shaping the K-12 Education Industry

Trend Impact
Demographics The last year of Generation Y, more than 4 million students, will start school this September, creating a
near-term need for classrooms and teachers. Over the next several years, Baby Boomer teachers will
begin to retire, creating a major need for new classroom teachers. In addition, schoolchildren as a group
are more diverse than at any point in our nation’s history, increasing the need for individualized instruction.
Finally, wealthy families have always had “school choice” (private schools); increasingly urban families may
too.
Technology Kids love computers. Technology can help kids learn new things in new ways, and connect them to the
whole wired world. In addition, technology can help teachers individualize instruction, increase parental
involvement in schools and improve school accountability.
Globalization The workers of tomorrow will increasingly find themselves competing for jobs and resources with people in
other countries. Our schools need to teach core academic subjects to prepare students for an economy of
knowledge specialists.
Branding The K-12 Education segment has few brands, although once a brand becomes established, teachers are
very loyal to it. We see a shift toward more branding in this segment; with the advent of school choice,
parents will increasingly look to programs that signify quality.
Consolidation Our highly fragmented school system, with nearly 15,000 school districts, can’t engage in research and
development of any scale. Large education management organizations such as The Edison Project can.
Technology also provides many opportunities to consolidate school management functions.
Privatization/ Private companies that completely manage public schools had a rocky start, as has been the case for
Outsourcing many pioneers in new industries, but changing attitudes, state legislation and increased demands for
accountability point to significant future activity. Charter schools are the best example of outsourcing in
action—1,200 charters exist today, up from none in 1991.

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The Book of Knowledge – 9 April 1999
The U.S. spends 10% of its
GDP on education. Just under
half of these expenditures,
about $360 billion, are spent on
K-12 education.
Despite this financial
commitment, 43% of our
fourth-graders can’t pass a
basic reading test
But far too many children are
not receiving the education they
need, which in our knowledge-
based economy is the equivalent
of an economic death sentence
58
Education #1 Issue In America
The U.S. spends 10% of its GDP on education. Just under half of these
expenditures, about $360 billion, are spent on K-12 education. Despite this
financial commitment, there is no question that there is a need for better results
from our public K-12 system:
• 43% of our fourth-graders can’t pass a basic reading test
• Nineteen percent of Americans over age 25 do not have a high school
diploma or equivalent, and even today, one in five young Americans drops
out of high school.
• Nearly half of all high school graduates have not mastered seventh-grade
arithmetic. Forty-one percent of 17 year-olds (high school juniors) cannot
“compute with decimals, simple fractions and commonly encountered
percents,” nor are they proficient in basic geometry.
• Only 7% of 17 year-olds are proficient in multi-step problem solving, can
solve routine problems involving fractions and percents, recognize properties
of basic geometric figures, work with exponents and square roots and solve
basic algebra problems.
• One-third of 17-year-olds cannot place France on a map of the world. Only
about one in 10 high school graduates can write a reasonably coherent
paragraph.
• Approximately 50% of all students entering the California State University
system are not ready for college-level English and math.
• Up to 42 million adults in this nation are functionally illiterate. Nine in 10
Fortune 1000 CEOs believe illiteracy is a problem in the American
workplace, and the U.S. Department of Labor estimates that illiteracy costs
U.S. businesses about $250 billion per year in lost productivity.
• The U.S. Department of Education reports that one-third of high school math
teachers, nearly one-quarter of high school English teachers and nearly one-
fifth of high school science teachers are teaching without a college major or
minor in their subjects.
Of course, there are many students who are fully prepared for the rigors of college,
who were satisfied with their public schools. But far too many children are not
receiving the education they need, which in our knowledge-based economy is the
equivalent of an economic death sentence. As a consequence, education is the
number one issue in America, with more citizens pointing to it as a high priority,
more than crime, health care or social security. Our K-12 education system needs
systemic change if it is to provide our children with the fundamental basics
necessary to be aware, productive citizens.
“Public schools too often fail because they are shielded from the very force
that improves performance and sparks innovation in nearly every other
human enterprise – competition.”
—Robert Lutz, President and COO
of Chrysler Corporation
 The Book of Knowledge – 9 April 1999

Chart 38: Education is America’s Top Priority

Education
Crime
Medicare
Social Security
Health Care
Budget Deficit
Environment
Tax Cuts for Families with Children
Welfare
Defense Spending
Capital Gains Tax Cut
Campaign Finance Reform
Term Limits
Abortion

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: Gallup Poll

When the picture is so dismal in an absolute sense, it is little consolation to be

As a nation, we spend far more
on a per-pupil basis than many
other developed countries, yet
our student achievement levels
are comparatively poor.
By the twelfth grade our
advanced students performed at
the bottom of international
comparisons
highly ranked on a relative basis. But we don’t even earn that satisfaction. As a
nation, we spend far more on a per-pupil basis than many other developed
countries, yet our student achievement levels are comparatively poor.
International tests illustrate this problem—American students’ math and science
achievements decrease the longer they stay in school, both on an absolute basis
and relative to their peers in other nations. In the Third International
Mathematics and Science Study (TIMSS), U.S. fourth graders performed fairly
well against their peers in other nations. TIMSS results for eighth-graders
weren’t so positive. They ranked 28th in science and 17th in math compared to
students in other countries. The situation worsens even further by the twelfth
grade, when our advanced students performed at the bottom of international
comparisons, and only Cyprus and South Africa has worse scores in basic math
than the U.S.

“I don’t know jokes; I just watch the government and report the facts.”
—Will Rodgers

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The Book of Knowledge – 9 April 1999

Table 36: U.S. Students Perform Worse In International Comparisons the Longer the Stay in School
4th Grade 8th Grade 12th Grade
Math Science Math Science Math Adv. Math Physics
Singapore Korea Singapore Singapore Netherlands France Norway
Korea United States Korea Czech Republic Sweden Russia Sweden
Japan Japan Japan Japan Denmark Switzerland Russia
Hong Kong Austria Hong Kong Korea Switzerland Denmark Denmark
Netherlands Australia Belgium Bulgaria Iceland Cyprus Slovenia
Czeck Republic Netherlands Czech Republic Netherlands Norway Lithuania Germany
Austria Czech Republic Slovak Republic Slovenial Italy Australia Australia
United States England Switzerland Austria Russia Greece Cyprus
Slovenia Canada Netherlands Hungary Lithuania Sweden Latvia
Ireland Singapore Slovenia England Czech Republic Canada Greece
Hungary Slovenia Bulgaria Belgium United States Slovenia Switzerland
Australia Ireland Austria Australia Cyprus Italy Canada
Canada Scotland France Slovak Republic South Africa Czech Republic France
Israel Hong Kong Hungary Russian Germany Czech Republic
Latvia Hungary Russian Fed. Ireland United States Austria
Scotland New Zealand Australia Sweden Austria United States
England Norway Ireland United States
Cyprus Latvia Canada Germany
Norway Israel Belgium Canada
New Zealand Iceland Sweden Norway
Greece Greece Thailand New Zealand
Thailand Israel
Protugal Germany
Iceland New Zealand
Iran England
Kuwait Norway
Denmark
United States
Scotland
Latvia
Spain
Iceland
Source: Third International Math and Science Study.

Sagging SAT scores over the past three decades strongly suggest that this problem
is not improving, despite continued increases in school funding.

Chart 39: SAT Average Scores Versus Public Per-Pupil Spending

540 $6,500
Increases in funding haven’t 530 $6,000
improved test performance 520
SAT Scores

$5,500
510
$5,000
500
$4,500
490
480 $4,000

470 $3,500
1968 1972 1976 1980 1984 1988 1992 1995

Verbal SAT score Math SAT score Public per-pupil spending

Source: U.S. Department of Education and College Entrance Examination Board. Scores reported are the recently
“recentered” scale. Expenditures are Per pupil in average daily attendance, in constant dollars.

60

Nationally, all teachers – public
and private – are 50% more
likely than the general public to
send their children to private
schools (17% versus 13%).
We see a tremendous value gap
based both on the cost of
educational delivery and the
quality of the product that is
being delivered.
The Book of Knowledge – 9 April 1999
Perhaps the best experts on the quality of our schools are our nation’s teachers,
who are in the trenches on a daily basis. Where do teachers send their kids to
school? Are they “eating their own cooking” or do they choose someone else’s,
i.e., private schools? Surely, Lee lacocca drives a Chrysler and Ray Kroc wouldn’t
have been caught dead eating a Whopper. How about our teachers?
Nationally, all teachers — public and private — are 50% more likely than the
general public to send their children to private schools (17% versus 13%). The
statistics are particularly revealing in America’s major cities, like Milwaukee, with
their often-troubled schools. In urban cities, public school teachers are
significantly more likely to enroll their children in private school. Finally, public
school teachers from higher-income families are even more likely to use private
schools, often three to four times more likely than the general public.
“I quit school in the fifth grade because of pneumonia. Not because I had it,
but because I couldn’t spell it.”
—Rocky Graziano, World Middleweight Boxing
We see a tremendous value gap based both on the cost of educational delivery and
the quality of the product that is being delivered. Our schools are not performing
well on either an international or historical basis, and the American public is
becoming increasingly frustrated with excuses provided by the current education
establishment, which invariably asks for more money and more time. Real
expenditures per student have increased rapidly for 40 years, average class sizes
have declined, teachers’ salaries have increased in real terms and centralization of
control has increased and then regressed. At the same time, SAT scores have
flattened after falling for twenty years, reading and math achievement levels are
frighteningly low and we are in danger of losing our competitive economic
advantage in a global, knowledge-based economy.
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The Book of Knowledge – 9 April 1999
Only half of school budgets are
spent on regular classroom
instruction.
Making schools customer-
centric, not employee-oriented
or product-focused is an
essential mindshift.
If you can’t measure it, you
can’t manage it.
Technology has the potential to
lead American education into
the 21st century, but first we
need to bring schools into the
20th century.
Expenditures per pupil have
been going up over the last 20
years while at the same time
measures of achievement have
been deteriorating.
62
Why Don’t We Have the Greatest Schools In the
World? — The 4 Ms
In a country whose achievements are often characterized by adjectives such as
“first,” “best,” “strongest,” or “biggest,” the overall sorry state of our public
education system is particularly striking and painful. In our view, the problem
stems from four major causes:
Money: We spend more on a per student basis than nearly any nation on earth,
and are getting among the worst returns. The problem is not how much we are
spending, but how we spend it. Approximately 50% of school budgets are spent
on regular classroom instruction. No service business in the world could exist
where 50% of every dollar is spent outside where the service is being rendered.
Mindset: Too often children are viewed as ‘products’ of the education system.
Children aren’t products. They and their families are customers. Making schools
customer-centric, not employee-oriented or product-focused is an essential
mindshift.
Measurement: Our schools have no consistent measurement or evaluation
system. If you can’t measure it, you can’t manage it. Parents and teachers need
tools and standards to evaluate performance.
Mired (The Opposite of Wired): The technological revolution has largely
sidestepped our education system. Technology has the potential to lead American
education into the 21st century, but first we need to bring schools into the 20th
century. This is changing. The number of computers in schools is now one per
every seven students up from one per every 16 just six years ago.
“Edison did not tinker with candles to make them burn better. Instead he
created something new: the light bulb. In the same fashion, American
education needs a fundamental breakthrough, a new dynamic that will light
the way to a transformed educational system.”
—Chris Whittle
Founder, The Edison Project
Money: Not How Much, But How It Is Spent
Expenditures per pupil have been going up over the last 20 years while at the same
time measures of achievement have been deteriorating. A simple review of per
pupil spending and SAT scores per state suggests there is no clear correlation
between what we spend and student achievement. In 1990, North Dakota and
Iowa ranked first and second nationally on the SAT, but ranked 43rd and 29th in
terms of expenditure per student. In contrast, New Jersey and New York spent the
most per student but ranked 37th and 42nd, respectively, on the SAT. Utah ranked
fourth on the SAT but last in terms of expenditure per student. While biased as
result of the vastly diverse percentages of students who take the SAT, these
comparisons can still highlight the fact that more money isn’t necessary better.
A billion seconds ago it was 1951
A billion minutes ago Jesus was alive and walking in Galilee
A billion hours ago no one walked on two feet on earth
And a billion dollars ago was 10.3 hours in Washington, D.C.”
—Alexander B. Trowbridge, Jr.
U.S. Secretary of Commerce
 The Book of Knowledge – 9 April 1999

Table 37: SAT Scores by State and Per Pupil Expenditure,

1994-95 Results
SAT Exam Results Per Pupil Spending
State Rank Verbal Math Total % Scored $/Student Rank
North Dakota 1 515 592 1,107 5 4,775 43
Iowa 2 516 583 1,099 5 5,483 29
Minnesota 3 506 579 1,085 9 6,000 21
Utah 4 513 563 1,076 4 3,656 51
Wisconsin 5 501 572 1,073 9 6,930 12
South Dakota 6 505 563 1,068 5 4,775 42
Kansas 7 503 557 1,060 9 5,817 26
Nebraska 8 494 556 1,050 9 5,935 22
Illinois 9 488 560 1,048 13 6,136 18
Missouri 10 495 550 1,045 9 5,383 31
Tennessee 11 497 543 1,040 12 4,388 48
Mississippi 12 496 540 1,036 4 4,080 50
Michigan 13 484 549 1,033 11 6,994 11
Alabama 14 491 538 1,029 8 4,405 47
Oklahoma 15 491 536 1,027 9 4,845 39
Louisiana 16 486 535 1,021 9 4,761 44
New Mexico 17 485 530 1,015 11 4,586 45
Montana 18 473 536 1,009 21 5,692 28
Arkansas 19 482 523 1,005 6 4,459 46
Wyoming 20 476 525 1,001 10 6,160 17
Kentucky 21 477 522 999 11 5,217 34
Colorado 22 462 518 980 29 5,443 30
Idaho 23 468 511 979 15 4,210 49
Ohio 24 460 515 975 23 6,162 16
Oregon 25 448 499 947 51 6,436 14
Arizona 26 448 496 944 27 4,778 41
Washington 27 443 494 937 48 5,906 23
New Hampshire 28 444 491 935 70 5,859 24
Alaska 29 445 489 934 47 8,963 4
West Virginia 30 448 484 932 17 6,107 19
Nevada 31 434 483 917 30 5,160 36
U.S. Average 428 482 910 41 5,988
Maryland 32 430 479 909 64 7,245 8
Connecticut 33 431 477 908 81 8,817 5
Massachusetts 34 430 477 907 80 7,287 7
California 35 417 485 902 45 4,992 38
Vermont 36 429 472 901 68 6,750 13
New Jersey 37 420 478 898 70 9,774 1
Delaware 38 429 468 897 68 7,030 10
Virginia 39 428 468 896 65 5,327 32
Maine 40 427 469 896 68 6,428 15
Texas 41 419 474 893 47 5,222 33
New York 42 419 473 892 74 9,623 2
Florida 43 420 469 889 48 5,718 27
Hawaii 44 407 482 889 57 6,078 20
Rhode Island 45 425 463 888 70 7,469 6
Indiana 46 415 467 882 58 5,826 25
Pennsylvania 47 419 461 880 70 7,109 9
North Carolina 48 411 454 865 60 5,077 37
District of Columbia 49 412 445 857 53 9,335 3
Georgia 50 406 448 854 65 5,193 35
South Carolina 51 401 443 844 58 4,797 40
Source: National Center for Education Statistics. Rankings of states based on SAT scores is biased because of the
varying proportions of students in each state taking the tests, as noted by the “% Scored” column.

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The Book of Knowledge – 9 April 1999
Private schools spend less
money per student on average
but have significantly higher
SAT scores.
On average, only $0.50 of every
$1.00 allocated to public
education is spent in the
classroom.
We can’t think of another
service industry that exists
where 50% of the money is
spent outside of where the
service is rendered
64
Private schools spend less money per student on average but have significantly
higher SAT scores. Particularly noteworthy, however, is how these schools spend
their money. In 1987, for example, there were 3,300 employees in the central and
district offices of the Chicago public school system. By contrast, the schools of the
Catholic Archdiocese of Chicago served 40% as many students in a much larger
geographical area with only 36 central office administrators. In 1989, New York
City had more than 6,000 administrators, compared to only 25 in the Catholic
schools, though the Catholic schools served about one-fourth as many students. In
California’s government-run schools, only 44% of the employees are teachers,
whereas in California’s private schools, 86% of the employees are teachers.
On average, only $0.50 of every $1.00 allocated to public education is spent in the
classroom. This is disheartening at best — we can’t think of another service
industry that exists where 50% of the money is spent outside of where the service
is rendered.
Table 38: Only $0.50 of every $1.00 Is Spent in the Classroom
Revenue (17 Kids * $6,650) $113,000 (a)
Teacher Salary 37,000 (a)
Books and Supplies @ 3% 3,400 (b)
Maintenance, Utilities and Transportation @ 18% 16,100 (b)
Classroom Expenses 56,500
Other Expenditures $56,500
(Where does it all go?!)
(c) Department of Education
(d) Local School Budget Profile: A Comparative Analysis, 1993-1994, Educational Research Service.
In Milwaukee, only $0.26 of every dollar ends up in the classroom and in New
York City, only $0.29 of every tax dollar is allocated toward the in-class
instruction of regular students. Almost as disturbing is the fact that most districts
across the country have no idea how their expenditures trickle down to specific
programs on a school-by-school basis, or even on a district level in many cases.
We see an important need for better management of public educational resources
through more meaningful data collection on how money is spent and decision and
policy making based on the “educational returns on investment” for those
expenditures. New York City schools are a case in point—greater understanding
of school finances is leading to improvements in how that school district delivers
education.
 The Book of Knowledge – 9 April 1999

Case Study: Challenges of Urban Education In New York City Public Schools
In 1994, Coopers & Lybrand completed a study of the education expenditures at all of New York City’s school districts,
tracking appropriations and expenditures in a way that is logical to business managers. At first glance, New York City’s
spending mix did not seem to differ much from the nation’s as a whole. In New York City, 47% of the education budget
was spent on instruction, compared to a national average of just over 50%. Upon closer examination, however, New York
City has significant issues that affect its allocation of education dollars.
Only $0.29 of every education dollar goes toward the in-class instruction of “traditional” students, about $0.15-0.20 less
than the national average. Twenty-two cents of every tax dollar allocated to education goes toward fulfilling the educational
needs of special education students, about twice the national average. Only $2,308 per pupil is used to teach “traditional”
education students in the classroom, compared to an average of $10,685 per pupil for full-time special education students.
New York City schools have two general classifications of students: full-time special education pupils and non-special
education pupils. Seven percent of all New York City students are in full- time special education programs, which absorb
22% of the total education budget. Of the remaining 93% of students, 39% are eligible for Chapter I and other reimbursable
programs, 16% attend bilingual education programs, and 6% are recipients of special education-related services. All told,
13% of all New York City students are believed to need at least some special education attention, and up to 64% of all
students receive services from additional programs. (This last number may be inflated somewhat by those regular education
students who participate in more than one additional program.)

Chart 40: Summary of School-Based Resources Allocated to Students

(New York City Public Schools: 1993-1994)

$16,926
18,000
Operations
16,000
14,000 Instruction Support
12,000 Instruction
10,000 $8,891
8,000 $6,442 $ 6,220 $6,097
6,000
4,000
2,000
0
All (Av erage) Full-Time Special Bilingual Chapter 1 and
Education Special Education Education Other
Education Related Reimbursable
Serv ices Programs

Based in part on these findings, in May 1995, an independent panel of New York University educators recommended
dramatically restructuring New York City’s special education system. The plan would take thousands of children who are
currently segregated in separate schools or classrooms and return them to regular classrooms, where they would receive
extra help. The panel found that 70% of pupils identified as special education students are labeled either ”learning disabled”
or ”emotionally handicapped” – classifications that many academics say are loosely applied. Furthermore, about 60% of
disabled elementary school children in New York City are segregated in either separate classrooms or separate schools, with
little chance of returning to regular classrooms, while nationwide the average is about 20%. Bottom line, New York City
spends less on teaching kids content in the core academic curriculum and more on costly additional programs, many of
which appear to be inappropriately applied.
Empowered with information about school spending, policy makers in New York City were able to identify changes in
school programs that would make better use of school finances to improve education. Not only were special education
programs reviewed, New York is now experimenting other reform concepts, including magnet schools, school choice, and
contracting of non-instructional services in an effort to better use its finances to deliver stronger student instruction.
Source Coopers & Lybrand.

65
The Book of Knowledge – 9 April 1999

Another area where schools are
not spending their money is on
research & development.
Fundamental to the issue of how money is being spent is also how it isn’t. One
key area where our educational system is not spending its money is on research &
development. We see this as a serious mistake. Perhaps the most significant
engine of economic growth in the U.S. over the past three decades has been the
new products and technologies made possible by research and development of our
leading corporations and universities. Significant advances have been made in
telecommunications and medicine. Entire industries in semiconductors, computer
hardware, software and the Internet have been created out of the thinking, testing
and experimentation of research labs around the country.
If education is the engine of growth in the knowledge economy, shouldn’t we be
seeking new ways of developing and delivering education content? A brief
comparison of the world’s most respected companies and the U.S. K-12 education
system provides a sad but unsurprising conclusion: we spend less than one tenth of
one percent of our education expenditures on research, compared to three to 17%
for innovative private sector companies.

Table 39: R&D Expenditures—U.S. Education Systems Versus Leading

Corporations
Company Annual Revenues Annual R&D R&D as % of
We spend less than one-tenth of ($ billions) ($ billions) Revenues
Microsoft $14.5 $2.5 17%
one percent of our education
Intel 26.3 2.5 10%
expenditures on research, Merck 26.9 1.8 7%
compared to three to 17% for General Motors 140.4 7.9 6%
comparison companies. Boeing 56.2 1.9 3%
Procter & Gamble 37.2 1.5 4%
Kellogg 6.8 0.1 2%
General Mills 6.0 0.1 1%
U.S. K-12 Public Education 330 0.3 0.1%
Source: Merrill Lynch, President’s Committee of Advisors on Science and Technology.

Last year, we spent almost as
much to develop the breakfast
cereal that Johnny eats before
going to school than we spent
researching how he learns for
the six to seven hours each day
he spends there.
High levels of R&D at technology companies are not surprising, given the rapid
rate of technology obsolescence in those industries. But even a company that
makes diapers and laundry detergent spends 10x more on R&D as a percentage of
revenues than the total U.S. K-12 education sector. Last year, we spent almost as
much trying to develop the breakfast cereal that Johnny eats before going to
school than we spent researching how he learns for the six to seven hours each day
he spends there.
Much of the $300 million that we do spend is research in a very nominal sense,
consisting of routine data collection. Dr. William R. Brody, president of Johns
Hopkins University put this $300 million into even finer perspective: “the total
national funding of true scientific research into educational issues is likely to be in
the tens, not the hundreds, of millions.” He notes that his university is home to a
National Educational Research Center, one of only eight funded nationally by the
U.S. Department of Education. That center’s budget? Just $5 million a year,
“about half of what the Baltimore public school system spends in a week.”
Indeed, a report from the President’s Committee of Advisors on Science and
Technology, Panel on Educational Technology, called for a quintupling of federal
educational research expenditures, to $1.5 billion. This would raise the amount
spent to 0.5% of revenues, not a lot of money, but at least, in our view, a start
toward incorporating some of the dynamism of the new economy into our schools.

66

Just as Hostess doesn’t listen to
the Twinkies, our schools don’t
always listen to the
communities they serve.
Capitalism and competition
have proved everywhere to
lower costs and improve quality
We believe parents and
investors will reward politicians
and entrepreneurs who support
and utilize market-based
reforms to improve education
School reform efforts have been
gaining strength throughout the
decade despite considerable
opposition to some of the more
progressive movements voiced
by teacher’s unions, district
administrations and the press.
The Book of Knowledge – 9 April 1999
Mindset: Improvement Through Discipline of the
Market
The old mindset views children as products, schools as factories and the school
board as a board of directors. The problem with this perspective is that, to
continue the analogy, corporations don’t listen to their products. Companies
respond to their customers. And under the old management mentality, just as
Hostess doesn’t listen to the Twinkies, all to often our schools don’t always listen
to the communities they serve. A new mindset is necessary, one that views
families as customers, schools as “retail outlets” where educational services are
received, and the school board as a customer service department that hears and
addresses parental concerns. As a near monopoly, schools escape the strongest
incentives to respond to their customers—the discipline of the market.
In the first place, God made idiots. That was for practice. Then he made
school boards.
—Mark Twain
Higher-income families have always had choice in education. They could buy
homes in areas where public schools were good or they could pay private school
tuition. Some middle and lower income families, of course, make tremendous
financial sacrifices to send their children to the local Catholic or other religion-
sponsored school, but the vast majority of American families only have one real
option, the local public school.
Expanding the choices that parents have for their children’s schooling will go a
long way to improving the education children receive. Capitalism and
competition have proved to every other industry in the world it will lower costs
and improve quality. We believe parents and investors will reward politicians and
entrepreneurs who support and utilize market-based reforms to improve education.
n Growth in School Reform Movement
School reform efforts have been gaining strength throughout the decade despite
considerable opposition to some of the more progressive movements voiced by
teacher’s unions, district administrations and the press. We have classified these
efforts into two tracks. One employs choice, where parents send their children to
the school they believe will best suit their needs. Change in this system comes
from external forces—the market—as schools respond to the needs of their
customers, families and parents. For the most part, the “Choice” track, is
characterized by education dollars following the child to the school he or she
wants to attend.
The other path relies on implementing improved management systems within
schools. This change can either be motivated from within or be imposed from the
outside—not by the market but by unhappy voters or school boards. In an effort
to improve, schools facing new demands to reform sometimes look to outside
firms with specific expertise to help in this process.
The following table shows the spectrum of possibilities in these two tracks, with
incremental changes at the top of the chart and the most aggressive at the bottom.
67
The Book of Knowledge – 9 April 1999

Table 40: Two Paths To Improving Schools

Improve School Management
Improve from Within
• Increase control of quality standards and
assessments at the school, district or state
levels
• Increase administration’s accountability for
student test scores
• Achieve financial and operational
accountability through use of computer
models.
Privatization/Contracting of Services
• Contract out non-core services to outside
firms, such as Operational Services
(transportation, custodial, food), Specialized
instruction (science & math, arts, ESL,
remedial) or technology (IT system design,
installation and management)
• Overall instruction responsibility not
contracted out
Offer School Choice
Magnet/Satellite Schools
• Increase number and diversity of
specialized public schools offering unique
programs (e.g., math science, arts)
Charter Schools
• State provides in most cases a limited
number of charters that fund schools on a
per pupil basis
• Organizations establish entirely new schools
within the district that are free of most
bureaucracy

Site-Based Management Vouchers

From an investment
perspective, private companies
can often participate in school
reform efforts regardless of
whether districts or states chose
to improve management of the
existing school system or
pursue school choice.
• Parents, teachers and other school workers • Issuance of vouchers that can be applied
develop school improvement plan with school toward paying tuition at any school
administration accepting them
• School site team given freedom from district’s • In its most progressive form, allows private
direct control, but performance is accountable and parochial schools to compete for public
to school board funds
• Team acts within confines of state laws and
regulations, district policy or union contracts
Private Management of Public Schools Home Schooling
• Hire outside firm to manage instruction and • The ultimate form of parental control—
administration parents take direct responsibility for their
• Private management able to infuse capital, child’s education.
leverage expertise of other companies
through partnerships and utilize state-of-the
art teaching concepts to energize schools
Source: Rand Corporation, as adapted by Merrill Lynch.
From an investment perspective, private companies can often participate in school
reform efforts regardless of whether districts or states chose to improve
management of the existing school system or pursue school choice. The following
table highlights the prominence of the various solutions detailed above, as well as
private participation in these markets.

“We’ve been working on the basics because, basically, we’ve been having
trouble with the basics.”
—Bob Ojeda, L.A. Dodgers

68
 The Book of Knowledge – 9 April 1999

Table 41: Prevalence of School Reform Solutions & Participation of

Private Companies
Improve School Management Offer School Choice
Improve from Within Magnet/Satellite Schools
In 10 states, principals may be removed from Over 100 cities using nationwide
underperforming schools • Specialized service providers may benefit,
18 states have standards and associated particularly those offering technology
standardized tests solutions for education.
• Private test development and delivery
companies benefit: National Computer
Systems, Harcourt General, McGraw Hill,
Houghton Mifflin
• Technology providers, especially enterprise
software for schools also poised to gain:
Advantage Learning, National Computer
Systems, The Learning Contract, Fox River
Learning, etc.
Privatization/Contracting of Services Charter Schools
• Variety of service companies provide food 34 states, D.C. and Puerto Rico have enabling
and janitorial service, such as Marriott state legislation
• Sylvan Learning Systems, Kaplan, Berlitz, Over 1,200 schools, up from 2 just six years ago
and HOSTS offer instruction in schools • Private, for-profit charter school operators
• National Computer Systems provides IT include The Edison Project, National
services Heritage Academy, Advantage Schools, and
The TesseracT Group.

Site-Based Management Vouchers

Upwards of 50% of schools have experimented
with some variant of site-based management,
although not all efforts extend to making financial
decisions
• Technology providers, especially enterprise
software for schools poised to gain
• Supplemental and Classroom materials could
also benefit
Milwaukee school district has partial voucher
system enabling choice among public schools.
Several other states are experimenting.
Private donors are sponsoring vouchers for low-
income families to send their children to
private/parochial schools.
• For-profit providers are not currently
benefiting.

Private Management of Public Schools Home Schooling

Even if 10% of parents are able
to freely choose which school
their children attend, it will
have a powerful ripple effect—
making a huge impact on how
traditional schools view their
responsibilities to educate the
remaining 90% of our children
A limited number of districts are trying this in states 1.2 million children are schooled at home
around the country. • Instructional materials providers may
• Education Alternatives (now TesseracT) was benefit, such as School Specialty, as may
the pioneer in this effort, but has since distance learning and education technology
retrenched. The Edison Project now companies.
manages 24 public schools in 8 states.
Source: Rand Corporation, as adapted by Merrill Lynch.
We don’t believe these two school reform tracks are mutually exclusive. This is
not a “VHS or Beta” situation where one option wins over all others. We don’t
necessarily believe, for example, that all schools will be under private
management at some point in the future. However, we think that if even 10% of
parents are able to freely choose which school their children attend, it will have a
powerful ripple effect—making a huge impact on how traditional schools view
their responsibilities to educate the remaining 90% of our children.

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The Book of Knowledge – 9 April 1999
Economist Milton Friedman
was one of the first in the
current age to develop the idea
that market forces could
improve education
School voucher programs have
been implemented in
Milwaukee and Cleveland.
Other cities are also
considering these measures.
70
Public school districts are taking extraordinary—and some say long overdue—
measures to keep students from defecting to Arizona’s charter school
explosion. . . Throughout the state, school superintendents and boards are
changing programs in response to the new competition. In Mesa last year, the
district went so far as to advertise for students and promote its full plate of
educational fare. Many are spicing up their curricula to match the enticements
of charter schools, which often offer a focused diet of arts, technology or back-
to-basics entrees catering to niche children, a category that includes both gifted
kids and academic strugglers.
“In order to survive, we had to quit our whining and do a better job ourselves,”
said Kent Matheson, former superintendent of Flagstaff Public Schools, who
launched a variety of programs in his district to dazzle students bent on
leaving.
—Kelly Pearce
The Arizona Republic (3/7/99)
Two school choice initiatives, school vouchers and charter schools, have received
significant public attention and merit additional consideration here.
n School Vouchers
Economist Milton Friedman was one of the first in the current age to develop the
idea that market forces could improve education. His influential book, Capitalism
and Freedom, published in 1962, theorized that by introducing competition into
the educational system, its quality and efficiency would increase. His proposal
advocated a limited role for government—that of mandating a minimum level of
education and licensing schools. Parents would receive tuition vouchers worth a
certain amount of money that they could redeem at any approved school of their
choice. With increasing dissatisfaction with the overall quality of public
education, voucher advocates have expanded to include political liberals, religious
conservatives and libertarians alike. Among the strongest advocates for vouchers
are minority, inner-city families.
In a few states, the concept has gone from theory to practice. Vermont offers
choice to students who live in a town without a local public school. Parents can
choose any state-approved public or “independent” nonsectarian school to educate
their children and the school’s full tuition is paid by the town. Milwaukee’s school
choice program has enabled 6,000 students (or 6% of Milwaukee’s student
population) from low-income families to obtain vouchers worth $5,000 that they
can use at any public or private school. Although Cleveland is the only other city
sponsoring a publicly funded voucher program, other cities are considering the
move.
Beginning around 2001, the widespread use of vouchers triggers rapid
expansion in these types of schools and spurs an entrepreneurial market for
education reminiscent of the can-do ethos of Silicon Valley. Many of the
brightest young minds coming out of college are drawn to the wide open
possibilities in the field—starting new schools, creating new curricula,
devising new teaching methods. They’re inspired by the idea that they’re
building the 21st century paradigm for learning.
—Peter Schwartz
Wired Magazine, The Long Boom
 The Book of Knowledge – 9 April 1999

n Charter Schools
The key principles behind Charter schools are independent public schools that parents can choose as an
charter schools—choice, alternative to the local neighborhood school. In return for a fee per student
autonomy and accountability— (usually a percentage of the district’s average per-child school expenditures) and
freedom from many district regulatory requirements, charter schools commit to
stand in stark contrast to the educate children in accordance with the goals defined in their charters. If they fail
principles guiding most public to deliver or attract students, they are closed. The key principles behind charter
schools. schools—choice, autonomy and accountability—stand in stark contrast to the
principles guiding most public schools.
The charter school movement began in 1991, and is spreading at a wildfire pace.
Now 34 states, the District of Columbia and Puerto Rico have charter school laws,
and there are over 1,200 charter schools operating in 26 states and D.C., up from
1,129 in September 1998 and just two in 1992.

Table 42: Minnesota Became Charter State in 1991; 34 Other States, D.C. and Puerto Rico have Since Passed Legislation
1991 1992 1993 1994 1995 1996 1997 1998
Minnesota California Michigan Arizona Texas Florida Pennsylvania Idaho
Colorado Kansas Alaska North Carolina Ohio Missouri
Massachusetts Hawaii Louisiana New Jersey Mississippi Utah
Georgia South Carolina D.C. Nevada Virginia
Wisconsin Delaware Connecticut Puerto Rico
New Mexico Rhode Island Illinois New York
New Hampshire
Arkansas
Wyoming
Source: Center for Education Reform.

Chart 41: 1,207 Charter Schools Opened As of February 1999

300
271
250

200
158
138
150
114
100 76
60 57
41 38 34 31 31
50 28 20 17 16 15 15 13 11 6 5 4 2 2 2 1 1
0
Mississippi
Massachusetts
Wisconsin

Pennsylvania

Illinois
Connecticut
New Jersey
California

Florida

South Carolina
Arizona

Michigan

Alaska
Texas

North Carolina

Minnesota

New Mexico

Rhode Island
Kansas

Louisiana
Colorado

Georgia

Hawaii

Idaho

Nevada
D.C.

Ohio

Delaware

Source: Center for Education Reform

Charter schools may be started by parents, teachers or other groups who see an
educational need and want to address it, such as museums, civic groups, industry
and service organizations. These charter operators must first receive charter
authority from charter sponsors. Charters sponsors may be the local school board,
the state school board, colleges and universities or a specific state agency set up
for this purpose.

71
The Book of Knowledge – 9 April 1999
The charter laws that have
spawned the greatest degree of
innovation are those that
require schools to adhere to
certain application and
outcome guidelines, but free
them from the majority of the
state’s public school
regulations.
72
The charter laws that have spawned the greatest degree of innovation are those
that require schools to adhere to certain application and outcome guidelines, but
free them from the majority of the state’s public school regulations. This means
that a school must practice open admission policies, meet health and safety
standards, comply with civil rights laws and meet the student performance goals
set forth in its charter. But the school is not bound to state education codes in
curriculum, personnel, scheduling or financial administration. Charter schools may
establish admission requirements in line with the goals of their schools but, like
other public schools and many private ones, are not selective on the basis of
academic ability.
We don’t need to think MORE; we need to think DIFFERENTLY!
—Albert Einstein
As the charter movement has matured, opponents have shifted their tactics from
fighting the adoption of charters altogether to limiting the autonomy and impact of
charters. In cases where opponents are successful, charter legislation may limit
the number of charters that can be granted, require the charter school to adhere to
state and district laws or require it to meet collective bargaining agreements. A
comparison of the “strongest” charter law adopted to date, as determined by the
Center for Education Reform, with the “weakest,” highlights these differences.

As the charter movement has
matured, opponents have
shifted their tactics from
fighting the adoption of
charters altogether to limiting
the autonomy and impact of
charters.
We believe charter schools
provide a potentially enormous
opportunity for the private
sector, with for-profit
companies such as The Edison
Project and Advantage Schools
successfully operating and
expanding under charter
legislation.
The Book of Knowledge – 9 April 1999
Table 43: Comparison of Charter School Laws
Criteria Strongest Charter Law— Weakest Charter Law—
Number of Schools Arizona Mississippi
Allowed Unlimited (*) Six
Multiple Chartering Three options—local school boards, Local school board must approve
Authorities state board of education and petition, state board of education
legislatively created state board for gives final charter
charter schools may approve petition
Eligible Charter Applicants Public body, private person or private Existing public schools only
organization
Types of charter schools Converted public schools, converted Converted public schools only
allowed private schools, new schools
Evidence of Local Support No Yes. Support of a majority of school
Required In Advance faculty, instructional staff and parents
required for approval
Automatic waiver from most Yes Yes, except as specified in charter
state and district laws law
Legal autonomy Yes No
Operational autonomy Annual report card and audit required; Annual progress report required.
students must participate in state Students must participate in state
standardized tests standardized tests
Guaranteed per pupil Negotiated with local school boards Basic funding not addressed in law
funding and specified in charter (*)
Fiscal autonomy Yes. Charter is allowed to make a No. Charter is not allowed to make a
profit profit
Exempt from collective Subject to negotiation Charter teachers remain employees
bargaining agreements of the district
Laws Signed 1994 1997
Number of schools opened 271 1
to date
Source: Center for Education Reform. (*) Under Arizona law, the number of charters granted by local school districts is
not limited. In addition, the state boards of education and charter schools may both approve up to 25 charters annually.
For the later two categories, per student funding is determined by the same base support level formula used for all district
schools.
A driving force behind the implementation of charter laws in a number of states
has been the desire to increase the amount and variety of schools available to
educate disadvantaged children. In fact, a study of more than l00 operating charter
schools by the Education Commission of the States and the Center for School
Change found that half of them specifically serve at-risk students. The study also
reports that one of the driving forces behind the creation of charters is the
opportunity to provide “better teaching and learning for all kids.”
n Investing in Private Management of Public Schools
As progressive charter laws are enacted from state to state, entrepreneurial and
caring individuals and organizations are stepping into the opening with charter
proposals that embrace a wide range of purposes and appeal to just about every
segment of society. With the chance to design and run schools that are
accountable for educating students, but not bound to follow endless government
dictates, parents, educators and citizens across the country are taking advantage of
the opportunity to create new, truly neighborhood schools.
Charter school laws could also increase the number of private and public
partnerships in education. Currently there are 50 corporate sponsored schools
about half of which are public schools.
73
The Book of Knowledge – 9 April 1999
It is our prediction that 10% of
the publicly-funded K-12 school
market will be privately
managed ten years from now,
implying a market of over $30
billion in today’s dollars
Approximately 10% of charters
are awarded to for profit
companies, and we believe
charter schools provide a
potentially enormous
opportunity for the private
sector.
An obvious “up and comer” is
The Edison Project. This
company is the current
standard-setter for private
management of public schools.
74
Approximately 10% of charters are awarded to for profit companies, and we
believe charter schools provide a potentially enormous opportunity for the private
sector. It is our prediction that 10% of the publicly-funded K-12 school market
will be privately managed ten years from now, implying a market of over $30
billion in today’s dollars. Companies such as The Edison Project, The Leona
Group, National Heritage Academy, The TesseracT Group and Advantage Schools
are successfully operating and expanding under charter legislation.
Table 44: Schools Operated By For-Profit Companies in the U.S.
Charter Contract Private
Company Schools Schools Schools
The Edison Project 27 24 -
The Leona Group 25 - -
National Heritage Academy 14 - -
Beacon Education Management (1) 12 - -
Advantage Schools 8 - -
Excel Education Centers 6 - -
White Hat Management 5 - 2
SABIS Educational Systems (2) 6 - 1
The TesseracT Group 2 - 5
Charter Schools USA 2 - -
Mosaica Education 2 - -
Ombudsman Educational Services 2 - -
Source: Public Documents and Center for Education Reform. (1) Includes 8 schools operated by affiliate JCR &
Associates. (2) SABIS also operates 13 private schools abroad.
We also see opportunities in this market for proprietary school operators, child
care companies and even postsecondary organizations as well. Indeed, Bright
Horizons Family Solutions has on staff the leading expert in corporate-sponsored
schools, and recently opened its first private school, in the Seattle area, to test the
market. Nobel Learning Communities, a provider of child care and private
schools, just received approval to open a charter school, its first, in Pennsylvania.
An obvious “up and comer” is The Edison Project. This company is the current
standard-setter for private management of public schools. Edison operates 51
schools, up from four in 1995. Student achievement in nearly all Edison schools
has been trending upward, with no schools losing ground. Parents, students, staff
and clients have consistently expressed high levels of customer satisfaction,
demonstrating the mindset of service so essential to transforming our education
system.
Edison ultimately plans a public offering of its stock, and, in what we see as a Big
Idea in education, it has given its teachers stock options, enabling them to, for the
first time, benefit from a school’s financial success as well as its educational
achievement.
Another Big Idea—the company provides every Edison family a computer for use
in the home, extending learning time, increasing parental involvement and
improving academic results.
 The Book of Knowledge – 9 April 1999

Case Study: The Edison Project

The Edison Project is a privately-sponsored company dedicated to the development of innovative K-12 public schools that
can operate at current public school spending levels. With 51 schools under management, Edison is now the country’s
leading manager of K-12 public schools. Founded in 1991, Edison establishes partnerships with schools either in contract
with public authorities or as part of a charter school initiative with the local community. The company implements
educational programs, technology plans and management systems within the school and also is responsible for the
performance of its students.
Edison was founded by Chris Whittle who saw an opportunity to help revitalize a failing American educational system.
The goal was to effectively narrow the gap between the cost of educational delivery and the quality of the product that is
being delivered. After intense research, including numerous visits to exemplary schools, Mr. Whittle, together, with his
blue-ribbon team, led by former Yale president Benno C. Schmidt, Jr., spent two years and nearly $50 million integrating
many of the world's most successful educational practices into a comprehensive school design.
Edison’s long-term strategy is to achieve educational and financial success via substantial investment in research, training
and technology, and more efficient usage of district school funding. In short, Edison offers a better educational experience
per dollar spent than traditional public schooling. Edison contracts with school districts to operate individual schools for
essentially the same amount of money per pupil offered to the districts’ other schools.
Edison-operated schools remain public schools, open to all students and funded with tax dollars. There are no extra costs
to parents associated with sending their child to an Edison partnership school. Edison is compensated only with what the
community currently spends—from federal, state, and local sources—for each student's education. By reducing
administrative and overhead costs, capitalizing upon world-class educational practices and design, and creating incentives
for employees, Edison is able to offer a higher quality education and, at the same time, ultimately save money.
In the summer of 1995, Edison opened its first four schools in Boston, Massachusetts; Mount Clemens, Michigan;
Sherman, Texas; and Wichita, Kansas. Combined, these schools served more than 2,000 ethnically diverse students
ranging from kindergarten through fifth grade. As positive reviews came streaming in following the first full year of
operation, Edison saw waiting lists grow at its schools and was quickly besieged with interest from several other districts
across the country. The number of schools managed has quickly grown to 51 for the 1998-1999 school year, and
continued rapid expansion is expected into the next century.
As a private firm in receipt of public funds, Edison is accountable to the public—for higher student achievement, greater
family involvement and enhanced teacher satisfaction. The local community may terminate Edison's contract at any time
if school performance does not meet the terms stated in the contract. In order to prove that it is indeed adding value to the
world of education, Edison carefully monitors the progress of its students. In addition to rigorous internal assessment and
monitoring, students at Edison schools take the same standardized tests given at comparable public schools in the district.
On average, Edison students are gaining an impressive 5 percentiles on national norm–referenced tests and 6 percentiles on
criterion- referenced tests annually. As an example of the more exceptional gains in student achievement, at Seven Hills
Charter School in Worchester, MA, fifth grade students advanced to the 48th percentile in reading, up from the 37th
percentile the previous year, to the 51st percentile from 30th in language achievement, and 42nd to 26th in math.
Students in Edison schools are making more than normal progress, parental involvement is greater, and discipline is much
improved. We believe Edison has truly begun to show that it has the wherewithal to operate effective schools nationwide.

The Edison Project’s Impressive Growth

60 30,000 $160
51 23,902 $132.0
50
# of Schools 25,000 # of Children $140 Revenues ($mm)
$120
40 20,000 $100
30 25 15,000 12,611 $80 $69.4

20 10,000 7,141 $60 $38.6

12
$40
10 4 5,000 2,249 $11.8
$20
0 - $-
1995-96 1996-97 1997-98 1998-99 1995-96 1996-97 1997-98 1998-99 1995-96 1996-97 1997-98 1998-99e

Source: The Edison Project

75
The Book of Knowledge – 9 April 1999
The third challenge with our
current school systems is that
there is no consistent
measurement and evaluation
system. If you can’t measure it,
you can’t manage it!
Nearly all states administer
some form of “norm-
referenced” exam, where
results are reported on a
comparative basis.
Many states, however, have
established state standards for
educational achievement, and
19 have designed custom
exams to test student
performance on these subjects
76
Measurement: If You Can’t Measure It, You Can’t
Manage It
The third challenge with our current school systems is that there is no consistent
measurement and evaluation system. If you can’t measure it, you can’t manage it!
Parents have little information on the following important issues: How is my child
progressing from year to year in an absolute sense, and compared to his peers?
Which teachers have the best gains in student performance annually? How does
my school rate versus others in my community? What are the strengths and
weaknesses of various schools and teachers for my child and her learning style?
Student, teacher and school performance must be measured in ways that enable
school managers and parents to make appropriate choices for their students.
Nearly all states administer some form of “norm-referenced” exam, where results
are reported on a comparative basis. Kids are measured relative to each other, not
against established academic standards. Most states use a standardized test from
one of the three major test publishers: Harcourt Brace (publishes the Stanford 9
and Metropolitan tests), McGraw Hill (California Achievement Test,
TerraNova),and Houghton Mifflin (Iowa Test of Basic Skills).
Many states have established state standards for educational achievement, and 19
have designed custom exams to test student performance on these subjects.
Perhaps the company that has recently benefited most from these trends is
National Computer Systems. NCS works with states to develop their customized
“criterion-referenced” exams and also scores them. As a gauge for both NCS and
the growth in assessment generally, in the Spring of 1998, the number of test
sheets that the company scored leapt to 177.7 million, up from 88.3 million in the
spring of 1997, as more states added customized exams and as existing states
tested on more subjects.
Chart 42: 18 States Now Deliver State-Specific Tests
State With Custom Test
Source: National Computer Systems.
Some states are beginning to take more aggressive measures to increase
accountability, such as publishing report cards for every school, or, in extreme
cases, taking over management of the entire school district, as has happened in
Newark, New Jersey and Stockton, California.

Increasingly, states and school
districts are attaching
consequences to student
performance on exams.
Promotion from grade to grade
may now depend on a student’s
performance on these tests in
many states
Minnesota is often a bellwether
of the direction of school
reform, having been the first
state to approve charter schools
and being an early adopter of
high-stakes exams. It now uses
a positive reward system,
offering teachers monetary
bonuses for student
performance.
The Book of Knowledge – 9 April 1999
Chart 43: Holding Schools Accountable — Most States Are Cautious
Statewide Tests 48%
School Report Cards 36%
School Ratings 19%
Assistance for Low-Performing Schools 19%
Sanctions for Chronically Failing Schools 16%
Monetary Rewards for Schools 14%
0% 10% 20% 30% 40% 50% 60%
Source: Education Week.
Increasingly, states and school districts are attaching consequences to student
performance on exams. Promotion from grade to grade may now depend on a
student’s performance on these tests. Nineteen states have tests that students must
pass in order to receive a diploma, and seven more states will have similar
requirements by 2003. In at least ten states, the consequences extend to teachers
and principals. In these cases, poor performing schools must demonstrate
improvement or principals may be removed. No state has rewards or sanctions for
individual teachers based on how well their students perform on tests, but some
states have come close.
Table 45: Holding Teachers Accountable for Student Performance
• Texas is the only state to hold teachers accountable for how their schools perform. One-eighth of
a teacher’s yearly evaluation is based on the school’s performance on state tests.
• Tennessee sends “teacher-effect reports” to every teacher in grades 4-8 and every high school
math teacher. The reports describe how much that teacher influenced his or her students’ scores
on statewide tests. Principals may not take the results into account on teacher evaluations, but
can use them to provide advice to the teacher on professional development.
• Colorado now requires student performance to be considered for teacher evaluations, but
local districts must decide what that means.
• In North Carolina, outside teams sent to assist low-performing schools may recommend that
classroom teachers take a general knowledge test. Those who fail could lose their teaching
licenses.
Source: Education Week.
Minnesota is often a bellwether of the direction of school reform, having been the
first state to approve charter schools and being an early adopter of high-stakes
exams. Minnesota now uses a positive reward system, offering teachers monetary
bonuses for student performance. The state gives Advanced Placement teachers
$25 for every student who scores 3 or higher on an Advanced Placement exam.
We believe this is a progressive idea, and indeed, a majority of taxpayers and
parents endorse the idea of paying monetary rewards to teachers whose students
perform. A majority of educators, however, do not, reflecting the profession’s
aversion to any form of accountability, whether positively or negatively enforced.
“You do not have a system of accountability if the only people held
accountable are the children. There has to be consequences for adults or the
kids do not learn.”
—Howard Fuller,
Former Milwaukee Superintendent
77
The Book of Knowledge – 9 April 1999
We are encouraged by the
expansion of states setting
standards, testing student
achievement and striving for
improved academic
performance from all children
and schools by attaching
consequences to performance
on exams.
Learning Information Systems
have the potential to become
permanent fixtures in schools
and classrooms, providing
teachers and administrators
with tools to improve student
learning.
78
Chart 44: Should Teachers Whose Students Achieve Be Rewarded Financially?
Taxpayers Parents Educators
37% 36%
40%
60%
63% 64%
Good Idea Bad Idea
Source: Education Week. The actual survey question was: “Some communities are considering proposals to make
educators more accountable by tying improvements in students’ academic performance to financial incentives for
teachers and principals. Do you think this is a good idea or a bad idea?”
The above discussion, of course, begs the question of how good state standards
are. Forty states have set standards in all core subjects: English, Math, Science
and History. Nine states have standards in some areas, and only Iowa has no
formal standards. But are these standards any good? According to a study by the
Thomas B. Fordham Foundation, the answer is no, with the composite grade for
all states and all subjects being a D+. However, in every subject, at least one state
has published excellent standards, documents that can serve as models for other
states. We are encouraged by the expansion of states setting standards, testing
student achievement and striving for improved academic performance from all
children and schools by attaching consequences to performance on exams.
More information on how our children are progressing in school coupled with real
incentives for teachers and administrators to improve student performance has
positive implications for American education. We believe this movement will
provide opportunities for for-profit education companies. Schools whose feet are
increasingly held to the fire will be looking for solutions—fast, choosing partners
who offer best practices or who are skilled at measuring and delivering results.
The beneficiaries will be diverse, as shown in the following table.
Table 46: Push for Standards and Assessment Provide Opportunities for
Range of Service and Product Companies
Test Development & Delivery
Tutoring In Schools
Teacher Training
Before- and After-School Programs
Textbooks
Supplemental Materials & Curriculum
Curriculum Software
Learning Information Systems Software
School Management Software
Source: Merrill Lynch.
Among the winners will be companies that offer school management and learning
information software that infuse a bit of science into the art of teaching. Just as
management information systems have become essential to successful businesses,
Learning Information Systems have the potential to become permanent fixtures in
schools and classrooms, providing teachers and administrators with tools to
improve student learning. Advantage Learning Systems and National Computer
Systems who are well positioned in this arena.
 The Book of Knowledge – 9 April 1999

Mired (The Opposite of Wired): The Digital

Technology has the potential to
lead American education into
the 21st century, but first we
need to bring schools into the
20th century.
The first major way of investing
in the public K-12 sector is in
private companies that manage
schools
Revolution Hasn’t Exactly Liberated Schools
Technology has the potential to lead American education into the 21st century, but
first we need to bring schools into the 20th century. Until recently, the technological
revolution had largely sidestepped our education system. Fortunately this is now
rapidly changing. The differences are so significant and the potential for investment
so large that we are highlighting this issue in the next section.
Investing in the K-12 Sector — Education
Management Organizations
There are two major ways of investing in the public K-12 sector—companies that
manage schools (Education Management Organizations) or companies selling
products and services into K-12 schools (a group we have called Specialty
Services Providers in the past).
n K-12 Education Management Organizations (EMOs)
For-profit K-12 school management companies were “born in the 1990s” and are
growing fast to date. Most of these have found success in winning public school
charters or contracts to manage charters. Only The Edison Project currently
manages traditional public schools. It manages 24 public schools for twelve
districts around the country, as well as 27 charter schools.

Table 47: Public and Charter School Education Management Companies

Company
Advantage Schools
Beacon Education
Management
Charter Schools USA
The Edison Project
Excel Education Centers
The Leona Group
Mosaica Education
National Heritage Academy
Nobel Learning Communities
Ombudsman Alternatives
SABIS Educational Systems
The TesseracT Group
White Hat Management
Source: Public Documents and Center for Education Reform.
Ticker Website Business Description
Private www.advantage-schools.com Operates eight charter schools. Based in Boston, MA.
Private www.beaconedu.com Offers contracted administration services, including a complete school management
solution, to traditional public schools and charter schools. Operates 12 charters,
including those operated by subsidiary company.
Private www.charterschoolsusa.com Operates two charter schools in Florida.
Private www.edisonproject.com Manages 51 schools, both traditional public schools and charter schools, implementing
its extensively researched curriculum and technology programs.
Private Not Available Operates five charter schools in Arizona.
Private www.leonagroup.com Operates 25 charter schools in Michigan and in Arizona.
Private www.mosaicaeducation.com Operates two charter schools, one each in Pennsylvania and Michigan.
Private www.heritageacademies.com Operates14 charter schools primarily in Michigan.
NLCI www.nobellearning.com Operates private schools and preschools. Has authorization to manage one charter in
Pennsylvania.
Private Not Available Operates two charter schools in Arizona.
Private www.sabis.net Operates private schools around the world, including one in the U.S. and manages 6
charter schools in the U.S.
TSST TesseracT.pvt.k12.mn.us Operates 2 charter schools in Arizona.
Private Not Available Operates five charter schools in Ohio.

The opportunity for school management organizations is tremendous. We

We estimate that the for-profit
market opportunity will grow
from under $0.5 billion today to
over $3 billion in 2001.
estimate that the for-profit market opportunity will grow from under $0.5 billion
today to over $3 billion in 2001. We expect that many more for-profit companies
will explore the charter school and school management opportunity. We have
devised a scorecard summarizing what we believe are key factors when analyzing
school management companies in the K-12 sector, whether these companies
operate charter schools, private schools or manage public schools. The two most
important considerations are whether students are performing better than before
the EMO started providing service and how extensively technology is deployed to
both improve student learning and school management.

79
The Book of Knowledge – 9 April 1999
With multiple schools under
management, a company can
leverage investments in fixed
costs such as curriculum,
training programs and
assessment methodologies,
reducing the per-school
investment.
The education establishment is
frequently resistant to change.
With education the #1 issue in
America, politicians may use
school reform issues to further
their own ends – sometimes to
the benefit of EMOs and
sometimes to their detriment
80
Table 48: K-12 School Management Scorecard
Total
1 Achievement/ How are students doing? Are standards clearly set, and are 15
2. Assessment students progressing toward those standards? How is student
progress measured? Are these measures comparable to schools
in the surrounding area?
3. Curriculum How comprehensive is the school’s curriculum? Is the curriculum 10
integrated from year to year?
4. Technology How is technology integrated into the classroom? Is technology 15
used to manage the learning process as well as a school’s
backoffice functions?
5. Teacher Training Are teachers degreed in the subjects they teach? How many 10
hours of training do they receive annually?
6. Learning Time How many hours of school do children attend each week? 5
7. Parental Involvement Perhaps the greatest measure of student achievement. How are 15
parents integrated into the learning process?
8. Retention Rates What percentage of students return each year? An important 10
measure of satisfaction.
9. Scalability Can the programs be scaled up to serve more children in more 10
locations? Can results be replicated in a variety of environments?
10.Profitability How profitable are schools and the company (gross site 10
contribution, net site contribution and total corporate profitability)?
How are financial incentives balanced with educational outcomes?
Total 100
n Issues in K-12 School Management
Although the opportunity is significant, there are six major challenges facing K-12
education management companies.
Again, scale matters: The first challenge is the need to balance the ten criteria in
our K-12 management scorecard. How can a company invest in a solid
curriculum, technology and teacher training and yet still achieve profitability?
One clear answer is scale. With multiple schools under management, a company
can leverage investments in fixed costs such as curriculum, training programs and
assessment methodologies, reducing the per-school investment. The current
structure of schools, highly fragmented into nearly 15,000 school districts reduces
the ability to make these investments, as well the incentives to make them “stick.”
Education management organizations can revitalize the way we educate through
the ability and willingness to invest in new ideas and methods.
The oppression of the status quo: The education establishment is frequently
resistant to change. The need to accommodate the status quo varies state to state
and, indeed, school to school. The number of charter schools in Arizona versus
Mississippi illustrates the impact that the need to operate within the constraints of
union contracts and school district requirements has on the dynamism in this sector.
Politics: With education the number one issue in America, politicians may use
school reform issues to further their own ends – sometimes to the benefit of EMOs
and sometimes to their detriment. Political supporters may leave office or be voted
out. Changing leadership can decrease consistently and stability for EMOs. This
being said, the weight and tailwinds of changes are on the EMOs’ side.
Challenges in replicating results: The ability to replicate results, both financial
and academic, from school to school is complicated by a variety of factors,
reflecting, in particular, the state in which the school is located and the
demographic profile of the school. The reasons schools have traditionally worked
are because of a strong principal and strong support of the community. A key
variant from state to state is the per student expenditure level. Other factors
include how payments to private providers are determined, state curriculum
requirements, the degree of development of state standards and testing
requirements, etc. Demographic variables include the number of children

The ability to replicate results
from school to school is
complicated by a variety of
factors, reflecting the state in
which the school is located and
the demographic profile of the
school
Finding the resources for
school buildings for charter
schools is often a challenge
Innovative financing methods
have sprung up to compensate
for the limited amount of state
and local funding that is
available for charter school
facilities.
We expect that results, impact,
quality programs and a brand
name will provide successful
entrants with a significant
competitive advantage in this
market.
The Book of Knowledge – 9 April 1999
qualifying for special educational programs, those for whom English is a second
language, those that qualify for Title I and other income-based funding programs,
and so forth. These variants can make standardizing programs and from school to
school difficult and obscure the comparability of school results. A challenge for
EMOs is creating conditions for great leaders and for community involvement,
particularly when each school’s situation is unique.
We expect that we may see EMOs clustering their schools in one or a few states to
increase the level of standardization possible between schools. We also expect
that we will see the most private activity in states such as Massachusetts,
Wisconsin, New York, Michigan and others that have higher per-pupil spending
levels.
School start-up costs—the real estate problem: Most charter schools are
responsible for locating and financing their own school buildings. The fact that
charter schools have to both find and fund their real estate creates a significant
inequality between charter schools and public schools that already have their
facilities in place. Charter schools have to support their real estate out of the per
child allocations.
Finding the resources for school buildings for charter schools is often a challenge.
Traditional financing has not to date been easy to obtain. The fact that charters are
a new phenomenon, subject in many cases to a five year renewal, and the fact that
the buildings are typically used for a single purpose (in other words, you can’t
make a school a McDonald’s restaurant) complicates the equation.
Innovative financing methods have sprung up to compensate for the limited
amount of state and local funding that is available for charter school facilities.
Corporate sponsorship, philanthropic commitments (as with Gap-founder Don
Fisher’s $25 million donation to the Edison Project to fund start-up expenses in
California) and partnerships with developers (as The TesseracT Group has forged
in Arizona) have filled immediate needs. We have begun to see more traditional
sources of capital become available, such as bank loans or private equity or the
public debt markets (with municipal type bonds). We also expect that, in the next
18 months, one or more EMOs will approach the public equity markets for equity
financing. We also expect that, following the example of nursing homes, hospitals
and other real-estate intensive businesses, charter schools could receive funding
through participating in REITs (Real Estate Investment Trusts). This could be a
viable financing source for charter schools providing catalyst for growth.
Experience, if a positive one, is a barrier to entry: Looking forward, as school
boards and charter boards make decisions about who they are going to hire to
manage their schools, and as they are faced with evaluating a company that has an
interesting business plan and a number of promises against another with a live
track record showing positive learning outcomes, the deciding board’s likely
response to the first company will be to “go experiment on someone else’s
children.” Although many states have evidenced a progressiveness in their
willingness to move from the status quo, we believe that the dynamics of the
“sales process” in the school management business will be affected by a risk
averse school or charter board, giving a significant advantage to experienced
operators with a history of student achievement. We expect that results, impact,
quality programs and a brand name will provide successful entrants with a
significant competitive advantage in this market.
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The Book of Knowledge – 9 April 1999

Investing in the K-12 Sector — School Products and

The second major way of
investing in the public K-12
sector is through companies
that sell products and services
into K-12 schools.
Services Providers
The second major way of investing in the public K-12 sector—is through
companies that sell products and services into K-12 schools (a group we have
called Specialty Services Providers in the past). This may include special
education services, education for at-risk or adjudicated youth, tutoring or remedial
instruction, before- and after-school programs, teacher training, textbooks,
software, instructional materials, and so forth.

n School Products and Service Providers

Companies in the Educational Services and Products category offer educational
services and products to two distinct markets – schools and consumers.

Chart 45: School-Focused Educational Services and Products

Educational Services Educational Products Product Distribution
Special Education Textbooks
At-Risk Education Supplemental Materials Sales Force
Schools Education of Adjudicated Youth Technology & Software Direct Marketing
Teacher Training Retail
Tutoring & Remedial Education
Before- and After-School Programs
Tutoring Books
Consumers Language Instruction Software
Test Preparation Toys and Games Retail
Before- and After-School Programs
Private Schools

Source: Merrill Lynch.

The market for products and
services for schools is visibly
expanding, propelled by schools
that are increasingly being held
accountable for educational
outcomes even as the
populations they serve become
increasingly diverse.
The market for products and services for schools is visibly expanding, propelled
by schools that are increasingly being held accountable for educational outcomes
even as the populations they serve become increasingly diverse. Many schools are
seeking solutions—fast—for kids that aren’t meeting expectations. As academic
standards are put in place or strengthened, teachers need training in assessing
children and refining instructional impact. Technology is also making an impact,
helping children to learn new things in new ways, and parents, taxpayers and
politicians are clamoring for schools to join the digital revolution. The number of
children classified as requiring special educational programs has zoomed too,
along with children at risk for dropping out of school or becoming part of our
dismal juvenile crime statistics. Special funding sources provide additional
flexibility for schools as they look to outside providers to help them meet their
educational objectives.

n Special Education and At-Risk Services

The number of children served A large number of students in the K-12 age range have educational needs that
in federally supported niche exceed the capabilities of the typical school. These categories include special
education programs has grown education for children with disabilities, alternative programs for children at risk, or
education in secured facilities for adjudicated youth. Typically dominated by state
steadily from 4.3 million in and local government agencies or local not-for-profit companies, the market for
1985 to 5.6 million a 1995, or a at-risk youth education and treatment services is large measuring $32 billion in
30% increase. size. The number of children served in federally supported niche education
programs has grown steadily from 4.3 million in 1985 to 5.6 million a 1995, or a
30% increase.

82

Special education enrollment
has grown from 3.8 million
students in 1980 to 5.95 million
in 1998, and spending on
special education programs is
currently estimated at $33
billion.
Non-public schools, institutions
that receive funding from
school districts to educate a
portion of their learning
disabled children, have long
served a component of these
children
Studies show that the private
sector currently is responsible
for $2.3 billion of the entire
$32.6 billion market.
The number of young people in
the criminal justice system has
risen significantly over the past
few years.
The Book of Knowledge – 9 April 1999
Special Education: Just over 10% of K-12 students in the U.S. are classified as
learning disabled and qualify for education under the federal Individuals with
Disabilities in Education Act (IDEA) as well as other federal and state laws.
Special education enrollment has grown from 3.8 million students in 1980 to just
under 6 million in 1998, and spending on special education programs is currently
estimated at $33 billion.
Non-public schools, institutions that receive funding from school districts to
educate a portion of their learning disabled children, have long served a
component of these children. Various sources put the number of private-sector
special-education schools in the U.S. at between 3,000 and 3,500. Yet while the
number of children enrolled in special education programs has grown 56% over
the last two decades, the number of children in non-public schools has remained
flat. Demands for keeping special education students integrated in regular classes
(“mainstreaming”), requirements that children should be educated in the least
restrictive environment regardless of cost, and the fact that “special needs” is
expanding to capture a broader range of students may account for this effect.
Studies show that the private sector currently is responsible for $2.3 billion of the
entire $32.6 billion market.
Chart 46: Private Sector Serving a Small, But Growing Portion of the Special Ed Market
Private Sector
Spending
$2.3 Billion
Public sector
Spending
$30.3 Billion
Source: KIDS 1
At-Risk or Adjudicated Youth: The number of young people in the criminal
justice system has risen significantly over the past few years. However, these
students still need and are entitled to an education. Juvenile crime continues to
grow at alarming rates, with the rate of homicides committed by young people,
and the number of homicides they committed with guns, doubling since 1985.
According to the U.S. Office of Juvenile Justice and Delinquency Prevention
(OJJDP), total delinquency arrests increased by 35% between 1988 and 1997, to
approximately 2.8 million arrests, led by a disturbing 11% increase in criminal
homicide and a 56% increase in forcible rape. Moreover, nearly one-third (30%)
of all persons arrested for robbery in 1997 were under age 18, substantially above
the juvenile proportion of arrests in other violent offenses: forcible rape (17%),
murder (14%), aggravated assault (14%).
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The Book of Knowledge – 9 April 1999
Total delinquency arrests
increased by 35% between 1988
and 1997, to approximately 2.8
million arrests, led by a
disturbing 11% increase in
criminal homicide and a 56%
increase in forcible rape
We estimate that the total
spending on educational
programs for this group is $4
billion, with the private sector
capturing up to 25% of this.
Table 49: At Risk Youth Companies
Company Ticker
Children’s Comprehensive Services KIDS
Cornell Corrections CRN
Correctional Service Corporation CSCQ
Corrections Corporation of America Private
Kids1 Private
Ramsey Youth Services RYOUD
Res-Care RSCR
Wackenhut Corrections WHC
Source: Public Documents.
84
In the 1940s a survey listed the top seven discipline problems in public
schools: talking, chewing gum, making noise, running in the halls, getting
out of turn in line, wearing improper clothes, not putting paper in
wastebaskets. A 1980s survey lists these top seven: drug abuse, alcohol abuse,
pregnancy, suicide, rape, robbery, assault.”
—George F. Will,
American news commentator and author
Although these statistics are an alarming commentary on our nation’s youth, this
situation offers a tremendous opportunity for at-risk youth providers, which have
proven, cost-effective solutions. Children and teens at risk of becoming part of
growing high-school dropout rates, or worse, crime rates, are often offered
alternative school programs. In many cases these students receive drug or alcohol
abuse treatment, counseling to overcome violent histories or child care for their
own infants along with their core educational content.
Thus, in addition to regular education, special education and “at-risk” youth need
specialized teaching, discipline and mental rehabilitation that is often difficult to
accomplish in a regular school environment. We believe many private providers
can offer services that are superior to what schools can (the result of their
narrower target) freeing schools to focus their efforts on their core student body.
The most successful at-risk youth companies are those that provide a high-quality
continuum of programs that can be provided at a lower cost than public school and
government-sponsored programs. This continuum ranges from non-restrictive
programs, such as family preservation and non-residential special education
programs, to secure residential and medium-security juvenile correction facilities.
School board and government agency decision-making is largely budget-driven,
and at risk providers can offer the same or better programs at a lower cost are
positioned to ride a wave of privatization that we believe will occur in this sector.
We estimate that the total spending on educational programs for this group is $4
billion, with the private sector capturing up to 25% of this. We expect an
explosion in this market similar to the tremendous growth that has occurred
among the adult corrections companies such as Corrections Corp. and Wackenhut.
Website Description
www.ccskids.com Provides a range of services for emotionally disturbed, behavior
disordered, developmentally delayed or learning disabled youths.
www.cornellcorrections.com Provides to governmental agencies the integrated development,
design, construction and management of facilities for correctional and
detention services.
www.correctionalservices.com Developer and manager of privatized correctional and detention
facilities in the U.S. including juvenile corrections.
www.correctionscorp.com Designs, constructs, finances, and manages juvenile detention and
correction facilities.
Not Available Specialized schooling for students facing learning, language, social
challenges. Mission is to build confidence and competence.
www.ramsay.com An operator and manager of diversified treatment and education
programs for at-risk and troubled youth in residential and non-
residential settings nationwide. Operates charter schools for at risk
youth.
www.rescare.com Provides residential, training, educational and support services to
persons with developmental and other disabilities and at-risk and
troubled youths.
www.wackenhut.com Developer and manager of privatized correctional and detention
facilities in the U.S., Puerto Rico, Canada, the United Kingdom and
Australia

Our nation’s schools will need
to hire over two million
teachers in the next decade, the
result of increased student
enrollment, teacher turnover
and retirement.
25% of teachers are over age
50, and another 42% are
between 40-49.
We estimate that as a result of
these demographics the market
for teacher professional
development is approximately
$3 billion in the U.S., of which
$0.5 billion is for-profit.
Of the $5+ billion our schools
will spend on technology, only
6% was historically spent on
teacher training.
The Book of Knowledge – 9 April 1999
n Teacher Training
Our nation’s schools will need to hire over two million teachers in the next
decade, the result of increased student enrollment, teacher turnover and retirement.
Now 25% of teachers are over age 50, and another 42% are between 40-49. We
estimate that, as a result of these demographics, the market for teacher
professional development is approximately $3 billion in the U.S., of which $0.5
billion is for-profit.
Chart 47: Distribution of Teacher Ages, 1993-94
45% 42%
40%
35%
30%
22%
25%
25%
20%
15% 11%
10%
5%
0%
Under 30 30-39 Years 40-49 Years Over 50
Source: U.S. National Center for Education Statistics.
There are already critical shortages of teachers in states such as California, which
have reduced class sizes in grades K-3 and consequently increased the number of
teachers needed. Our inner cities have long struggled to fill teaching positions,
and teachers who have advanced skills are in limited supply. To fill this gap, New
York City’s school system has looked abroad for skilled teachers. In a concerted
recruiting effort, it has hired over two dozen schoolteachers from Austria. Other
states and districts have granted “emergency” or “provisional” certification to
teachers to fill vacancies in our classrooms.
In addition to new teacher hires, there is a significant need for ongoing teacher
training. A study by National Commission on Teaching and America’s Future
found a correlation between the performance of a state’s students on standardized
tests and whether that state had a system of teacher development, particularly one
that keeps teachers knowledgeable in their subject and in touch with expertise
within their schools. And given the tremendous impact that a teacher can have on
student learning, it is essential for teachers to continue to learn throughout their
careers.
One area where we see a sore need for teacher training is in technology use and
integration. Of the $5+ billion our schools will spend on technology, only 6% will
be spent on teacher training. The lack of teacher training is an impediment to
making technology ubiquitous in schools. As many as 65% of teachers have never
used a computer before being introduced to one in the classroom. This is not
surprising, of course, given that most adults today learned their computer skills on
the job. Fifty-one percent of our teachers are over age 40, and another 30% are
between 30 and 39, meaning that most, if not all, of their formal education
occurred without the benefits of technology. Only 20% of teachers feel very well
prepared to integrate educational technology into classroom instruction.
The continued push to standards, assessment and accountability also concerns our
teachers. This sentiment is understandable in an era of high-stakes consequences for
both students and children. Only 36% of teachers feel very well prepared to implement
state or district state and district curriculum and performance standards. Further, just
28% of teachers feel very well prepared to use student assessment techniques.
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 The Book of Knowledge – 9 April 1999

Table 50: Teacher Training Companies

Company Ticker
Advantage Learning Systems ALSI
Caliber Learning Network
Canter & Associates
Classroom Connect
EMG
ETC
FUTUREKIDS
Primedia
Teacher Universe
(Knowledge Universe)
Source: Public Documents.
Website Business Description
www.advlearn.com Provides teacher training on incorporating learning information systems and
assessment techniques into the classroom.
CLBR www.caliberlearning.com Developing teacher education courses with Columbia Teachers College.
Sub: SLVN www.sylvanlearning.com Teacher education and professional development through distance learning.
Private www.classroom.com Develops Internet-based curriculum and teacher resources, conducts interactive
learning adventures (such as MayaQuest) and hosts teacher training programs.
Sub: PRSNY www.emg.com Satellite network in K-12 schools. Delivers content over 16 channels for
approximately 19 hours each school day to 4200 schools.
Sub: T Not Available Professional development programs for teachers and school administrators.
Graduate level instruction via satellite broadcast.
Private www.futurekids.com Trains teachers and children to use technology while engaged in fun, curriculum-
based projects at its network of computer learning centers or at school.
PRM www.primediainc.com Broadcasts news and educational content. Develops and delivers education and
skill development programs to teachers using multimedia technologies.
Private www.knowledgeu.com Provides teachers with instructional technology planning, professional
development, instructional tools, and career and life services.

n In-School Remedial Education

Some schools have selected for-profit providers to provide supplemental, remedial
or special education services for children who need more intensive interaction than
the typical classroom provides. In most cases, children are “pulled out” of regular
class to receive focused instruction, particularly in reading or English as a Second
language (ESL). Private providers who have stepped forward with specialized
curriculum that can offer guarantees or unique solutions are few, but notable
companies.

Table 51: In-School Tutoring Companies

Company Ticker Website Company Description
HOSTS Private www.hosts.com Contracts with 1,000 mainly public schools serving 60,000 students. Operates a one-
on-one tutoring program, usually after school, by training volunteers from businesses
and the community.
Kaplan Sub: WPO www.washpostco.com Contracts with 35 public and 6 non-public schools serving 6,500 students. Provides
tutoring and test preparation for students at tutoring centers and through contracts to
schools.
Sylvan Learning Systems SLVN www.sylvanlearning.com Contracts with 139 schools for in-school tutoring programs modeled after the tutoring
programs taught in its learning centers and 625 non-public schools serving special
needs children.
Source: Public Documents, Merrill Lynch.

“Outsourcing” instructional
services is a small market, but
one we see as having strong
growth potential as schools seek
to achieve measurable results,
as they struggle with teacher
shortages and as they find
innovative ways to improve
student learning.
Sylvan’s in-school programs for public schools are modeled after their highly
successful tutoring centers. HOSTS is a wonderful program that helps schools
structure a reading tutoring program staffed by unpaid volunteers. Scientific
Learning has developed an intensive four to eight week technology-driven
program that significantly improves reading skills in children that have dyslexia
and other learning challenges.
“Outsourcing” instructional services is currently a small market, potentially $1
billion but with just $0.2 billion provided by for-profit companies today. Still, we
see this market as having strong growth potential as schools (i) seek to achieve
measurable results; (ii) as they struggle with teacher shortages; and (iii) as they
find innovative ways to improve student learning.

86

The growing number of dual-
income and single parent
families coupled with growing
child poverty rates and juvenile
crime statistics has made public
sponsorship of before-and
after-school care a compelling
national priority.
Few for-profit providers have
focused specifically on this
segment, but we predict that
this will be an area of
significant change in the next
few years.
Table 53: Before and After Care Companies
Company Ticker
Berlitz BTZ
Explore, Inc. Private
Sylvan Learning Systems SLVN
Voyager Expanded Learning Private
Source: Company Documents
The Book of Knowledge – 9 April 1999
n Before- and After-School Care
Politicians and parents are increasingly focusing on the need for before- and after-
school care for school-aged children. The growing number of dual-income and
single parent families coupled with growing child poverty rates and juvenile crime
statistics has made public sponsorship of before-and after-school care a
compelling national priority.
Table 52: Why We Need After-School Programs
• More than 12% of 5 to 12 year-olds are regularly left unsupervised at least some time during the
week.
• Kids spend more of their out-of-school time watching TV than any other activity
• Eighth-graders left home alone after school were more likely to use cigarettes, alcohol, and
marijuana than those in adult-supervised settings
• Juvenile crime triples between 2:00 pm and 8:00 pm.
• After-school activities for children ages 11 to 14 are offered in 71% of high income neighborhoods,
but only 23% of low income neighborhoods.
Sources: National Child Care Information Center; School-Age Child Care Project at Wellesley College; NCES; Explore,
Inc.
The facts that “latchkey” children are at greater danger of engaging in risky or
criminal behavior, being truant from school and earning poor grades than children
with adult supervision is turning public attention to the need for quality school-age
care.
There are approximately 50,000 programs serving school-aged children, with 90%
located in urban or suburban settings. Only 28% of these programs are in public
schools, with 14% found in religious institutions, 35% in child care centers, and
23% in other locations, such as community centers, private schools, work sties,
municipal buildings, etc. Four out of five programs serving school-age children
also serve preschool children. Most school-age care is provided by independent
providers. The largest providers are YMCAs and YWCAs which serve school-age
children in nearly 2,800 locations. Few for-profit providers have focused
specifically on this segment, but we predict that this will be an area of significant
change in the next few years.
Website Company Description
www.berlitz.com With Berlitz Jr. program, provides world language and ESL teaching services for K-
12 and for administrators and staff.
www.exploreinc.com Before and after school program operator and developer that has academic focus
that teaches through experiential learning, homework and study skills support,
community service and recreation. The two-year old company operates programs at
80 schools in seven states.
www.sylvanlearning.com Developed after-school curriculum with National Geographic. Likely plan is to
license program to schools and let them manage.
www.iamvoyager.com Offers activity-based summer and before-and-after curricula for elementary and
middle school children. Curriculum partners include NASA, Discovery Channel,
Smithsonian Institution and Polaroid.
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The Book of Knowledge – 9 April 1999

We estimate that the market for before–and after-school programs that could be
provided in the K-12 market is $1.5 billion, of which $0.3 billion is currently
captured by for-profit providers (more of this market is currently served by child
care providers today, as much as $5 billion.)

n Textbooks—K-12 and University

U.S. schools purchase nearly $6
billion in new textbooks each
year, $3.1 billion for K-12 and
$2.5 billion at the college level.
U.S. schools purchase nearly $6 billion in new textbooks each year. The K-12
textbook market is estimated to be $3.1 billion in 1998, growing at 4.4% annually,
and the university market is estimated at $2.5 billion in 1998, growing at 6.6%
each year. Growth in these two sectors has been revised upward over the past few
years, as schools and universities respond to demands for updated, more rigorous
instructional material.
The textbook publishing sector is very concentrated, unlike many sectors in the
education industry. The top ten largest college publishers, for example, accounted
for over 85% of sales in 1997, according to Cowles/Simba Information, and the
eleven leading K-12 publishers captured 96% of U.S. sector sales in 1996.

Table 54: Textbook Publishing Companies

K-12 Publishing 1996 U.S. Sales (1) College Publishing 1996 U.S. Sales (2)
The textbook publishing sector Simon & Schuster (Pearson) 632.0 Simon & Schuster (Pearson) 516.1
is very concentrated, unlike McGraw Hill 627.1 Thomson 400.0
many sectors in the education Houghton Mifflin 497.7 McGraw-Hill 205.2
industry Harcourt General 390.9 Addison Wesley Longman (Pearson) 175.0
Addison Wesley Longman (Pearson) 300.0 Harcourt General 155.8
Tribune 151.9 Houghton Mifflin 138.3
K-III Communications 146.5 George Von Holtzbrinck 80
Scholastic 146.5 John Wiley & Sons 68
Tompson 146.2 W.W. Norton 45
Torstar 56.7 Jones & Bartlett 25
Steck-Vaughn 39.8
TOP 11 3,088.8 TOP 10 1,808.4
Industry Total 3,216.4 Industry Total 2,272.1
Source: Cowles/Simba Information. (1) Revenues from K-12 sales, includes supplemental materials. (2) Revenues
from college sales.

Technology in general and the
Internet in particular are
impacting the publishing
industry
A couple of innovative
companies are quickly stealing
share from college bookstores,
using the advantages of scale
and convenience to outsmart
them.
In 1998, Harcourt exceeded Houghton to earn the number three spot in K-12
publishing, in part due to the success of its reading series, Signatures.
Technology in general and the Internet in particular are impacting the publishing
industry. One area that is being increasingly transformed—distribution of books
including at the college level. It used to be that once a professor selected a book
for a course, students had little choice but to head to the campus bookstore to buy
it. Some bookstores developed a healthy trade in used books, which captured up to
70% of a books sales annually. Still, students were for the most part captive
customers.
A couple of innovative companies are quickly stealing share from college
bookstores, using the advantages of scale and convenience to outsmart them.
Varsitybooks.com, CampusBooks.com, and BIGWORDS.com have emerged
quickly as alternatives in a new race for student dollars.

88

The U.S. spends $6.1 billion
annually on non-textbook
educational supplies and
equipment. About sixty percent,
or $3.6 billion of this is sold to
institutions, with the remaining
$2.5 billion sold to consumers.
School suppliers is highly
fragmented, with 3,400
distributors
We believe technology will
begin to change the way schools
buy supplies and classroom
tools.
The Book of Knowledge – 9 April 1999
n Supplemental Materials and Curriculum
The U.S. spends $6.1 billion annually on non-textbook educational supplies and
equipment. About sixty percent, or $3.6 billion of this is sold to institutions, with
the remaining $2.5 billion sold to consumers. We expect this market to grow by
6% per year, driven by increasing per-student expenditures and an increasing
student population.
In addition, under site-based management, teachers and school administrators are
given increased ability to determine how their budgets are spent, and we believe
this could drive additional spending on supplemental materials: musical
instruments, arts and crafts supplies, physical education equipment and
manipulatives (physical objects) to help kids learn geography, math and science.
Supplemental curriculum materials too, such as workbooks, lesson plans, video
tapes and films in curricular areas are also widely sold, along with the more
typical office supplies such as paper, copier toner and paper clips.
Most of the major textbook publishers also distribute supplemental materials.
Other companies participating this highly fragmented market are noted below.
Table 55: Supplemental Materials Providers
Tribune Education
Classroom Connect
Primedia
American Educational Products
Educational Development Corp.
Cinar Corp.
School Specialty
J.L. Hammett
Torstar
The distribution of supplemental materials takes place through retail stores, direct
mail and distributors. The market for distribution as well is highly fragmented,
with 3,400 distributors. Just two brand name suppliers have any significant size,
School Specialty, which holds 9% of the market and J.L. Hammett, which holds
2%. About 65% of the industry’s sales go through distributorships, with contract
stationers claiming 6%, office superstores 11% and mass merchants 18%. We
believe technology will begin to change the way schools buy supplies and
classroom tools. School Specialty and J.L Hammett have both developed e-
commerce sites to complement their traditional catalogs, direct sales forces and
retail outlets.
n Software & Technology
This $5 billion market is significant and growing, as we discuss in the following
section.
Issues in Marketing Products and Services To
Schools
Two major issues face companies selling products and services to the schools
market. First is the ever-present question of funding—where will our “cash-
strapped” schools find funding for new programs? Second is access to schools.
Building a skilled sales force can be a significant barrier to entry.
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The Book of Knowledge – 9 April 1999

n Funding for Products and Services

Most specialty services in
schools are paid for with
funding from a variety of
sources seeking to address
particular needs in schools.
The variety of funding sources
poses both challenge and
opportunity for for-profit
providers.
One option that may become
increasingly possible is
corporate sponsorship through
advertising, particularly for
technology purchases.
Channel One: Sponsoring Technology Through Corporate Advertising
Most specialty services in schools are paid for with funding from a variety of
sources seeking to address particular needs in schools. These include Title I
funding, grants for disabled children and state professional development funds.
Products in schools tend to be paid for out of a school’s general budget allocation.
Technology purchases are an exception. In the last few years, the sources for
technology funding for schools have zoomed, and range from e-rate funding to
technology literacy grants. Specialty products and services may also be purchased
by parent-teacher organizations or associations (PTAs or PTOs) corporations,
even philanthropic organizations seeking to impact the quality of American
education. The variety of funding sources poses both challenge and opportunity
for for-profit providers. Many, particularly technology providers, offer grant
writing assistance for schools who are interesting in purchases but are not
equipped to navigate the various funding sources.
Our observation has been that, on some levels, the “lack of funding” argument is a
red herring that distracts from the real school financing problem discussed earlier
in this report—that only $0.50 of every dollar in education goes to the classroom.
We have seen many cases where, if schools want something enough, they find the
money for it. In many of these situations, the “need” is created by healthy
competition. If the charter school up the street gets a computer in every
classroom, often the local public school, which had previously argued that it
couldn’t afford PCs, miraculously delivers one to every teacher.
One option that may become increasingly possible is corporate sponsorship through
advertising, particularly for technology purchases. Factors enabling this are the facts
that: (1) computer technology is seen as essential in schools by many, but is often
viewed as unaffordable; and (2) corporate advertising is an accepted business model
on the Internet. Channel One (now a subsidiary of Primedia) was the first company
to attempt this, and despite starting the effort in a different time and under different
circumstances, the company has been successful, both educationally and financially.

Channel One, a wholly-owned subsidiary of Primedia, owns and operates an advertising-supported educational television
service for secondary-school students in the United States. Launched in March 1990, Channel One transmits its
programming by satellite to middle and high schools located across the United States for school wide rebroadcast during
each school day. The company has placed in each participating school, at no cost to the school, $25,000 of Channel One-
owned equipment consisting principally of a satellite dish, a satellite receiver, two video cassette recorders (“VCRs”) and
color televisions. Channel One derives substantially all its revenue from national advertising directed at its student
audience and aired on Channel One, its 12-minute news and current events program.
Four years after launch, Channel One’s revenues were $64 million and EBITDA was $22 million. Moreover, the
company served eight million students in 12,000 schools. In addition to being financially successful, customers appeared
very satisfied. Ninety-nine percent of schools that carry Channel One Network choose to renew at the end of their one-
year contract.

n Building a Sales Force

A second significant issue for
companies selling to schools is
building a sales force or
successful direct marketing
channel.
A second significant issue for companies selling to schools is building a sales
force or successful direct marketing channel. A large school sale may be
complicated by decision-makers on many different levels—teachers (those who
use the products), school administration (who support implementation), district
administration (who disburse the funding) and school boards (who hold the purse
strings). In our experience, the most important challenge facing start-up
companies in this market is hiring a qualified sales force.
Companies with a strong sales force or direct marketing channel to teachers in
place have a tremendous asset, a pipeline to schools that can be used to for a
variety of products. We see this obstacle driving consolidation among providers of
products and services to schools.

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 The Book of Knowledge – 9 April 1999

Table 56: Textbook and Supplemental Materials Publishers and Distribution Companies
Company Ticker Website Business Description
Addison Wesley Longman Sub: PRSNY www.pearson.com Comprehensive programs and materials for primary and secondary school students
(Pearson) and teachers
American Educational AMEP www.amep.com Develops and produces hands-on supplemental teaching aids for schools and
Products teachers
BIGWORDS.com Private www.bigwords.com Internet bookstore that sells and “rents” new and used textbooks.
Books Are Fun Private www.readings-fun.com One of the largest direct marketers of hard cover books in North America. The
company conducts book fairs and book display events at over 30,000 companies and
80,000 schools nationwide.
CampusBooks.com Private www.campusbooks.com Internet bookstore that sells textbooks.
Cinar Corporation Private www.cinar.com Integrated entertainment and education company involved in the quality educational
products for children and families.
Classroom Connect Private www.classroom.com Develops Internet-based curriculum and teacher resources, conducts interactive
learning adventures (such as MayaQuest) and hosts teacher training programs
Educational Development EDUC Not Available Distributor of a line of children's books and related materials to book, toy and gift
Corp stores, libraries and home educators
George Von Holtzbrinck Private Not Available Owns majority stake in McMillan publishing.
Harcourt General Sub: H www.harcourtbrace.com Publisher of textbooks and related multimedia products for K-12 and college under the
Harcourt Brace and Holt, Rinehart & Winston names
Houghton Mifflin HTN www.hmco.com Publishes print and electronic educational materials for K-12, postsecondary and
corporate markets.
J.L. Hammett Private www.hammett.com Distributes school supplies and supplemental materials
John Wiley & Sons JW.A, JW.B www.wiley.com Publishes, books, journals and electronic products for the educational, professional,
scientific, technical and consumer markets
Jones & Bartlett Private www.jbpub.com Ninth-largest publisher of college textbooks in the US. Also produces multimedia
products in a variety of disciplines
K-III Communications PRM www.primediainc.com Provides specialized information for targeted audiences in the education, business,
(Primedia) special interest, and consumer markets
McGraw-Hill Publishing MHP www.mcgraw-hill.com Publishes print and electronic educational materials for K-12, postsecondary and
corporate markets. Also offers Internet and CBT-based courses.
Nebraska Book Company Private www.nebook.com One of the largest used and new book distributor in North America. The company’s
products and services include: Textbooks, Retail College Bookstores, Information
Systems, and Consulting Services
Scholastic Corporation SCHL www.scholastic.com A global children publishing and media company, Scholastic publishes original print
and Internet-based curriculum for grades K-8.
School Specialty SCHS www.schoolspecialty.com Distributor of non-textbook educational supplies and furniture for grades pre-
kindergarten through 12 to school districts, administrators and teachers through its
catalogs
Simon & Schuster Sub: PRSNY www.pearson.com Leading publishing company. Prints under the Addison Wesley Longman, Prentice
(Pearson) Hall, and Allyn & Bacon, Simon & Schuster imprints.
Thomson Publishing Toronto: TOC itp.thomson.com Publisher of textbooks and related multimedia products for high-school and college.
Torstar TS:B www.torstar.com Broad-based publisher with operations that include children's supplementary
education products.
Touchstone Applied TASAD www.tasa.com Develops, publishes, and distributes a proprietary line of custom reading tests to
Science Assc. elementary, secondary schools and universities nationwide
Tribune Education Private www.tribuneeducation.com A leading publisher of K-12 supplemental materials.
Varsitybooks.com Private www.varsitybooks.com Internet bookstore that sells textbooks. Has booklists from over 50 of the nations
largest schools.
W.W. Norton Private www.wwnorton.com College and professional textbook publisher
Wolters Kluwer WTKWY www.wkap.nl Netherlands-based publishing company active in academic and professional fields.
Source: Public Documents.

91
The Book of Knowledge – 9 April 1999
Ten percent of American school
children are attending private
schools. Of these five million
or so children, 50% are
attending Catholic schools,
35% attend other religion-
sponsored schools, and 15%
attend non-sectarian private
schools.
There are 26,100 or so private
schools in the U.S., with 8,351
Catholic schools, 12,180 other
religion-sponsored schools, and
5,563 non-sectarian schools.
The presence of choice in this
market has created a situation
where education for children is
the real beneficiary.
92
Private Schools
Ten percent of American school children are attending private schools. Of these
five million or so children, 50% are attending Catholic schools, 35% attend other
religion-sponsored schools, and 15% attend non-sectarian private schools.
Chart 48: Enrollment in Private Schools and Comparable Tuition Rates
Non-Sectarian
$8,000
15% $6,631
Other Religious
$7,000
34% $6,000
$5,000
$4,000
$2,915
$3,000 $2,178
$2,000
$1,000
Catholic $-
51%
Catholic Other Religious Non-Sectarian
Source: NCES.
The total cost of private education is $27.5 billion, of which we believe $2.6
billion is captured by for-profit providers. There are 26,100 or so private schools
in the U.S., with 8,351 Catholic schools, 12,180 other religion-sponsored schools,
and 5,563 non-sectarian schools. The stereotypical student at these programs
couldn’t be more different. Many Catholic schools are featured in the news for the
remarkable success they have had in educating inner-city children and the
tremendous support they receive from parents who scrimp to pay for tuition to
help their children escape dismal public schools. The privileged kids attending
one of the country’s 778 private non-sectarian secondary schools, on the other
hand, pay average tuition of nearly $10,000.
Despite these extreme differences in family situation of these two examples, we
believe the motivations for parents sending their children to private schools is
ultimately very similar. That is, a desire to ensure that their children receive the
best possible education available to them, one which encompasses parents hopes
for their children’s development and their futures.
These schools are subject to the discipline of the market. If they aren’t able to
offer a superior education, environment or set of opportunities for children,
parents will withdraw their business, and the schools will close. The presence of
choice in this market has created a situation where education for children is the
real beneficiary.
The non-sectarian schools bring in tuition revenues of approximately $6 billion.
This is a highly-fragmented industry in which we believe most schools, although
not all, are operating on a for-profit basis. A few companies have consolidated or
developed clusters of schools in certain markets where they can gain leverage with
advertising, hiring and other expenses as well as build a brand that reflects their
educational philosophies.

Table 57: Private School Companies
Company
Bright Horizons Family Solutions
Challenger Schools
Nobel Learning Communities
PineCrest Schools
TesseracT Group, The
Source: Public Documents.
The population of
homeschoolers is so large, that
there are now more children
studying at home than there are
public school students in New
Jersey.
While this market is hard to
measure, a conservative
estimate puts the market at
$500 million, based on per
student expenditures of $400.
Increasingly, parents who are
teaching their children at home
do so because they believe they
can offer a superior alternative
to the run down or unsafe
school, the ancient textbooks
and teachers who may not have
degrees in the subjects they
teach.
The Book of Knowledge – 9 April 1999
Ticker Website Business Description
BFAM www.brighthorizons.com A high-quality provider of corporate child care, Bright Horizons opened
its first private school last fall to test the opportunity of serving children
who attend their work-site child care centers.
Private www.challengerschool.com Operates approximately twenty private schools in California and Utah
NLCI www.nobellearning.com Provides affordable private education (from preschool to the eighth
grade) for children of middle-income working families.
Private www.pinecrestschools.com Private school that offers 11 campuses in the LA area that focuses on
modern teaching methods and mastering basic skills.
TSST tesseract.pvt.k12.mn.us An integrated education management company, TesseracT has two
private schools in Arizona that teach the company’s extensively-
researched curriculum.
Homeschooling
In the purest indictment of the educational system, more than 1.2 million children
are not enrolled in school at all. The population of homeschoolers is so large, that
there are now more children studying at home than there are public school
students in Wyoming, Vermont, Delaware, North Dakota, Alaska, South Dakota,
Rhode Island, Montana and Hawaii combined. Put another way, the population of
homeschoolers is larger than student populations in New Jersey and forty other
states. While this market is hard to measure, our estimate puts the market at $500
million, based on per student expenditures of $400 on books and other supplies.
Chart 49: Homeschoolers Exceed Population of 10th Largest School State (NJ)
1,300,000
1,250,000
1,200,000
1,150,000 9th
1.2
1,100,000 mm 10th
1,050,000
1,000,000
Georgia Home Schoolers New Jersey
Source: Home School Legal Defense Fund, 1996.
Historically, many parents who taught their children at home were doing so for
religious reasons, with an aim to infusing education with their religious beliefs and
moral values. Increasingly, however, parents who are teaching their children at
home do so because they believe they can offer a superior alternative to the run
down or unsafe school, the ancient textbooks and teachers who may not have
degrees in the subjects they teach. Indeed, studies show that parents do know
best—homeschooled children perform better on standardized tests than the general
school population.
93
The Book of Knowledge – 9 April 1999
The Internet is also a
tremendous resource for
homeschooling families,
providing access and
interaction like never before
possible.
94
Alternatively, children who are homeschooled may have needs that can’t
effectively be met by the public school system. Of the 1.5 million U.S. children
who are taught at home, about 5-10% percent have learning disabilities. While all
students benefit from one-on-one teaching, special- education kids may benefit
most. Most public schools can't afford to give special-needs kids the full-time,
one-on-one attention they may require.
The Internet is also a tremendous resource for homeschooling families, providing
access and interaction like never before possible. And a variety of companies
have enjoyed some success selling software, supplemental materials and other
resources to home schools, proving business concepts that can later move into
mainstream schools.
 The Book of Knowledge – 9 April 1999

6. Education Technology: Powerful School

Tool
EdTech Market Statistics • We think technology can take American schools into the 21st Century, but
first we need to bring our schools into the 20th Century.
Size of Market
$4.8 billion • Technology spending by public schools has increased at an encouraging
14% annually, from $2.1 billion in 1990-91 to an estimated $4.8 billion over
Market Growth Rate the past six years. With public school expenditures exceeding the $300
12% billion mark, however, this still only represents 1.6% of total expenditures.
Market Capitalization • The ratio of students per computer has improved dramatically, from 16 to
(Excluding Publishers) one in 1992 to 7 to one in 1997. The number of classrooms connected to the
$3.7 billion Internet has zoomed too, from 3% in 1994 to 27% in 1997.
• This being said, only 3% of schools are at the “leading edge” of effectively
integrating technology into the classroom.
Five Largest Companies
• As many as 65% of teachers have never used a computer before being
Pearson (CCC)
introduced to one in school, and 80% remain uncomfortable using
Primedia
technology for classroom instruction.
Jostens Learning Co
The Learning Company • Technology improves student outcomes in language arts, math, social
McGraw-Hill studies and science. Students performing at below-average levels often see
the greatest gains.
• 61% of teachers using technology believe computers result in a “great
improvement” in student motivation. An additional 33% say technology
provides some improvement in student motivation.
• Technology in schools can also be used to improve school management, in a
parallel to corporate enterprise resource applications. Just as management
information systems have become essential to the efficient functioning of
successful businesses, Learning Information Systems have the potential to
become permanent fixtures in the classroom.

Table 58: Megatrends Shaping the Education Technology Industry

Trend Impact
Demographics Generation Y is increasingly technologically sophisticated, placing additional challenges on schools. Is it
any wonder that kids who shoot down space ships with their Nintendo games all weekend are bored in a
classroom equipped only with a blackboard and chalk?
Technology Kids love computers. Technology can help kids learn new things in new ways, and connect them to the
whole wired world. In addition, technology can help teachers individualize instruction, increase parental
involvement in schools and improve school accountability.
Globalization The workers of tomorrow will increasingly find themselves competing for jobs and resources with people in
other countries. Developing technology literacy is one component of this. Technology also enables
students to access educational resources from around the world, making the globe seem even smaller.
Branding The K-12 Education segment has few brands, although once a brand becomes established, teachers are
very loyal to it (Apple Computer is a prime example).
Consolidation Providing technology solutions to schools will require some scale, with finding a qualified sales force one of
the major problems of companies in this sector. As with other technology sectors, companies may acquire
R&D to speed their time to market, rather than building their own.
Privatization/ IT management is an ideal candidate for outsourcing by schools. This area is complicated by the rapid-fire
Outsourcing rate of change as well as the difficulty in keeping good IT staff. Teacher training on technology can also be
done effectively by outside organizations.

95
The Book of Knowledge – 9 April 1999

Technology has the potential to Technology has the potential to lead American education into the 21st century, but
lead American education into first we need to bring schools into the 20th century. Until recently, the
the 21st century, but first we technological revolution had largely sidestepped our education system.
Fortunately this is now rapidly changing, creating opportunity for many private
need to bring schools into the providers of education technology. We see two major roles for technology in
20th century. We see two major schools—helping children learn and helping teachers teach.
roles for technology in
While schools have been slow to add computers, there is a landslide of public
schools—helping children
support for technology in the classroom. To us, this makes perfect sense. Is it any
learn and helping teachers wonder that kids who shoot down space ships with their Nintendo games all
teach. weekend are bored in a classroom equipped only with a blackboard and chalk?
The fact that technology uses a highly engaging, interactive format to help
children learn is a big part of its appeal to kids, teachers and their parents. This,
coupled with the fact that the charter school down the street has a computer in
every classroom (or in the case of The Edison Project, a computer in every home)
has increased commitment to technology in schools.
What’s more, schools are only starting to use technology in the way that
businesses have been doing for years—to automate operations, manage
information, and improve (or even customize) service to customers. Just as
Management Information Systems (MIS) have become essential to the efficient
functioning of successful businesses, Learning Information Systems (LIS) have
the potential to become permanent fixtures in schools and classrooms, providing
teachers and administrators with tools to improve their performance and, in the
process, student learning.

There are thousands of buildings in this country with millions of people in

them who have no telephones, no cable television and no reasonable prospect
of broadband services. They are called schools.

—Reed Hundt
Former Chairman, U.S. Federal Communications Commission

The ratio of students per Access to information technology is growing as schools add more equipment and
computer has improved link libraries and classrooms to the Internet. The ratio of students per computer
dramatically, from 16 to one in has improved dramatically, from 16 to one in 1992 to 7 to one in 1997. The
number of classrooms connected to the Internet has zoomed too, from 3% in 1994
1992 to 7 to one in 1997. to 27% in 1997.

Chart 50: Students per Computer Declining And Internet Connectivity Increasing

18
16 90% 82%
16
14 80%
14 65%
70%
12 11
60%
10 50%
10 9
50%
8 7 35%
40%
6
27%
30%

4 20% 14%
8%
2 10% 3%

0 0%
1 9 92 -93 19 9 3-9 4 19 94 -9 5 1 99 5-9 6 1 99 9-9 7 19 9 7-9 8e 1994- 95 1995- 96 1999- 97 1997-98e

Cla ssrooms S c hools

Source: Quality Education Data.

96

Technology spending has
increased at an encouraging
14% annually, from $2.1 billion
in 1991-92 to $4.8 billion over
the past six years.
Only 3% of schools are at the
“leading edge” of effectively
integrating technology into the
classroom.
The Book of Knowledge – 9 April 1999
Technology spending has increased at an encouraging 14% annually, from $2.1
billion in 1991-92 to $4.8 billion over the past six years. With public school
expenditures exceeding the $300 billion mark, however, this still only represents
1.6% of the total.
Chart 51: Educational Technology Funding is Up in K-12 Schools ($billions)
6 5.4
4.8
5
4.3
3.9
4 3.6
2.8
3 2.5
2.1
2
0
1991-92 1992-93 1993-94 1994-95 1995-96 1999-97 1997-98 1998-99e
Source: Quality Education Data.
As with all statistics, to really understand the numbers requires getting behind
them. According to a recent study by the CEO Forum on Education and
Technology, a nonprofit organization of 21 U.S. business executives and
educators, only 3% of schools are at the “leading edge” of effectively integrating
technology into the classroom. Approximately 59% of K-12 schools in the U.S.
are either without computers in their classrooms or have antiquated hardware. The
other 38% are using computers in their classrooms, but not to their potential. So
while the computer-per-student ratio has come down substantially, this simple
number alone is not a sufficient proxy for the use of technology in schools. The
bottom line is, we still have a long way to go before technology can fill its promise
in America’s schools.
Technology As a Learning Tool — Kids Love
Computers
We have spent more than five years researching the rapidly growing educational
services and training industry. We have had the opportunity to see many examples
of the effective use of technology in schools, and how this has benefited both
affluent and disadvantaged children. Our view, which is supported by decades of
educational research, is that those solutions that work best have a combination of
the following key characteristics:
Table 59: Characteristics of Effective Technology Solutions
High Expectations
Effective Teachers
Involved Families
Technology in Every Child’s Hands
Engaging, High-Quality Content
Internet Connected
Sufficient Learning Time
We need programs that set high expectations by providing challenging subject
matter in a manner that is motivating to students. This means using the compelling
power of multimedia to which students are so attracted. We need teachers who can
effectively use today’s technology. Individual behavior does not change as quickly
97
The Book of Knowledge – 9 April 1999
Kids love computers. 61% of
teachers believe computers
result in a “great improvement”
in student motivation.
The computer can facilitate
more “real-world” inquiries
that require students to use
higher-order skills.
Technology in the home can
also increase the amount of
time parents spend with
children on their studies.
Learning Information Systems
have the potential to become a
permanent “teachers aide” in
the classroom.
Whether kids live in Minot,
North Dakota, Murfreesburo,
Tennessee or Manhattan, they
will be able to access the same
resources on the Internet.
School-provided technology in
the home encourages kids to
continue learning after they
leave school.
98
as technology does or as fast as logic might suggest. For example, ATM
technology has been around since the 1960s, but did not become ubiquitous until
the mid-1980s. Likewise, just putting computers in kids’ hands will not create
change unless teachers can use it and parents are involved. This means
professional development and parental outreach.
When done effectively, there are myriad benefits of integrating technology into
the classroom and taking kids online.
Increases student motivation. Kids love computers. When Jostens Learning
Corp. in 1997 surveyed 1,000 teachers who used computers in class, it found that
61% of teachers believed computers resulted in a “great improvement” in student
motivation. An additional 33% said technology provided some improvement in
student motivation. Many teachers indicated that technology increased student
attendance, while others said that discipline problems decreased.
Improves student achievement. A growing number of studies are quantifying the
benefits of technology in the classroom. Using technology improves student
outcomes in language arts, math, social studies and science, according to a 1995
review of more than 130 academic studies conducted by the Software Publishers
Association. Students performing at below-average levels often see the greatest
gains.
Encourages higher-level thinking. Effective use of technology in the
classroom can transform the learning process. The computer can facilitate more
“real-world” inquiries that require students to use higher-order skills such as
problem solving, collaboration, statistical analysis and simulation. These types
of projects require greater student initiative, meaning kids take a more active
role in the learning process.
Involves parents. Parental involvement has long been recognized as an important
contributor to student success. The broadcast nature of e-mail makes it easier and
less time-consuming for teachers to communicate with parents on a regular basis,
not only when problems arise. Technology in the home can also increase the
amount of time parents spend with children on their studies.
Gives teachers tools to improve instruction. In business, management
information systems have become critical to the efficient operations of every large
company. In education, similar systems can give teachers powerful tools to
monitor, guide and assess the progress of their students. Learning information
systems can be used to track student performancereal time and over time.
Teachers can also use technology to access resources to supplement instruction
and exchange ideas with other teachers and professionals. Just as management
information systems have become essential to the efficient functioning of
successful businesses, learning information systems have the potential to become a
permanent “teachers aide” in the classroom.
Utilizes the resources of the whole wired world. It has been said that it takes a
village to raise a child. The Internet allows us to access the resources not just of
our local community, but of the entire “global village” to educate our children.
Whether kids live in Minot, North Dakota, Murfreesburo, Tennessee or
Manhattan, they will be able to access the same resources on the Internet. These
include museums, universities and even other school-aged children who may share
unique interests.
Expands learning time. School-provided technology in the home encourages kids
to continue learning after they leave school, mostly because it is fun. We have
evidence that if you create engaging educational content, kids will spend time with
it, rather than watching more TV. More time to practice difficult subjects or explore
interesting ones enables children to improve their skills and develop their creativity.
 The Book of Knowledge – 9 April 1999

New and expanding
technologies will account for
80% of new jobs in the next 10
years. We cannot let our
children graduate from high
school without full language
literacy and technology literacy.
Prepares children for the future. We live in a knowledge-based economy. The
winners in this society will be those who can rapidly receive, filter, process and
utilize information whenever and wherever it is desired or needed. The
Department of Labor estimates that new and expanding technologies will account
for 80% of new jobs in the next 10 years. We cannot let our children graduate
from high school without full language literacy or technology literacy. We know
that more than 350,000, or 10%, of IT jobs are presently unfilled. This percentage
is expected to increase to 20-30% over the next five years. Technology proficiency
will be a significant determinant of future economic success both for an individual
and our nation as a whole.
There are many companies developing technology specifically for the K-12
market. As well, there are many case studies illustrating the power of that
technology in the classroom.

Scientific Learning: Giving Kids a Jump Start On Reading

Scientific Learning develops and markets proprietary, science-based software products that help accelerate learning,
especially learning to read. The company’s first product, Fast ForWord, dramatically improves children’s pre-reading
skills, particularly for those who have learning difficulties. Children who have historically performed at levels well below
average for their age group, including children with attention deficit disorder and dyslexia, make, on average, a gain of 1.5
to 2 years in language comprehension after just four to eight weeks on the intensive Fast ForWord program. For the
families of the 20% of American students who have learning difficulties such as these, Fast ForWord is akin to a cure for
cancer.
Fast ForWord can offer significant cost savings over current alternatives. The dollars saved on special reading instruction
can be directed back into regular classroom instruction or better serve children who have more severe learning disabilities.
A study by SRI International estimated that improvements in the speech of children who currently qualify for special
speech services was so significant that 26-40% of these children would no longer qualify, generating net savings of up to
$10,000 per child over a three year period. Given that up to 20% of children lack these critical language skills, the savings
from this program could be significant.

NetSchools: Putting Technology In Every Child’s Hands

NetSchools has developed a total technology solution for schools based on their needs. Recognizing that kids do not sit at
desks for hours on end, NetSchools designed a computer for kids, rather than pulling a solution out of the corporate closet.
The NetSchools computer, or StudyPro, as it is called, is practically bump-proof, water-proof, theft-proof and portable. It
also has a wireless connection to the Internet and school LAN, so students do not have to trip over power cords. Teachers
are given weekly training over the first year of usage and there is dedicated technical and instructional support to help
teachers effectively use the system in the classroom. When every student has a computer, technology can become a
seamless part of the learning process, rather than something kids need a hall pass to use. The StudyPro can also be used by
parents at home, to communicate with teachers. Finally, the classroom management information system track student
progress on a detailed level, so there can be immediate intervention if a child is falling behind.

APEX: Increasing Access to Rigorous Academic Content

APEX is an innovative online service providing quality Advanced Placement courses to schools with limited resources for
AP instruction. APEX courses enable college-oriented high school students the opportunity to take an AP course not
normally offered at his or her school. These courses feature experienced AP teachers working with students over the
Internet.
APEX courses are self-paced, but are not independent study. Experienced faculty interact with students online and are
also available by telephone. The company, funded by Vulcan Northwest, currently offers two courses: U.S. Government
& Politics and Microeconomics. Upcoming courses include Calculus, Physics, Statistics and History. Providing the best
content to learners will deliver on the promise of the Internet. The company’s website, www.cramcentral.com, offers
crash courses in A.P. exam topics.

99
The Book of Knowledge – 9 April 1999

The Learning Portal: Creating A Home-School

Connection
The Internet has the power to access the best content in the world. Many
education technology companies have focused on developing new content or
recasting existing content for this new medium. We predict that we will now see
increasing interest and opportunity for companies seeking to aggregate or manage
that content specifically for K-12 students, creating education portals that students
and teachers can access in school, and that parents and children can access at
home. In addition to increasing the school-to-home connection by easily linking
parents, teachers and the community, these portals can create corporate value by
capturing “eyeshare” of this very attractive market.

ZapMe!: With PC and Internet Access For All

ZapMe! offers schools an interactive global education portal that delivers safe, meaningful and educational content and
services to the K-12 community. And it’s free. ZapMe! will give K-12 schools 15 PCs, satellite-delivered Internet access
and its aggregated education content at no cost. In return, schools pledge to ensure that the system is used for at least four
hours each day. The ZapMe! solution enables all schools to employ technology to help children learn. The company has
thousands of schools interested in its technology solution.
On ZapMe!’s Netspace, students can access 10,000 educational web sites, message boards, e-mail and chat functions, as
well as the Microsoft Office suite. If school administration and parents approve, students can also access the broader
Internet. The ZapMe! lab is funded by technology placement fees from partners such as Compaq, Philips, Microsoft and
Gilat Satellite Networks as well as paid advertising on the ZapMe! netspace, school e-commerce and, in the future, home
access charges. The company manages costs through standardization of hardware and software configurations. As the
technical support provider, this standardization also enables ZapMe! to provide a high-level of customer service to
schools, ensuring that the network always available.

FamilyEducation Company: Fostering Education on the Web

FamilyEducation Company develops and provides educational resources and services for families, schools and other
groups interested in education. The company helps parents use online tools as well as publications to become more
involved in their children’s education and development. For schools, the FamilyEducation Network offers schools free
customized web sites to create a parent/school connection. The company has developed a unique partnership with public
sector associations such as The National PTA, National School Boards Foundation and others. The company has also
partnered with America Online, The AT&T Learning Network, Fleet Financial Group, Hold Educational Outlet and NBC.
More than 1,100 schools are now using the FamilyEducation Network, schools from 48 states, the District of Columbia
and Puerto Rico.

The Lightspan Partnership: Education Portal and (Almost) Hardware-less Software Increase Home-School
Connection
Lightspan is facilitating school-to-home communication through its “Local Connect” service, an effective, user-friendly,
online program that can integrate the entire school community—teachers, students, parents, and administrators. The
program aggregates the best education content on the Web, and provides Internet and e-mail access for participating
schools. One thousand schools are using the service, building on the 2,000 that are using the company’s academically
enriched, fun, interactive software that supplements in-class instruction in math, reading and language arts. The software
is very graphics-driven and even kids raised on Nintendo for breakfast, lunch and dinner enjoy it. This highly engaging
software can be used in the classroom and is also provided to parents on a CD-ROM so children can continue to practice at
home. At home, the software can be run on a home computer or on a $200 Sony PlayStation, a device that attaches to a
standard TV. In many cases, the school provides each family with this inexpensive piece of hardware so that parents can
help their child use the software and even communicate via e-mail with their child’s teacher by hooking it up to a
telephone outlet. In the U.S. about 50% of homes have computers. Yet more than 99% of homes have a television set, even
more than have indoor plumbing. Lightspan has found ways to engage children and electronically connect their parents,
regardless of their income levels.

100

The general lack of
accountability of schools for
student achievement (and tax
dollars spent) has led to
renewed calls for uniform
measurement systems and
standards
Thus all but two states have
developed or are developing
school accountability systems
and associated tests. Many are
linking standards and
assessment
Charter schools have zoomed
from zero to 1,000 in just five
years. School reform will
increase accountability for all
schools
The Book of Knowledge – 9 April 1999
Technology As a Management Tools — Enterprise
Software For K-12 Schools
Technology in schools can also be used to improve school management. Schools
are only starting to use technology in the way that businesses have been doing for
years—to automate operations, manage information, and improve (or even
customize) service to customers. Just as Management Information Systems (MIS)
have become essential to the efficient functioning of successful businesses,
Learning Information Systems (LIS) have the potential to become permanent
fixtures in schools and classrooms, providing teachers and administrators with
tools to improve their performance and, in the process, student learning.
The need for Learning Information Systems is clear for anyone who wants our
nation’s children to have the best possible education. How can the effectiveness
and quality of a teacher or how well a school is doing educating a child be
measured? Unfortunately, they usually can't under any quantitative scheme
because currently most schools are not equipped with a proper means to measure
performance. Parents and teachers often have little information on how a child is
progressing from year to year in an absolute sense, and compared to peers.
Parents also have a limited ability to determine whether a teacher is helping their
child achieve his or her potential, and how a school’s performance compares to
others in a community. Student progress must be measured in ways that enable
teachers and parents to make appropriate choices for their students, and which let
parents measure the effectiveness of schools and teachers.
“Before you build a better mousetrap, it helps to know if there are any mice
out there.”
—Mortimer B. Zuckerman, Chairman and
Editor-in-chief, U.S. News and World Report
The general lack of accountability of schools for student achievement (and tax
dollars spent) has led to renewed calls for uniform measurement systems and
standards from parents, politicians, and from business leaders. Parents and
communities alike want tools to measure our children’s absolute and relative
educational progress. As they understand, if you can’t measure it, you can’t
manage it!
We believe there will be a dramatic increase in information about school and
student performance in the near future, as political forces pressure schools into
monitoring and publicizing their achievements. All but two states have developed
or are developing school accountability systems and associated tests. These
programs will continue to evolve over the next few years, particularly because few
of these programs effectively evaluate students against clear performance
standards. In addition, the stakes tied to these tests will continue to increase, as
state legislators link student graduation or even advancement from grade to grade
to performance on the exams. These forces provide opportunity for companies
that develop, deliver or prepare students for these tests.
School reform initiatives can also provide momentum for this segment. These
initiatives, such as choice, school vouchers and charter schools, which have
zoomed from two to 1,200 in just six years, are transforming the way education
has historically been delivered. This transition will both facilitate and be
facilitated by an increase in student and school performance data provided through
Learning Information Systems. All of these reforms bring with them the need for
better management of the school as an enterprise, creating opportunities for
companies such as National Computer Systems, Advantage Learning and others.
These programs can also significantly increase the connection between schools
and parents, linking the few people who really do know best about how a child is
learning and could be learning.
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The Book of Knowledge – 9 April 1999

“Our top-down, left-brain mass educational system cannot provide the

individualized education that our children need to develop their unique
creativity and the right-brain skills of the future.”

Harry Dent
The Roaring 2000s

n Enterprise Management Software Key In Transformation of

Schools
Administrative software By collecting and managing information on what children are learning, how that
applications have the potential relates to district or state standards, teacher ability or even school finances,
to professionalize teaching and administrative software applications have the potential to professionalize teaching
and school administration as well as significantly increase parental involvement in
school administration as well as
their children’s education.
significantly increase parental
involvement in their children’s The spectrum of opportunities in this sector ranges from backoffice functions like
education school finance and student attendance to teacher desktop tools such as student
assessment, lesson planning and standards mapping. Some solutions provide
teachers with educational content, such as lesson plans, supplemental materials
Given that 80% of teachers do (e.g. worksheets and group activities) and so on. Given that 80% of teachers do
not yet feel comfortable not yet feel comfortable integrating technology into the classroom, we see teacher
integrating technology into the training (both generally and technology-specific training) as critical to the
classroom, we see teacher adoption of these solutions, with several providers offering supplemental training,
as shown in the following chart.
training as critical to the
adoption of these solutions
Table 60: Enterprise Software Providers to the K-12 Market
School Student Instructional Teacher Access to Home To
Finance Info Management Development Content School
Advantage Learning X X
Computer Curriculum Corp. X X
Chancery Software X
Classroom Connect X X
Discourse Technologies X
Family Education Network X
Fox River X X X
Learning Contract X X X
Lightspan Project X X X
MediaSeek X
NCS X X X X X X
NetSchools X X X X X
PowerSchool X
Pentamation X
Source: Merrill Lynch. These are very broad categories such that companies with products in one particular category
may not necessarily directly compete against other companies in the same category. Teacher Development suggests
teacher training beyond how to directly use a company’s products.

National Computer Systems: Think “SAP for Schools”

National Computer Systems is the leading provider of enterprise software solutions to schools. Through acquisition and
internal development, NCS has developed a complete product line of software to manage information in schools, from the
back office to the teacher desktop and, soon, to the home. The company’s solutions cover a range of needs in the school:
from accounting, payroll and personnel to teacher training tools and Internet-delivered lesson plans.
NCS is in the process of integrating these programs and in so doing, is in the strongest position to become the “SAP” for
schools - providing an enterprise-wide school management system. To support the expansion of technology in schools, the
company has also developed a service organization providing computer network system design, implementation and
integration programs for schools.

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 The Book of Knowledge – 9 April 1999

Advantage Learning: Improving Learning Through Information Systems

Advantage Learning is another company that effectively uses technology to increase student learning, by empowering
teachers with quantitative data on student performance. Advantage Learning’s software also encourages kids to read
books. After they have read a book, students take a computer-based quiz and get points based on the difficulty and number
of words in the book and their understanding of it. Kids enjoy using the computer and competing against themselves and
their peers. Teachers praise the immediate, quantitative information the software provides on student achievement. It helps
them guide students in a way that meets his or her specific needs. The company’s software is installed in 32,000 schools in
the U.S. and Canada, or 26% of the total. It has also trained nearly 60,000 teachers, librarians and other reading specialists
on increasing the effectiveness of reading programs.
A study of more than 9,000 schools in Texas and Tennessee, half of which owned the Advantage Learning software, found
that schools with the software performed better on virtually all subject tests, including reading, math, science and social
studies. At a cost of about $20 per child, Advantage Learning offers an easy and effective way to use technology to
improve reading levels and give teachers the information they need to make instructional decisions about their students.

Issues In Education Technology

For this reason, simply wiring
classrooms with the latest
technology is insufficient.
Teachers need training on the
capabilities of the computer
n Teacher Training
Technology can be a powerful supplement to traditional classroom teaching, and can
be used by skilled teachers to facilitate the learning process in ways that have never
been done before. Not integrating computers into the classroom contradicts the
pervasive role technology has in our modern world. For this reason, simply wiring
classrooms with the latest technology is insufficient. Teachers need training on the
capabilities of the computer and the curricular resources available in order to integrate
the computer into classroom instruction and launch a new paradigm of learning. With
prepared teachers, technology will allow students to learn new things in new ways.
Thus, at the heart of whether technology is effectively used in K-12 schools is the
amount of training that teachers receive. Right now, that level is insufficient. Of
the $4.2 billion our schools spent on technology in 1996, 61% was for purchases
of hardware and 15% for software and online services. Another 18% was spent on
supplies, service and “other.” Teacher training accounted for only 6% of the total.

Chart 52: Just 6% of K-12 Technology Spending Was on Training

6%

18% Hardware
Software
Service/Supplies
Training

15% 61%

Source: The CEO Forum on Education and Technology. 1995-96 school year.

As many as 65% of teachers
have never used a computer
before being introduced to one
in the classroom
While no reasonable person would argue that technology should replace teachers,
technology can help support teachers in the classroom and the student’s home. The
lack of teacher training is an impediment to making technology ubiquitous in
schools. As many as 65% of teachers have never used a computer before being
introduced to one in the classroom. Sixty-seven percent of our teachers are over
age 40, and another 22% are between 30 and 39, meaning that most, if not all,
were educated without the benefits of technology. Teacher training must be a
significant part of the technology solution.

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The Book of Knowledge – 9 April 1999

Classroom Connect: Training Teachers for the 21st Century

Classroom Connect is a teacher training and K-12 curriculum resources company focused on integrating the Internet into K-
12 instruction. The company’s newsletters, conferences and curriculum guides help teachers use the Internet first, and design
lessons and student activities using it as a resource next, enlivening and expanding student educational possibilities. The
company’s adventure learning series takes students on explorations around the world, from Guatemala to Kenya to China.
On these adventures, connected classrooms can interact with the in-country team, sharing in decisions and discovery.
The company’s Connected Classroom Conferences are currently the only educational conferences that focus exclusively on
the use of the Internet in K-12 instruction. Expert presenters and classroom teachers lead attendees in labs and sessions teach
practical skills that can be applied immediately, providing insight into the future of learning. Teachers can also earn
professional development credit for the company’s seminars

Although the hardware base is
improving, our schools still
have a significant investment
ahead before every classroom
can access the internet
Approximately 59% of K-12
schools in the U.S. are either
without computers in their
classrooms or have antiquated
hardware
n State of Technology
Approximately 59% of K-12 schools in the U.S. are either without computers in
their classrooms or have antiquated hardware. The other 38% are using computers
in their classrooms, but not to their potential. In many schools, computers are still
only in libraries or labs, and are a hodge-podge of unrelated, sometimes donated,
technology. Multimedia computers per student, those capable of running today’s
colorful, media-rich graphics, for example, are much less common in the schools,
with access ranging from one per every six kids in Alaska to one per every 35 kids
in Louisiana and Ohio. Although the hardware base is improving, our schools still
have a significant investment ahead before every classroom can access the internet
or each teacher has a desktop loaded with classroom management tools. While
this may be a negative for schools today, it is certainly a positive for companies
and investors in the K-12 technology segment because we believe the change over
will be inevitable.

n Affording The Investment

The size of the technology
investment required to bring
our schools into the 21st century
is substantial, but we believe it
is necessary
Fortunately for technology
providers, there is more funding
specifically earmarked for K-12
technology purchases than ever
before
The size of the technology investment required to bring our schools into the 21st
century is substantial, but we believe it is necessary. What is the dollar value of
students who have developed problem-solving skills or are prepared for the world
of work and responsibilities of citizenship? There is no question that the return on
education is significant, that economic prosperity, international competitiveness,
and social stability are related to the education of the population. Some would
quantify these benefits in terms of the resulting economic growth or tax dollars
generated. In our view, a more relevant question is, which investments in
education lead to the greatest gains in skill levels? Many of the education
technology investments we have discussed have shown measurable increases in
student achievement. Given that in the United States only 50% of every dollar
spent on public education goes to regular classroom instruction, it is clear that
there is an opportunity to reallocate resources (that is, invest our education dollars
differently) to improve student achievement. We believe increased spending on
effective uses of technology will result in gains that will more than offset
decreased spending in other areas.
Fortunately for technology providers, there is more funding specifically earmarked
for K-12 technology purchases than ever before. In the last few years, the sources
for technology funding for schools increased significantly and range from e-rate
funding to technology literacy grants. Technology products and services may also
be purchased by parent-teacher associations, corporate sponsors, even
philanthropic organizations (such as the Albertson Foundation in Idaho) seeking to
impact the quality of American education. Smart technology providers are
helping schools and districts identify and apply for funding for purchase of their
programs.

104

We think this sector will be
characterized by a significant
level of growth and dynamism
over the next few years
The Book of Knowledge – 9 April 1999
Investing In the K-12 Education Technology Sector
There are many players providing technology to the K-12 sector. We have seen
and will likely continue to see consolidation in this group. Many companies offer
a single piece of a complete education technology solution, and we expect that
they will join forces through mergers or partnerships with others in order to
leverage sales force resources, brands and an existing installed base.
Consequently we think this sector will be characterized by a significant level of
growth and dynamism over the next few years.
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 The Book of Knowledge – 9 April 1999

Table 61: K-12 Education Technology From A.D.A.M. to ZapMe!

Company Ticker Website Business Description
A.D.A.M Software ADAM www.adam.com Creates, publishes and markets educational multimedia software products that provide
anatomical, health related, and medical information
Academic Systems Private www.academic.com Develops engaging instructional software for math and English.
ACTV Net IATV www.actv.com Online education services provider for k-12 education
Advantage Learning ALSI www.advlearn.com Provides learning information systems to the K-12 market, with a presence in 30% of
Systems Inc. schools in the U.S. and Canada.
American Education AEDU www.amered.com Develops and markets educational software and CD-ROM titles in basic academic
Corporation subjects and early childhood development
APEX Private www.apex.netu.com Offers AP courses online.
Apple Sub: AAPL www.clarisworks.com Provides a suite of desktop applications to the education market, including word
processing, graphics and illustration, spreadsheet and presentation software
Boxer Learning Private www.boxerlearning.com Online math tutorial programs for K-12
Byron Preiss Multimedia CDRM www.byronpreiss.com Publishes and distributes educational software and books for the educational and
Company consumer markets
Computer Curriculum Sub: PRSNY www.cccnet.com Provider of educational software and services to K-12 schools.
Corporation
Chancery Software Private www.chancery.com Develops and markets student information and library management systems for K-12.
Cinar Corporation CINRF www.cinar.com Integrated entertainment and education company involved in the quality educational
products for children and families.
Classroom Connect Private www.classroom.com Develops Internet-based curriculum and teacher resources, conducts interactive learning
adventures (such as MayaQuest) and hosts teacher training programs
Discourse Technologies Private www.discourse.com Offers a client-server GroupWare application that serves as an instructional delivery,
communication and management tool for student measurement.
Educational Insights EDIN www.edin.com Designs, develops and markets supplemental educational materials, such as electronic
learning aids, activity books, science kits, etc.
Family Education Private www.familyeducation.com An Internet information service that brings local, state and national education resources
Company together in one place to both parents and schools.
Fox River Learning Private Not Available Developed an schoolwide enterprise management software system
FUTUREKIDS Private www.futurekids.com Trains teachers and children to use technology while engaged in fun, curriculum-based
projects at its network of computer learning centers or at school.
Granada Learning Private www.granada-learning.com Supplies multimedia curriculum software and videos to schools
Grolier Private www.grolier.com Publishes reference, educational, and childrens books including educational multimedia
applications
Harcourt Brace Sub: H www.harcourtbrace.com Sells supplemental educational materials in print and multimedia form under Steck-Vaughn
and other names.
Havas Interactive Private www.havasinteractive.com Develops, publishes, and distributes multimedia educational software for use in school and
at home. Purchased from Cendant, brands include Knowledge Adventure and Davidson.
Houghton Mifflin HTN www.hmco.com Publishes print and electronic educational materials for K-12, postsecondary and corporate
markets.
Humongous Entertainment Sub: GTIS www.gtinteractive.com "Edutainment" publishing arm of GT Interactive, a global interactive entertainment software
company.
IBM/Edmark Sub: IBM www.edmark.com Develops and publishes children’s educational software under the Edmark name. Also
publishes reference software.
Infonautics INFO www.education.elibrary.com Online information content management services and custom archive services for
business and education under the Electric Library brand.

Source: Public Documents.

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 The Book of Knowledge – 9 April 1999

Table 61: K-12 Education Technology From A.D.A.M. to ZapMe! (Continued)

Company Ticker Website Business Description
Jostens Learning Private www.jlc.com Develops a comprehensive curriculum software that is installed in over 15,000 schools
Corporation serving 10 million students.
Learingstation.com Private www.learningstation.com Offers a subscription-based "thin-client" network that enables schools to run modern
software on obsolete machines over the Internet serving the K-12 and adult learning
markets.
The Learning Company TLC www.learningco.com The market share leader in educational, personal productivity and reference software for
the consumer market. Brands include Broderbund, SkillsBank, Comptons and Mindscape.
The Learning Contract Private www.projectachieve.com Develops a comprehensive information management systems for K-12 schools
Lightspan Partnership Private www.lightspan.com Provides interactive educational programming in Reading/Language Arts and Mathematics
for children in grades K-6 using digital video and Internet technologies.
Logal Educational LOGLF www.logal.com Designs, creates, publishes, and markets interactive simulation-based, educational
Software software for curriculum in high schools and colleges.
Mathsoft Private www.mathsoft.com Develops, markets, and supports technical calculation and data analysis software
productivity tools for professionals, students, and educators.
MC2 Learning Systems ASE: NCZ.A www.mc2.sfu.ca Provides educational groupware that enables teachers to organize, structure and share
Internet-based projects.
McGraw-Hill MHP www.mcgraw-hill.com Publishes electronic and web-based educational materials, including videodiscs under
Optical Data name.
Media Seek Private www.mediaseek.com Provider of print, video, and electronic resources for curriculum planning and mapping
N2H2 Private www.n2h2.com Offers an internet filtering device to prevent children from accessing inappropriate content
and manages a kid-oriented Internet search engine (Searchopolis.com).
National Computer NLCS www.ncs.com The leading provider of administrative teacher software. The largest academic test
Systems processing company, catering to education and corporate markets.
NetSchools Corporation Private www.netschools.com Developed and supports a complete education technology solution for K-12 schools,
including a specially-designed laptop for kids, academic software, wireless infrared
networking, and teacher training.
NovaNet Private www.novanet.com Computer-based education and communications network that offers self paced interactive
curriculum for secondary and adult learners
Pentamation Private www.pentamation.com Provides administrative application software to K-12 schools
Primedia PRM www.primediainc.com Online supplemental instructional materials including encyclopedias and news
Scholastic Corporation SCHL www.scholastic.com Develops software and online materials. Scholastic Network is a comprehensive Internet
curriculum service for K-8
Scientific Learning Private www.scilearn.com Develops neuroscience-based education software and designed to increase human
Corporation learning and performance, especially for individuals with language and reading problems.
Sunburst Communications Private www.nysunburst.com Creates and publishes video and computer based teaching materials for K-12
Theatrix Interactive Private www.ah-hah.com Publishes entertaining educational CDs and Web-based digital media experiences for kids.
Torstar Toronto: www.teachsp.com Develops and publishes educational software designed for grades K-12 in the areas of
TS:B science, social studies, mathematics, and language
TRO Learning TUTR www.plato.com Develops interactive, self-paced instructional courseware geared toward adolescent and
adult learners.
Winnebago Software Private www.winnebago.com Provides software, support, and service for proprietary library automation software.
ZapMe! Private www.zapme.com Gives schools a complete Internet-connected computer lab at no cost through partnerships
with technology companies, corporate advertising and school e-commerce.

Source: Public Documents.

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 The Book of Knowledge – 9 April 1999

Technology As a Management Tool — Enterprise

Specialty technology
applications are also being
developed for colleges and
universities, technologies that
can improve the operations of a
campus and also the student
experience at school
Software For Colleges & Universities
Specialty technology applications are also being developed for colleges and
universities, technologies that can improve the operations of a campus and also the
student experience at school. While we look at the powerful use of technology,
especially the Internet, in learning in a separate section, we note the following
companies that have developed software and services for the university as an
enterprise. These companies have identified technology as a means to improve
everything from the application process that starts every student’s college career to
the recruiting process that launches a student into the world of full-time work.

Table 62: Education Technology For Universities

Company Ticker Website Business Description
Campus America Private Not Available Provider of enterprise applications and services for colleges and universities.
CampusPipeline Private www.campuspipeline.com Creates "home base" for students, faculty and administration at a college that combines
elements of an Internet portal and an intranet that integrates existing campus applications.
CollegeEdge Private www.collegeedge.com A resource on the Internet for the "going to college" market. Students can apply to leading
colleges and universities, including Stanford, MIT and Berkeley.
CollegeHire Private www.collegehire.com A Internet-based job placement service for college students focusing on high-tech
industries. Each student-candidate is matched with a placement expert who guides the
process.
COLLEGIS Inc. Private www.collegis.com Offers of IT solutions to higher education institutions with expertise in areas of
administrative, academic, and communications technology functions.
National Computer NLCS www.ncs.com Manages the financial aid process for the Department of Education, including an online
Systems application system.
SCT (Systems & SCTC www.sctcorp.com Provider of enterprise software and IT services for higher education and business. SCT
Computer Technology provides administrative applications to about half of the U.S. universities with over 2000
Corp.) students.
Source: Public Documents.

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 The Book of Knowledge – 9 April 1999

7. Postsecondary Industry: Meeting the

Needs of the New Economy
Postsecondary Market Statistics • The U.S. postsecondary market is huge, measuring $237 billion in size and
representing almost one-third of education spending.
Size of Market
Overall : $237 billion • The growing pay gap between those with college degrees and those without is
For Profit: $5 billion driving demand for education and training. In today’s knowledge-based
Market Growth Rate
economy, the salary difference between those who have a college education
Overall: 6% and those who don’t has widened from 50% in 1980 to nearly 100% today.
For-Profit: 15% • The need for skilled labor has never been greater. By the year 2000 skilled
jobs are projected to represent 65% of all jobs, up significantly from 20% in
Public Market Capitalization 1950. The demand for a more educated workforce by employers and the
$6,600 million shortage of skilled labor creates compelling economic incentives that are
driving people back to school.
Largest Public Companies
Apollo Group • The clear “push” from employers demanding relevant skills and the “pull”
DeVry Inc. from employees seeking better jobs has created a fertile growth environment
ITT Educational Services for proprietary postsecondary providers.
Education Management
Strayer Inc.

Table 63: Megatrends Shaping the Postsecondary Industry

Trend Impact
Demographics Demographics are a powerful predictor for future demand and the demographic landscape for
the postsecondary education sector has never been better. The number of high school
graduates is expected to increase 22% from 2.5 million in 1995 to 3.1 million in 2008. More
importantly, more high school graduates are enrolling in higher education today then ever
before. And adult students are accessing high education in record numbers.
Technology Technology is transforming how we live, work and play and is the driver for the knowledge-
based economy. Lifelong learning, which is now required for economic survival and longevity,
is made possible through technology such as the Internet, video-conferencing and satellite
systems.
Globalization For every one foreign student studying here in the U.S., we believe there are three to five
students who would if they had the resources or the access. We believe that proprietary
postsecondary companies are well positioned to serve a global pent up demand as they have
the resources, capability and motivation to serve this market.
Branding Brands matter to customers of all sorts, and postsecondary education is no exception. While
schools such as Harvard, Stanford, Princeton and Yale all have developed brand names
based in part on their selective admissions processes, proprietary companies have created
their own brand names based on critical mass, national presence and relevant, career oriented
curriculum.
Consolidation The postsecondary market is highly fragmented with over 3,700 schools in the United States of
which there are very few large proprietary schools. Through the merger and acquisition of
small regional schools, postsecondary companies are able to gain critical mass and scale
quickly and efficiently.
Privatization/ Postsecondary institutions can provide corporations with a cost effective training mechanism,
leading to growing partnerships between corporations and colleges and universities.
Outsourcing

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The Book of Knowledge – 9 April 1999
Proprietary postsecondary
institutions represent $5 billion
out of the $220 billion market
The proprietary postsecondary
industry is fairly developed with
over 12 public companies in
this space with average market
capitalization of $700 million.
The number of high school
graduates is expected to
increase 22% from 2.5 million
in 1995 to 3.1 million in 2008.
110
The Large and Growing Postsecondary Market
Our postsecondary institutions are widely viewed as the finest in the world. In
spite of this fact, or perhaps because of it, they have been slow to adapt to striking
demographic and economic realities that have significantly changed the needs of a
great proportion of college students. This has created significant opportunities for
nimble private players to capture a good share of certain educational niches.
The postsecondary market is $237 billion, representing almost one-third of
education spending. The proprietary postsecondary industry is composed of 345
schools and measures approximately $5 billion in size. Adding $2.5 billion in
textbook and other college materials and $500 million for distributed learning
courses, brings the for-profit component of the postsecondary industry to $8.0
billion, representing less than 2% of the total industry.
Chart 53: Proprietary Schools Represents A Small Fraction of the Postsecondary Pie
Proprietary
Schools Public Schools
345 1,655
Private Non-profit
Schools
1,706
Source: Digest of Education Statistics, 1997
The proprietary postsecondary industry is fairly developed relative to other sectors
in the education and training group with over 12 public companies in this space
with average market capitalization of $700 million.
The postsecondary industry is poised to benefit from the seven key megatrends
shaping the overall education industry, creating a fertile market environment for
investors.
• Generation Y Heads to College: The demographic landscape for the
postsecondary education sector has never been better. The education industry
is currently faced with the “baby boom echo,” the children of the 76 million
baby boomers born from 1946-1964 after the ending of World War II. The
number of high school graduates is expected to increase 22% from 2.5 million
in 1995 to 3.1 million in 2008. More importantly, more high school graduates
are enrolling in higher education today then ever before. In 1995, 65% of
high school graduates enrolled in a postsecondary institution, up from 49% in
1980.
“Education’s purpose is to replace an empty mind with an open one.”
—Malcolm Forbes

More high school graduates are
enrolling in higher education
today then ever before. In
1995, 65% of high school
graduates enrolled in a
postsecondary institution, up
from 49% in 1980.
Most colleges and universities
are still operating in the old
education paradigm, set up to
serve students ages 18-22 who
are looking for a general
education as well as a “college
experience” — football games,
student unions, and fraternities
or sororities.
In 2000 skilled jobs will
constitute 65% of the jobs, a
dramatic increase from 20% in
1950.
The pay gap between those with
a college education and those
who don’t has widened from
50% in 1980 to over 100%
today. Yet only 21% of
American adults over age 25
have a bachelor’s degree or
better.
The consequence of these
trends is that there is a
significant opportunity for
companies that provide
education that is oriented to
market demands.
The Book of Knowledge – 9 April 1999
Chart 54: More High Schools Graduates Enrolling in College
65%
65% 62%
60%
60% 58%
55%
49%
50%
45%
40%
1980 1985 1990 1995 1996
Source: Digest of Education Statistics 1997
• Underserved Growing Group of Working Adult Students – While adults
over 25 represent nearly 50% of our postsecondary student population, most
colleges and universities, are still operating in the old education paradigm, set
up to serve students ages 18-22 who are looking for a general education as
well as a “college experience” – football games, student unions, and
fraternities or sororities. The lack of convenient education options translates
to opportunity for innovative proprietary postsecondary institutions that can
provide a “no nonsense” and “customer” oriented, efficient education model
that is convenient, accessible, and relevant in today’s world.
• Dramatic Shift to a Skilled Workforce – As we move towards a more
automated society, human labor is being displaced by advanced technology,
creating the need for higher skilled employees. By the year 2000, skilled jobs
will constitute 65% of the jobs, a dramatic increase from 20% in 1950. The
demand for a more educated workforce by employers and the lack of skilled
labor creates attractive economic incentives that are driving people back to
school.
• Widening Wage Gap Between High School and College Graduates – In
today’s knowledge-based economy, the pay gap between those who have a
college education and those who don’t has widened from 50% in 1980 to
nearly 100% today. Yet only 21% of American adults over age 25 have a
bachelor’s degree or better. These economic facts are driving “non-
traditional” students back to school in record levels. Adults age 25 and over
represent 43% of all postsecondary enrollments, up from 28% in 1970.
• Technology Education – Technology is transforming how we live, work and
play and is the driver for the knowledge-based economy. With the
introduction of technology such as the Internet, video-conferencing and
satellite systems, lifelong learning, which is now required for economic
longevity, is made possible.
The consequence of these trends is that there is a significant opportunity for
companies that provide education that is oriented to market demands. While
proprietary postsecondary education providers currently capture just $5 billion of
the $220 billion spent annually on postsecondary education, we see private, for-
profit schools continuing to gain market share from traditional institutions that are
currently neglecting a large portion of the education market.
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The Book of Knowledge – 9 April 1999
The education needs of the new
customer are characterized by
what we define as the Five
Cs — Convenient, Condensed,
Cost Effective, Career-Oriented
and Customer Service-Oriented
Education
112
We highlight toward the end of this section several companies that are meeting
student and employer needs, while creating compelling investment opportunities
in the process.
The Education Solutions in the New Economy
Require the Five Cs
One of the fundamental problems with the education system is the disconnect
between who colleges think their customers are and the real customer, the
students. In the last century the student body has changed dramatically with now
nearly 50% over the age of 25, yet our traditional institution system have remained
unchanged, still set up to serve 18-22 year olds.
Education today, more than ever before, must see clearly the dual objectives:
Education for living and education for making a living.
—James Mason Wood
We have often said that where there is a problem, there is an opportunity and in
this case, we see the opportunity for proprietary schools as huge in that they can
provide education that is market- driven and customer-oriented. The education
needs of the new customer are characterized by what we define as the Five Cs –
Convenient, Condensed, Cost Effective, Career-Oriented and Customer Service-
Oriented Education.
1. Convenient – Traditional schools usually operate on a semester or quarter
system where classes begin only twice or three times a year and are scheduled
sporadically throughout the day. Campuses usually have minimal parking
and are not located within access to public transportation. Adult students want
an education that caters to their busy schedules, which includes year-round
program start dates as frequent as every six to eight weeks. As consequence,
we are seeing several new education models emerging, providing busy
students with education that is delivered around their schedule, including
technology-based distributed learning programs.
2. Condensed Instruction – Working adults want quality curriculum delivered
in a condensed, efficient format. However, most traditional postsecondary
schools continue to deliver classes one way, scheduled sporadically
throughout the day, two or three times a week – a schedule that is not
conducive to a working adult’s needs. Working adults demand curriculum
that is concentrated in either morning, afternoon or evening sessions, allowing
students to schedule part-time, and even full-time work around school.
Furthermore, many adults cannot afford to take the standard four to five years
to complete a bachelor’s degree. They want an intense, concentrated
curriculum that allows them to learn the most in the shortest amount of time.
3. Cost Effective Education – Traditional universities and schools are
expensive in terms of money and time requirements. Moreover, traditional
schools often operate as islands, unresponsive to typical market factors such
as supply/demand, return on investment, and customer service. Since
proprietary schools are not required or expected to financially support
extracurricular activities (i.e. athletic teams, clubs, home coming) and the
infrastructure that surrounds it (i.e. student union, track and field), costs are
significantly reduced.

The bottom line is that students
want an education that serves
their needs. For many, that
means an education that is
convenient, accessible and most
importantly, relevant.
In accordance with the theme
of outsourcing non-core
competencies and cost
containment, postsecondary
institutions provide
corporations with an
inexpensive training solution.
The number of community
colleges actively seeking to
provide training for companies
has increased approximately
50% in 1990 to 90% today.
Proprietary postsecondary are
well positioned to benefit from
the growing partnerships with
corporations as many have the
flexibility to provide companies
with convenient, inexpensive,
career oriented curriculum that
can complement the degree-
focused studies of its workforce.
The Book of Knowledge – 9 April 1999
4. Career-Oriented Curriculum – Postsecondary education serves different
purposes for different people. For some, it represents a four-year adventure
characterized with dorm living, athletic events, and student activities,
designed not only to educate through classes, but through experience. For
others, it is for the simple pleasure of personal enrichment. In the case of
working adults, postsecondary education is typically pursued to increase one’s
skills and knowledge base relevant to one’s employment.
5. Customer Service – The student is the customer. Thus, schools that succeed
in the future will listen to what the customer is asking for and deliver services
to meet those needs.
The bottom line is that students want an education that serves their needs. For
many, that means and education that is convenient, accessible and most
importantly, relevant. We believe proprietary schools are well positioned to
provide students with what they want and when they want it.
“The meek may inherit the earth, but they don’t get into Harvard.”
—Robin Williams in Dead Poets Society
Strategic Partnerships With Corporate America
In accordance with the theme of outsourcing non-core competencies and cost
containment, postsecondary institutions provide corporations with an inexpensive
training solution. Subsidizing postsecondary education through tuition
reimbursement programs has proved to be a cost effective alternative for
corporations relative to providing training internally. First, courses at postsecondary
institutions typically only cost a few hundred dollars for approximately 3 months of
training, as opposed to the average of $1,000 a day for onsite outsource training.
Secondly, postsecondary school courses are typically offered on campus, not on the
employer’s premises, thus eliminating the expense of maintaining extra space for
classes onsite. Lastly, courses are typically completed in the evening or weekends
on the employee’s time, thus a day or week of productivity and time away from the
job is not lost to an onsite training program.
Consequently, we are seeing several partnerships sprout up between employers
and postsecondary institutions and designing specialized courses that are
specifically related to their corporation. A survey conducted by the Wisconsin
Manufacturers & Commerce Association indicated that their technical college
system was the most important external training resource for in-state employers.
According to the American Association of Community Colleges, the number of
community colleges actively seeking to provide training for companies has
increased approximately 50% in 1990 to 90% today.
Alliances with corporations also bode well for postsecondary schools as they serve
as a positive endorsement of the institution’s quality and programs, as well as give
them access to a large audience of working adults. Moreover, since employers are
footing the bill, revenues are extremely visible and predictable. We believe
proprietary postsecondary schools, in particular, are well positioned to benefit
from the growing partnerships with corporations as many have the flexibility to
provide corporations with convenient, inexpensive, career oriented curriculum that
can complement the degree-focused studies of its workforce.
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The Book of Knowledge – 9 April 1999
Accreditation provides a
benchmark for quality, as well
as qualification to participate in
federal financial aid programs
under Title IV
Accreditation, while a lengthy
and cumbersome process,
provides as an enormous
barrier to entry
114
Accreditation Provides Extremely High
Barriers to Entry
Postsecondary education is a highly-regulated industry monitored on Federal,
State and local levels. Accreditation provides a benchmark for quality, as well as
qualification to participate in federal financial aid programs under Title IV. The
process of gaining accreditation is what many have characterized as a long tedious
process. There are six regional accreditation offices in the United States as shown
below.
Chart 55: United States Regional Accreditation Bodies
New England
Association
Northwest
Association
North Central
Association
Middle States
Association
Western
Association
Southern
Association
Source: Department of Education
While accreditation may seem like a never-ending process depending on the
accreditation body, state and school, the upside for current providers is that it
provides an enormous barrier to entry for new programs. We believe at a
minimum, it would take 2 years for an outside competitor to enter the scene. For
example, it took DeVry, a school that has been in business 67 years with 15
campuses nationwide, 3 ½ years to gain accreditation for its New York campus.
However, many proprietary postsecondary companies such as Apollo, DeVry, ITT
Educational Services and Education Management have mastered, to the extent
possible, the lengthy regulation process, allowing them to move their accreditation
applications through the system with few hang-ups.
“A professor is one who talks in someone else’s sleep.”
— Wystan Hugh Auden
American Poet
 The Book of Knowledge – 9 April 1999

Postsecondary Scorecard
To help us differentiate and evaluate proprietary postsecondary companies, we
have devised a scorecard summarizing what we believe are key factors when
analyzing companies in the industry.

Table 64: Postsecondary Scorecard

To help us differentiate and
evaluate proprietary Total
postsecondary companies we 1. Job Placement Rates 15 pts
have devised a scorecard 2. Revenue Visibility 15 pts
summarizing what we believe 3. Enrollment and Same Campus Growth 10 pts
4. Customer-Oriented Focus 10 pts
are key factors when analyzing
5. Use of Technology 10 pts
companies in the industry. 6. Return on a Student’s Investment 10 pts
7. Breadth and Depth of Program Offerings 10 pts
8. Default Rate on Student Loans 10 pts
9. Profile of Student Body 5 pts
10. Geographic Reach 5 pts
Total 100 pts
Source: Merrill Lynch

While we do not grade each proprietary school individually, we compare the

schools on criteria of our scorecard below.

n Job Placement Rates

Job placement rates are an important, telling metric that speak to the effectiveness
and quality of a school’s programs. At the end of the day, students need to be
armed with education and skills that are relevant in today’s workplace.

Chart 56: Job Placement Rates of Comparable Postsecondary Companies

96% 93%
Job placement rates are an 100% 90% 87%
83% 83% 83%
90% 77%
important, telling metric that 80%
speak to the effectiveness and 70%
60%
quality of a school’s programs. 50%
40%
30%
20%
10%
0%
DeVry Career Education ITT Educational Education Corinthian Edutrek Int’l Computer Quest Education
Management Colleges Learning

Source: Company Documents

Note: A majority of Apollo and Strayer students are working adults, thus placement rates are not applicable. Placement
data for Whitman Colleges was unavailable.

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The Book of Knowledge – 9 April 1999
Longer program lengths,
coupled with high quarterly
persistence and overall
retention rates, provide
postsecondary schools with
predictable and visible
revenues.
Enrollment and same-campus
growth is another important
metric that we believe
communicates the quality of a
school’s program, market
demand and sustainability.
The bottom line is that the
student is the customer.
Institutions that are able to
effectively adopt, integrate and
implement these new
technology-based education
models are well poised for long
term growth in today’s new
economy
We believe due to the career-
oriented curriculum offered at
these proprietary schools, most
students are likely to enjoy a
high return on investment.
116
n Revenue Visibility
Longer program lengths, coupled with high quarterly persistence and overall
retention rates, provide postsecondary schools with predictable and visible
revenues. All of the proprietary companies that we are aware of offer, at a
minimum, two-year associate degree programs, thus providing companies with
high recurring revenue streams.
n Enrollment and Same Campus Growth
Enrollment and same campus growth is another important metric that we believe
communicates the quality of a school’s program, market demand and
sustainability.
Table 65: Enrollment At Proprietary Schools
Companies Total Enrollments
Apollo Group, Inc. 81,015
DeVry Inc. (a) 42,500
ITT Educational Services, Inc. 25,000
Education Management 21,500
Career Education 16,700
Corinthian Colleges 15,900
Computer Learning Centers 11,000
Quest Education 11,000
Strayer Education 10,400
Whitman Education Group 7,500.0
Argosy Education 4,800
EduTrek International 3,800
Source: Public Documents
(a) Excludes Becker CPA enrollments
n Customer-Oriented Focus
The bottom line is the student is the customer. We believe the education needs of
the new customer are characterized the Five Cs – Convenient, Condensed, Cost
Effective, Career-Oriented and Customer Service-Oriented Education. We
believe adherence to the five Cs is one of the key differentiating factors between
many public and proprietary schools, and as such, most public companies in this
sector excel in this area.
n Use of Technology
With the introduction of technology such as the Internet, video-conferencing and
satellite systems, technology has become a valuable tool in the education industry.
We believe institutions that are able to effectively adopt, integrate and implement
these new technology-based education models are well poised for long term growth
in today’s new economy. Three proprietary companies that have successfully
implemented distributed models are Apollo Group’s University of Phoenix, DeVry’s
Keller Graduate School of Management and Strayer. All three programs are
excellent examples of the opportunity created through the powerful combination of
technology, strong academic content and highly marketable brand names.
n Return on a Student’s Investment
Obviously there are many benefits attached to attaining an education. In this case
we are evaluating the economic returns received which include monetary gain
through employment or promotion opportunities. We believe due to the career-
oriented curriculum offered at these proprietary schools, most students are likely
to enjoy a high return on investment.

The ability to offer a broad
range of degree programs will
allow a school to capture a
larger market share and
provide leverage across fixed
assets.
Government student loans are a
critical source of tuition
funding for many students.
Access to these funds is based
on several factors including
maintaining student default
rates under a 25% threshold.
We believe the age and
financial status of students
have some correlation to
program completion and
default rates
The Book of Knowledge – 9 April 1999
n Breadth and Depth of Program Offerings
The ability to offer a broad range of degree programs will allow a school to
capture a larger market share and provide leverage across fixed assets.
Table 66: Program Offerings
Certificates/
Diploma Associate Bachelor Master Doctoral
Apollo Group X X X X X
Argosy Education X X X X X
Whitman Education X X X X X
DeVry Inc. X X X X
Strayer Education X X X X
Corinthian Colleges X X X X
ITT Educational X X X X
EduTrek International X X X X
Education Management X X X
Quest Education X X X
Career Education X X X
Computer Learning Centers X X
Source: Company Documents
n Default Rate on Student Loans
Government student loans, commonly referred to as Title IV, are a critical source
of tuition funding for many students. Access to these funds is based on several
factors including maintaining student default rates under a 25% threshold. Loss of
Title IV funding may have detrimental implications for a school’s enrollment
growth and accordingly revenue growth. Default rates also speak to student
completion and satisfaction rates as “drop outs” are more likely to default than
satisfied graduates.
Chart 57: Default Rates
20.0%
16.6% 16.6% 17.0% 17.2%
18.2%
18.0% 15.8%
16.0% 13.7%
15.2%
14.0%
12.0%
10.0%
8.0% 5.8%
6.0%
4.0%
2.0%
0.0%
Apollo Group Edutrek Int’l Strayer Education Career Education Education Computer DeVry ITT Educational Ave for US
Management Learning Proprietary
Institutions
Source: Company Documents.
Note: Default rates unavailable for Whitman, Quest and Corinthian Colleges.
n Profile of Student Body
We believe the age and financial status of students have some correlation to
program completion and default rates. As such, older working adults, in our
opinion, have a “lower risk” profile due to their maturity level, employment status,
and typically higher completion and lower default rates. Younger students, while
still a very attractive student body to serve, are “higher risk” due to their younger
age and short if any employment history.
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The Book of Knowledge – 9 April 1999

n Geographic Reach = Scale

Scale matters in the education industry. Size provides leverage on fixed assets and
curriculum development, as well as name recognition.
Scale matters in the education
industry. Size provides leverage Table 67: Scale Matters In the Education Industry
on fixed assets and curriculum Number of Campuses Number of States
development, as well as name Apollo Group (a) 126 34
recognition. ITT Educational 67 27
DeVry Inc. (b) 45 9
Corinthian Colleges 37 16
Quest Education 30 11
Computer Learning Centers 27 10
Whitman Education 24 13
Education Management 17 13
Argosy Education 14 8
Career Education 22 14
Strayer Education 12 3
EduTrek International 7 3
Source: Company Documents
(a) Includes UOP, Western International University and Institute for Professional Development campuses.
(b) Excludes Becker CPA locations.

Table 68: Valuation of Comparable Postsecondary Providers

Price Mkt Cap Total Market Cap Cal EPS (a) P/E Growth P/E/G
Companies Symbol 4/6/99 (mm) Enrollments Per Student 1999E 2000E 1999E 2000E Rate (b) 1999E 2000E
Apollo Group, Inc. APOL $27.56 $2,187.7 81,000 $27,009 $0.80 $1.04 34.5 26.5 30% 115% 88%
Argosy Education ARGY $8.75 42.9 4,800 $8,932 $0.78 NA 11.2 NA 20% 56% NA
Career Education CECO $36.50 260.7 16,700 $15,610 $1.04 $1.28 35.1 28.5 20% 175% 143%
Computer Learning CLCX $4.44 77.2 11,000 $7,019 $0.28 $0.50 15.8 8.9 25% 63% 36%
Corinthian Colleges COCO $22.00 115.2 15,900 $7,245 $0.79 $0.95 27.8 23.2 20% 139% 116%
DeVry Inc. DV $29.69 2,057.7 42,500 $48,417 $0.57 $0.68 52.1 43.4 20% 260% 217%
Education Mgmt EDMC $27.38 817.2 21,500 $38,009 $0.64 $0.77 42.8 35.6 20% 214% 178%
EduTrek International EDUT $7.00 74.5 3,800 $19,609 $0.26 $0.35 26.9 20.0 35% 77% 57%
ITT Educational Svcs. ESI $36.38 989.6 25,000 $39,585 $1.02 $1.22 35.7 29.7 20% 178% 149%
Quest Education QEDC $8.63 69.6 11,000 $6,324 $0.79 $0.99 10.9 8.7 25% 44% 35%
Strayer Education STRA $37.00 578.6 10,400 $55,639 $1.34 $1.63 27.6 22.7 20% 138% 113%
Whitman Education WIX $4.44 58.8 7,500.0 $7,838 $0.37 $0.44 12.0 10.1 20% 60% 50%

Average 27.7 23.4 23% 127% 107%

Median 27.7 23.2 20% 126% 113%
Source: Public Documents
(a) Earnings Estimates obtained from First Call as of 4/1/99 calendarized and/or grown at IBES when necessary. Estimates for APOL, DV, EDMC, and ESI are Merrill Lynch Estimates.
(b) 5-Year Growth Rates taken from I/B/E/S as of 4/1/99.

118
 The Book of Knowledge – 9 April 1999

Table 69: Postsecondary Companies

Company Ticker Website Description
Apollo Group, Inc. APOL www.apollogrp.com Provider of career-oriented degree programs tailored to working adults.
Argosy Education ARGY www.argosyeducation.com Provider of doctoral and master’s degrees in psychology, education and business, as well
as bachelor’s degrees in business, associate degrees in allied health professions and
diplomas in information technology.
California Culinary Academy COOK www.baychef.com One of the three largest providers of fully-accredited culinary arts education and
professional training in the United States.
Career Education Corp. CECO www.careered.com Offers career-oriented degree programs in computer technologies, visual communications
and design technologies, business studies and culinary arts.
Computer Learning Centers CLCX www.clcx.com Offers associate degrees and non-degree diplomas in area of information technology.
Corinthian Colleges COCO www.cci.edu Provider of career-oriented degrees and diploma programs in the healthcare, electronics,
and business fields.
DeVry Inc. DV www.devry.com Provider of career-oriented degree programs in technology and business, including MBA
courses delivered online.
Education Management EDMC www.edumgt.com Provider of career-oriented degree programs in areas of design, media arts and
technology, culinary arts, fashion and professional development.
EduTrek International EDUT www.edutrek.com Provider of career-oriented, int’l focused higher education programs in areas of IT,
international business, multimedia communications, art and design.
ITT Educational Services ESI www.itttech.edu Provider of career-oriented degree programs in technology.
Learning Ventures Private www.aprisa.com Provides custom and standard online education including Ph.D. and Masters (M.S.)
programs in a variety of fields
Quest Education QEDC www.questeducation.com Provider of diploma and/or associate degree programs in the areas of healthcare,
business, fashion and design, and photography.
Strayer Education STRA www.strayer.edu Provider of career-oriented degree programs in Washington, D.C., Maryland, and Virginia,
including an online program.
Universal Technical Institute Private www.universaltech.com Provider of programs in autobody repair and painting, auto mechanics, commercial art,
refrigeration, heating and air conditioning, and travel and tourism.
Whitman Education Group WIX Not Available Provider of graduate, undergraduate and non-degree programs primarily in the fields of
information technology, healthcare and business.

Source: Public Documents

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 The Book of Knowledge – 9 April 1999

8. Distributed Learning: Schools Without

Walls
Distributed Learning Market Statistics • Education is the fuel for the new economy and has become critical for both
Size of the Market individuals and employers. Ironically, at the same time, delivery and access
Overall: $1.5 Billion to educational services have remained unchanged for a hundred years.
For-Profit: $500 Million Technology has the potential to “democratize” education, reducing its cost
and increasing its geographic accessibility to the growing population of adult
Market Growth Rate students.
Overall: 35% • We believe the growing presence of technology in the workplace, home and
For-Profit: 50% classroom, will make distributed learning a not only logical, but preferred
mode of education for many.
Public Companies • IDC estimates that the number of students enrolled in distributed learning will
Caliber Learning Network increase from 710,000 students in 1998 to 2.23 million in 2002, representing a
Asymetrix compound annual growth rate of 33%.
Private Companies • Several innovative companies have emerged to serve the distributed learning
Pensare requirements of colleges and universities, such as Caliber Learning Network,
Blackboard Inc. Pensare, Blackboard Inc., OnlineLearning.net and Real Education. While
Real Education some of these companies are public, many are private, growing rapidly, and
OnlineLearning.net ready to enter public markets, providing investors with an opportunity to
participate in what we believe is a exciting new opportunity in the education
and training industry.

Table 70: Megatrends Shaping Distributed Learning Market

Trend Impact
Demographics Moving into the next century, our postsecondary schools are faced with significant
capacity challenges as the number of high school graduates and the percent
enrolling in college increase. Distributed learning eliminates the problem as it
enables unlimited number of students to access education anywhere and anytime.
Technology Technology has the potential to “democratize” education, reducing its cost and
increasing its geographic accessibility. Distributed learning allows schools to
broaden their reach to include working adults and international students, as well as
further penetrate the 18-24 year old market.
Globalization Distributed learning makes it possible to serve students around the world,
regardless of which country or time zone they may be in.
Branding Harvard, Stanford, Princeton and Yale have spent decades building their brand
names. Through the Internet, individuals now have the ability to access brand name
content, such as theirs, anywhere, anytime. Branded content will have an edge on
the Internet.
Consolidation In response to the high demand for distributed learning courses, many schools are
working together, pooling resources, expertise and curriculum. Aggregators of
distributed learning courses act as a link between students and content providers
such as universities and colleges.
Privatization/Outsourcing We believe most universities and colleges will logically look to outside providers to
help them enter the distributed learning market. In fact, some universities will
outsource the entire development, maintenance and management of their
distributed learning efforts, using outside contractors to setup and manage their
technology programs.

120

Education is the fuel for the
New Economy, making the
concept of a four-year degree
(where learning is limited to a
finite period of time) obsolete
and lifelong learning a reality.
Unfortunately and ironically, at
a time when education is more
important than at any point in
our history, it is also becoming
less accessible and more costly.
Technology has the potential to
“democratize” education,
eliminate the scheduling and
monetary barriers many face by
delivering the educational
content to their homes,
reducing its cost and increasing
its geographic accessibility.
We believe the proliferation of
PCs and the increasing
penetration of the Internet are
key contributors to the rising
demand for distributed
learning.
The Book of Knowledge – 9 April 1999
Virtual Classrooms — Universities Stay Relevant in
Today’s Digital Age
Education is the fuel for the New Economy, making the concept of a four-year
degree (where learning is limited to a finite period of time) obsolete and lifelong
learning a reality. Unfortunately and ironically, at a time when education is more
important than at any point in our history, it is also becoming less accessible and
more costly. Most schools are designed to serve the traditional 18 – 22 age group,
totally irrelevant to the 6.1 million adult students that represent nearly 50% of the
student population. Moreover, the price tag to an education has skyrocketed in the
past two decades with tuition increasing fivefold, much faster than personal
income and inflation. The cost of education (including tuition, room and board)
can be as much as $30,000 a year, equating to $120,000 for a four year
undergraduate degree.
Technology has the potential to “democratize” education, removing the barriers,
revolutionizing the delivery of educational content. The Internet, video-
conferencing and satellite systems can eliminate the scheduling and monetary
barriers many face by delivering educational content to students’ homes, reducing
its cost and increasing geographic accessibility to the growing population of
students.
Distributed Learning can do for higher education what the Gutenberg Press did for
the Bible. Until 1450 A.D., books were painstakingly copied by hand, a lengthy
process which limited them to an elite few. The combination of moveable type,
ink and a press, however, greatly increased the distribution of the written word.
Likewise, capacity in courses at top schools such as Stanford, Harvard and
Wharton is limited. With distributed learning, however, a Harvard professor can
teach students not just in Boston, but now all around the world, creating schools
without walls.
We have broken that insidious link between quality and exclusiveness of
access, which has tarnished education for centuries and is still rampant in
many universities today.
—Sir John Daniel
Open University Vice Chancellor
Knighted in 1994 for his contributions to higher education
Technology Growth Reflected At Colleges
We believe the growing presence of technology in the workplace, home and
classroom, will make distributed learning a not only logical, but preferred mode of
education for many. In the past few years the PC has achieved rapid penetration.
• At the corporate level, there is now one PC for every 1.3 employees.
• By 2002, 60% of households are forecasted to have PCs, up from nearly 50%
in 1998.
• Approximately 92% of college students have access to a PC at school.
Moreover, approximately 55% of students own personal computers, a higher
penetration rate than the rate for all households.
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The Book of Knowledge – 9 April 1999
Adoption of the Internet has
happened at a wildfire rate,
reaching 25% of the population
in only seven years.
Internet access is forecasted to
grow to 320 million users in
2002, up from 14 million in
1995.
With distributed learning a
Harvard professor can teach
students not just in Boston, but
now all around the world,
creating schools without walls.
In 1998 710,000 students were
enrolled in distributed learning
courses, a figure that is
expected to jump to 2.2 million
in 2002, representing a
compound annual growth rate
of 33%.
122
Moreover, Internet usage is exploding, growing at an unprecedented pace,
reaching a 25% market share in only seven years, versus 35 years for the
telephone and 30 years for the microwave. According to International Data
Corporation (IDC), Internet access is forecasted to grow to 320 million users in
2002, up from 14 million in 1995.
The pervasiveness of computers and Internet in our lives today is illustrated by the
growing integration of the World Wide Web and e-mail in university courses.
• One third of all college classes are using Internet resources as part of the
syllabus, compared with 25% in 1997 and 15% in 1996.
• Almost one fourth of all college courses are using World Wide Web pages for
class materials and resources, compared with 8% in 1996 and only 4% in
1994.
• The percentage of classes using e-mail increased to 44% in 1998, up from just
8% in 1994.
The Power of “.edu”
In the past few years, we have seen a dramatic uptick in the number of public and
private colleges and universities that are seeking to develop education delivery
systems that combine the best of traditional classroom instruction with the power
of technology. This is illustrated by the growth in students enrolled in distributed
learning and the number of distributed learning courses offered by two and four
year institutions. In 1998, 710,000 students were enrolled in distributed courses, a
figure that is expected to jump to 2.2 million in 2002, representing a compound
annual growth rate of 33%.
Chart 58: Enrollment Growth in Distributed Learning Courses
2,500,000 2,230,000
CAGR: 33%
2,000,000 1,590,000
1,420,000
1,500,000
980,000
1,000,000 710,000
500,000
-
1998 1999E 2000E 2001E 2002E
Source: International Data Corporation
Approximately 84% of four-year colleges are expected to offer distance learning
courses in 2002, up from 62% in 1998. Two year colleges, are also quickly
moving into the distributed learning arena with 85% expected to offer distance
learning courses in 2002, up from 58% in 1998.

Approximately 84% of four-
year colleges will be offering
distance learning courses in
2002, up from 62% in 1998.
Recently, several programs
have been launched to
capitalize on assets such as
scale, brand name recognition
and the ability to offer a greater
breadth of content to students
interested in online programs.
Jones International University
became the first university to
exist solely online to receive
accreditation from a nationally
recognized accrediting body in
March 1999.
In response to the high demand
for distributed learning courses,
many schools are working
together, pooling resources,
expertise and curriculum to
create strong programs.
The Book of Knowledge – 9 April 1999
Chart 59: Growth in Distributed Learning Courses at Two and Four year Institutions
95% 90%
84%
85%
78%
77%
72%
70%
75% 67%
62% 64%
65% 58%
55%
45%
35%
1998 1999E 2000E 2001E 2002E
Two year Institutions Four Year Institutions
Source: International Data Corporation
Perhaps most illustrative of the rapid acceptance of distributed learning is the
adoption of this new education model by some of the world’s finest institutions:
• Stanford University last fall inaugurated a master's degree program in
electrical engineering that can be taken over the Internet using streaming
video and audio.
• Harvard University also went online, when its Extension School began
offering one of its computer courses on the Web, with lectures digitally taped
and archived.
• University of Pennsylvania’s Wharton School has taken another approach,
offering executive education courses via two-way interactive satellite through
its partnership with Caliber Learning Network.
• Duke University’s Fuqua School of Business has one of the most praised (and
publicized) programs, offering a Global Executive MBA degree almost
entirely through technology.
• New York University announced a plan to create a for-profit subsidiary to
market Internet courses.
Adding to the evidence that the virtual university has indeed “arrived” is the recent
accreditation of the first postsecondary institution to exist completely online. On
March 9, 1999, Jones International University became the first online university to
receive accreditation from a nationally recognized accrediting body. While other
universities and colleges offer accredited online courses, Jones International
University is currently the only accredited university that exists completely online
without accompanying traditional “brick and mortar” classrooms.
In response to the high demand for distributed learning courses, many schools are
working together, pooling resources, expertise and curriculum. An example of
this is California Virtual University (CVU). CVU serves as a clearinghouse of
distributed learning courses, acting as a link between students and online courses
offered by California’s accredited colleges and universities. Initiated by former
governor Pete Wilson, CVU is a joint project of the University of California,
California State University, California Community Colleges and the Association
of Independent California Colleges and Universities. While students cannot get a
degree or certificate from CVU, they can get them from the participating schools.
As of January 1999, there were 111 campuses offering more than 1,950 courses to
an estimated 27,000 students.
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The Book of Knowledge – 9 April 1999
Schools, in our opinion, should
not neglect the power of
distributed learning as they will
miss a significant opportunity
to expand upon their
educational mission and
educate the citizens of the 21st
century.
Distributed learning provides
postsecondary schools with the
ability to expand their reach to
new markets and stay
competitive and relevant in
today’s digital world.
Through distributed learning,
location and cost are no longer
barriers for earning a degree.
124
Western Governors University (WGU) was formed with the same goal as CVU—
to share higher education distance learning resources. WGU, an independent,
non-profit organization of governors from 17 states and one territory, offers a
growing list of more than 300 college-level distance learning courses from 35
affiliated universities and education providers from those states.
While activity in this sector is certainly dynamic, not all universities have made
wholesale shifts to meet this new learning model. Not surprisingly, there are
skeptics concerned about the potential of diluting a university’s brand name and
reputation built over tens if not a hundred or two years. Even so, schools, in our
opinion, should not neglect the power of distributed learning as they will miss a
significant opportunity to expand upon their educational mission and educate the
citizens of the 21st century.
The Net is a 10.5 on the Richter scale of economic change.
—Nicholas Negroponte
Undeniable Benefits of Distributed Learning
In a time when many universities and colleges are under pressure to attract new
students and revenue streams, they cannot ignore the benefits of distributed
learning. Distributed learning provides postsecondary schools with the ability to
expand their reach to new markets and stay competitive and relevant in today’s
digital world. The benefits of technology-delivered education at the postsecondary
level are significant:
• Increase Access to Education: Education is a key determinant of economic
success in the new economy, yet 79% of adults over the age of 25 do not hold
a bachelor’s degree. Distributed learning allows adults who have work,
family and personal responsibilities to access education at their convenience,
anytime and anywhere.
• Increase Access to Best Content: Distributed learning also increases the
reach of highly-regarded professionals or programs, providing students with
the ability to potentially take courses from the Wharton School of Business,
UCLA’s screenwriting program or MIT’s engineering programs. We believe
top education brands, such as these (or a Harvard, Stanford or Columbia, for
example) can find appropriate ways to leverage their quality content using
distributed learning models.
• Decrease Cost: The cost of education can reach upwards of $120,000 for a
four-year undergraduate degree. While not all distributed learning programs
are less expensive than classroom based programs, many are, and most can be
accessed from any location with a laptop and modem.

A congressionally mandated
review of 47 comparisons found
that multimedia instruction
brought time savings of 30%,
improved achievement and cost
savings of 30-40%.
Distributed learning enables
schools to reach working adults
and international students, as
well as further penetrate the 18-
24 year old market.
The Book of Knowledge – 9 April 1999
Chart 60: Rising Average Cost of A 4-Year Education
$18,476
$20,000
$15,000 365%
Increase
279% $7,331
$10,000
Increase
$3,977
$1,935
$5,000
$0
Public Private
1976-77 1996-97
Source: Digest of Education Statistics, 1997
• Increase Effectiveness: A congressionally mandated review of 47
comparisons of multimedia instruction with more conventional approaches to
instruction found time savings of 30%, improved achievement and cost
savings of 30-40%. Further studies indicate that retention of certain subject
matter may be up to 250% greater as a result of the immediacy of computer
based training (CBT) and online training.
Reaching Audiences World Wide
Distributed learning enables schools to broaden their reach to include working
adults and international students, as well as further serve the 18-24 year old
market.
Working Adults: Working adults, who represent nearly 50% of postsecondary
students (6.1 million individuals), in our view, are the perfect candidates for
distributed learning courses. Working adults want to stay relevant in today’s
knowledge-based economy, yet when seeking education find many schools
inaccessible, with either inconvenient schedules or expensive tuition.
• Among adults potentially interested in acquiring additional education or
training, 54 percent report lack of time as a barrier, forty percent report that
courses are not available at convenient times, and 25 percent consider
distance between their home and educational institutions to be a barrier.
• Forty-one percent of participants in adult education said their “work
schedule” made it difficult to participate in adult education, 37 percent said
that “meeting times” constituted an obstacle, 30 percent said that family
responsibilities interfered with their participation, and 22 percent cited the
location of classes as a barrier
Distributed learning enables adults to schedule in education alongside with work,
family and personal obligations, providing them with a flexible, convenient
learning solution.
Traditional Students: The benefits of distributed learning have also caught the
attention of younger students who are currently enrolled in traditional campus-
based programs. A growing number of younger college students are working
125
The Book of Knowledge – 9 April 1999

while in school, meaning they too are tempted by the convenience and flexibility
of distributed learning programs. Approximately 84% of students at public, two-
year institutions work while in school and 76% of students attending both public
and private four-year institutions also work. Moreover, sixty-five percent of
students at public two-year colleges enroll part time. Distance education presents
younger students with a flexible, convenient solution to gaining an education
while working.
International Markets: Unlike the U.S., where postsecondary education is
relatively available, seats in postsecondary institutions in many parts of the world
are limited. We believe that in the knowledge-based global economy, there is a
huge opportunity to serve this pent up demand. Currently over 400,000 foreign
students study in the U.S., spending $7 billion.

Chart 61: Foreign Students enrolled in institutions of higher education in the United
States and outlying areas

500,000 452,635 453,787

449,704
Currently over 400,000 foreign 450,000 419,590
438,620
407,530
students study in the U.S., 400,000
343,780
spending $7 billion. 350,000 311,880
300,000
250,000
200,000
150,000
100,000
50,000
0
1980-81 1985-86 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Source: Department of Education

We believe that for every one
foreign student studying here in
the U.S., there are three to five
students who would if they had
the resources or the access.
While many of these students study in the U.S. because they want the cultural
experience of living in a new country or to attend a specific university, many
likely came because they did not have access to a university education in their
home country or did not have the diversity of choices that we enjoy in the U.S.
We believe that for every one foreign student studying here, there are three to five
students who would if they had the resources or the access. Distributed learning
makes it possible to serve these students who would never have had this
opportunity before. Sylvan Learning Systems has announced plans to own a
network of up to ten institutions of higher learning in countries around the world
to capitalize on this need. We think distributed learning could be a highly
complementary part of this plan.

Table 71: The International Opportunity is Significant For Postsecondary

and Distance Education Providers
U.S. Former USSR India Japan China Germany
Population 265,000 287,000 945,000 126,000 1,215,000 82,000
Higher-Ed Enrollment 14,200 5,273 4,471 2,683 2,173 1,687
Teaching Staff 2,600 404 303 271 397 198
Source: Milken Institute, World Bank.

126
 The Book of Knowledge – 9 April 1999

Designing A Distributed Learning Program

One of the more remarkable aspects about the activity in the distributed learning
sector is the variety of approaches that schools are exploring to capitalize on this
vast opportunity, as universities’ perceptions of distance learning (video and
cable) are transformed by today’s technology opportunities. Solutions today range
from live satellite broadcasts to high-tech centers around the country to
asynchronous Internet collaboration.

Chart 62: Evolving Technology Based Distributed Learning Models

Old Economy New Economy

There are a variety of
approaches that schools are
exploring to capitalize on
distributed learning.
Distance Learning Distributed Learning
Correspondence Course via Distributed Learning via
Mail, Videotape or Cable TV Internet, Satellite delivery of
Video Conferencing

Asynchronous Synchronous
Chat Rooms Video-conferencing
E-mail Conversations Web publishing,
Threaded Discussions Conferencing,
Streaming media

Source: Merrill Lynch

The chart below describes the distributed learning programs offered at two
prominent MBA schools, reflecting two different models of distributed learning
that have proven to be successful.

Table 72: Distance Learning at Top Business Schools – Different

Approaches Meet Various Needs
Distributed learning programs
offered at two prominent MBA Duke — Fuqua School U Penn – Wharton School
Structure Five meetings totaling 11 weeks over 19 Students meet in one of 28 Caliber centers
schools show that diverse months, twice on campus, once each in in major metropolitan cities around the
models are viable and have Asia, Latin America and Europe. For the country. Professors lecture and take
proven to be successful. bulk of the time, students view lectures via questions via two-way satellite. Students
CD-ROM and discuss them using bulletin chat and ask written questions through
boards and live chat sessions. Internet-based "wrap-around" system.
Delivery Primarily Asynchronous Primarily Synchronous
Cost $83,500 $2,500/program
Time 19 months 6 Weeks/program
Programs Global Executive MBA Building a Business Case
Using Financial Statements
Managing People: Foundations of
Organizational Effectiveness
Degree Granting Yes No
Class Size Up to 80 Participants at 28 sites
Partners Internally Developed Caliber Learning Network; Pensare

How is it that two top programs serving what is presumably a similar student body
could develop such different programs? We believe universities, in designing
their distributed learning programs, have to evaluate the several questions, and
based on those answers develop a program appropriate to their goals.

127
The Book of Knowledge – 9 April 1999
We believe universities, in
designing their distributed
learning programs, have to
evaluate several questions, and
based on those answers, develop
a program appropriate to their
goals.
Who are the students? Working
adults? Recent high school
graduates?
What kind of experience do we
want students to have?
How difficult will it be to
convert and convey the
information in a distributed
learning format?
How much will a professor’s
job change?
To outsource or not to
outsource?
128
Table 73: Designing A Distributed Learning Program—Questions to Ask
• Who are the students we are trying to serve? (Why are we doing this?)
• What kind of experience do we want students to have?
• What kind of distributed learning is most appropriate for our subject?
• How much can we ask our professors to change the way they do things?
• How much of this program do we want to manage ourselves?
Source: Merrill Lynch
Who are the students? Are students older, requiring an educational model fit to
the lifestyle of adults with demanding work, family and personal responsibilities?
If so, then asynchronous Internet-based courses may be appropriate, as
communication is indirect and accomplished via e-mail, voice mail, chat rooms
and threaded discussions.
Or, are students younger, who might enjoy a higher level of interactivity and
instructor involvement? In this case, a synchronous model, where the courses are
conducted in real time and require students to log on the Internet, a video
conferencing system or conference call at a specific time to participate, may be
more appropriate.
What kind of experience do we want students to have? Is this a course where
students will be learning a lot from their peers? Where teamwork and interactivity
will be valuable aspects of the learning process? Are students going to school to
extend professional or personal networks?
What is the content? How difficult will it be to convert and convey the
information in a distributed learning format? For instance, an online acting course
may require a video component while an English course may just require posting a
syllabus, reading assignments and homework.
How much will a professor’s job change? Some distributed learning
environments can significantly leverage a professor’s time and experience; others
require even more instructor attention than classroom-based models. If
universities chose to use a solution that require professors learn technology, it
might affect their decision about the final question—hiring outside support.
How much do we want to do ourselves? Certain institutions may want to
maintain a high degree of control, a decision dependent on how proprietary they
see their programs as, how central they are to their education and growth strategy
and their ability to technically manage such a program.
In many ways, the first three decisions really speak to how “convenient” the
programs must be and what degree of “collaboration” between students and their
professors (and other students) the class should provide. We depict the options
resulting from these decisions below.
 The Book of Knowledge – 9 April 1999

Chart 63: The Collaboration-Convenience Decision

• Mail Correspondence
• Asynchronous Internet
• Video Correspondence Courses
High
• Synchronous
The decision on which Internet Courses
distributed learning model to
• Caliber
employ is dependent on the Courses
level of convenience and Convenience
collaboration desired
• Classes on
campus at night

Low • Cable TV Broadcasts

• Classes on campus
during the day

Low High
Collaboration
Source: Merrill Lynch.

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The Book of Knowledge – 9 April 1999

Case Study: Caliber Learning Network

Caliber Learning Network, a provider of a nationwide network of adult professional education centers linked through a live
satellite connection, is an example of an interactive, highly collaborative, yet convenient, distributed learning model. By
combining the best of traditional classroom instruction with the convenience of distance learning, the company’s state-of-
the-art learning network distributes executive-level education from top-name universities and training from Fortune 1000
companies to students and employees at its 40 high-tech campuses in North America
Caliber campuses feature professional classrooms, educational facilitators, state-of-the-art satellite transmission, video
conferencing, wide-area network computing and Internet technologies providing working adults access to live expert
instruction, real-time two-way interactivity with the instructor and the ability to collaborate with other course participants.
In addition, Caliber integrates personal computing and the Internet to enhance student-teacher interactivity and to extend the
learning experience beyond the classroom. Leading universities such as Johns Hopkins and Wharton and corporations such
as Compaq, Microsoft and Intel are already using the Caliber system.
Caliber Learning Network—Linking Cities World Wide

Investing in Schools Without Walls—Outsourced

We believe a large number of
colleges will outsource the
development and/or
management of their distributed
learning programs to outside
companies
Technology and Service Providers
We believe a large number of colleges and universities will choose to outsource
the development and/or management of their distributed learning programs to
outside companies and will also look to outside technology providers that have
designed solutions specifically for this market.
There are over 3,700 postsecondary institutions in the United States that have
accumulated curriculum based on years of extensive research and are looking for
new ways to leverage it into new channels. In a survey of many of these schools,
the Department of Education found that:
• 43% of institutions cited program development costs as a deterrent to offering
distributed learning
• 31% cited a limited technological infrastructure
• 23% cited equipment failures and cost of maintaining equipment as inhibitors.
Moreover, some schools may be hampered by the fear that any execution,
implementation or technology failures on their part could damage the institution’s
reputation. Experienced outside providers can eliminate some of these barriers
and enable these schools to reach more students and leverage their leading content.

130

Several innovative companies
have emerged to serve these
colleges and universities, such
as the Caliber Learning
Network, Blackboard.com, Real
Education, and Pensare.
We believe that many of these
technology, software and
service providers could become
big companies and attractive
investments.
Investors can also participate in
the fast growing distributed
learning industry, albeit slightly
more indirectly, by investing in
proprietary postsecondary
institutions that offer
distributed learning solutions.
The Book of Knowledge – 9 April 1999
Several innovative (but still private) companies have emerged to serve the
distributed learning requirements of colleges and universities, such as the Caliber
Learning Network, Blackboard.com, Real Education, Pensare and
OnlineLearning.net. Realizing the tremendous opportunity, companies that have
typically served corporate and IT training markets, have also entered the scene,
expanding their offerings to serve postsecondary institutions. We believe that
many of these technology, software and service providers could become big
companies and attractive investments.
While we think it may be too early to tell which technology providers will win,
companies that offer strong technology solutions and high levels of service to both
content owners and students, have significant competitive advantages in the new
era of technology-delivered education.
Investing in “Schools Without Walls”—Proprietary
Postsecondary Institutions Exploiting the Power of
Distributed Learning
Investors can also participate in the fast growing distributed learning industry,
albeit slightly more indirectly, by investing in proprietary postsecondary
institutions that offer distributed learning solutions. While many of these
postsecondary schools began as brick and mortar schools, they have found ways to
leverage their quality content into new distributed learning education models,
enabling them to expand their market presence and reach new audiences such as
working adults and international students.
Two companies that have successfully implemented distributed models are Apollo
Group’s University of Phoenix, DeVry’s Keller Graduate School of Management
and Strayer Online, as highlighted below. All three programs are excellent
examples of the opportunity created through the powerful combination of
technology, strong academic content and highly marketable brand names.
Table 74: Distance Learning at Proprietary Postsecondary Providers
Keller Graduate School
University of Phoenix of Management Strayer Online
Programs Offers BS, MA, MS, MBA Offers MBA Degrees via Strayer Online offers
Degrees via the Internet. No the Internet, although most undergraduate and graduate
classtime required. students utilize as degrees online
supplement to classroom-
based courses.
Launch Date 1989 Late 1998 Fall 1997
Students Nearly 7,000 Approximately 600 Approximately 900
Partners Convene International Real Education Lotus/Databeam
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The Book of Knowledge – 9 April 1999

Case Study : Apollo Group — Leading Pioneer in Distributed Learning

University of Phoenix (UOP), a subsidiary of Apollo Group, is the largest private university in the United States and one of
the first pioneers to explore the uncharted terrain of the new world of distributed learning. UOP’s focus is solely on serving
the educational needs of working adults over the age of 25, an audience that we believe can truly appreciate the benefits of
distributed learning courses. Working under the desire to provide adults with a convenient, flexible education, Apollo
understands that individuals have different learning styles and needs. Accordingly, the company offers not one, but three,
and soon four, different distributed learning models. The company’s spectrum of distributed learning solutions ranges from
self-paced courses to online interactive classes. Apollo expects to soon be offering real-time synchronous courses via a
partnership with Hughes Network Systems.
Online Campus – Asynchronous Distributed Learning
Launched in 1989, UOP’s online education is the largest (and probably the oldest) online program in the nation with current
enrollment of approximately 5,321 students growing at a CAGR of approximately 50%. The Online program provides
campus-based courses on a interactive computer conferencing system that enables students and faculty to participate in a
learning group of 8 to 13 students without having to be on-line concurrently, making the course convenient and accessible
per one’s schedule. Students can download assignments, engage in discussions with the instructor, classmates and study
groups via e-mail and upload their responses to assignments and case write-ups in real time. The online platform is
convenient and flexible, allowing students to complete their course requirements at any time of the day from virtually any
location.
The Center For Distance Education – Distributed Learning For the Less Technologically Savvy
UOP’s Center For Distance Education is tailored to the less technology savvy student where communication and
coursework is primarily paper based as opposed to computer based and student-teacher interaction is achieved through a
combination of voice, fax, e-mail and traditional “snail” mail.
CPEInternet
The CPEInternet is part of Apollo’s continuing professional education (CPE) division and offers non–degree professional
certification programs in finance and business via the Internet. While there is a technology component, these classes are
self-paced study courses with little to no interaction with an instructor, in a web-enabled variant of paper-based
correspondence courses.
Coming Soon: Synchronous Satellite-Based Distributed Learning
Apollo recently added a real-time synchronous education model to its offerings, thus completing its spectrum of distributed
learning solutions, through a joint venture with Hughes Network Systems, a leading supplier of private satellite networks.
The joint venture acquired One Touch Systems, a leading provider of interactive distance learning solutions with an
installed base of over 20,000 classrooms in 55 countries. While still in pilot stage, Apollo will soon have the ability to
leverage its UOP through this real time distributed learning channel.

132

Table 75: Distributed Learning Companies
Company
Allen Communication (subsidiary Subsidiary
of Times Mirror)
Asymetrix Learning Systems
Blackboard Inc.
Caliber Learning Network
California Virtual University
ComWeb
Concord University School of Law Sub: WPO
Convene International
Course Technology
Headlight.com
ILINC
Jones International University
Keller Graduate School of
Management
Knowledge University
Learning Ventures
Lotus/DataBeam
Macromedia
National Technological University Private
NYU On-line Inc.
OnlineLearning.net
Pensare
Real Education
Strayer Education
University Access
University of Phoenix
UNEXT.com
UOL Publishing
WBT Systems
Western Governors University
Source: Public Documents
The Book of Knowledge – 9 April 1999
Ticker Website Description
www.allencomm.com Provides multimedia training software to corporate and education clients,
including authoring and course management tools.
ASYM www.asymetrix.com Provides multimedia training software to corporate and education clients,
including authoring and course management tools.
Private www.blackboard.com Provider of online learning technologies enabling higher education institutions to
convert curriculum to web-based courses.
CLBR www.caliberlearning.com Provides a nationwide network of satellite-linked professional learning campuses
that offers adults a classroom environment featuring live, real-time instruction.
Private www.california.edu A clearinghouse of distributed learning courses, acting as a link between students
and online courses offered by California’s accredited colleges and universities.
Private Not Available Provider of distributed learning solutions.
www.concord.kaplan.edu The first major institution offering a Juris Doctorate (JD) degree earned entirely online.
Private www.convene.com Provider of technology and services to aid universities in developing,
implementing and managing distributed learning programs.
Subsidiary www.course.com As publisher of electronic textbooks, the company has over 800 titles used at
thousands of colleges, universities, technical schools and vocational schools
worldwide. The company is a division of International Thomson Publishing.
Private www.headlight.com Distributes Web-based training from multiple vendors through an e-commerce site.
Offers information technology, softskills and certification training as complete
courses as well as smaller lessons ranging in length from 2 to 20 minutes.
Private www.ilinc.com Provides online learning solutions for the Internet, Intranet and wide area network
environments.
Private www.jonesinternational.edu First regionally accredited university to exist exclusively on line. Offers degree
programs in business and communications
Sub: DV www.keller.edu Offers online MBA degrees
Private www.knowledgeuniversity. Plans to deliver a variety of degree, certificate and continuing education programs
com to corporations and individual learners.
Private www.aprisa.com Provides custom and standard online education including Ph.D. and Masters
(M.S.) programs in a variety of fields.
Sub: IBM www.lotus.com/home.nsf/tab Provides real-time remote collaboration and distance learning software. A
s/learnspace subsidiary of IBM.
MACR www.macromedia.com Delivers Internet tools and technologies applicable to training program development.
www.ntu.edu Offers a wide range of satellite-delivered instructional television courses taught by
the top faculty of more than 50 of the nation’s leading engineering schools and
other organizations and institutions selected because of their special expertise.
Private www.nyuonline.com For profit subsidiary of New York University that will sell continuing education
courses delivered online.
Private www.onlinelearning.net Supplier of continuing higher education for professionals and postsecondary
education. Offers UCLA extension courses.
Private www.pensare.com Creates intranet-based performance improvement courses in partnership with
first class business schools and well-recognized seminar providers.
Private www.realeducation.com Offers technology solutions for postsecondary institutions seeking to build and
distribute on-line educational courses.
STRA www.strayer.com Provider of career-oriented degree programs in Washington, D.C., Maryland, and
Virginia, including an online program.
Private www.universityaccess.com Provider of high-quality business courseware for distance learning utilizing the
television and the Internet.
Sub: APOL www.apollogrp.com Offers one of the largest distributed learning programs with more than 9,000
students enrolled as of February 1999.
Private www.unext.com Plans to deliver postgraduate-level training electronically to corporations around
the world. Has signed agreement with Columbia Business School.
UOLP www.uol.com Publishes interactive, Web-based courseware for corporate training and
education markets.
Private www.wbtsystems.com Offers a web-based education and training management solution for higher
education and the corporate markets.
Not-for-profit www.wgu.edu/wgu/index.html An independent, non-profit organization of governors from 17 states and one
territory that offers a growing list of more than 300 college-level distance learning
courses from 35 affiliated universities and education providers from those states.
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The Book of Knowledge – 9 April 1999

9. Corporate Training: Lifelong Learning in

the Global Marketplace
Training Market Statistics • The corporate-sponsored training market is huge, measuring over $60 billion
for formal training in 1998 and serving approximately 54.5 million
Size of Market individuals. Including government training expenditures, which we estimate
Corporate: $60 billion to be $38 million, the training market is approximately $98 billion in size. Of
Government: $38 billion this amount, we estimate approximately $19 billion are earmarked for outside
Total: $98 billion expenditures, a figure growing at 13% annually.
For Profit: $19 billion
• The perception of training is changing from a cost center to a revenue-
generating investment. Motorola calculates that every $1 spent on training
Market Growth Rate
equates to $30 in productivity improvements in three years. We believe
Overall: 6%
training providers that have products that produce measurable results will be
For Profit: 13%
well positioned to succeed in this new market environment.
Largest Public Companies • Corporate America is facing a shortage of one of the most valuable resources
Franklin Covey in our global knowledge-based economy – skilled labor. Approximately 33%
PROVANT of job applicants tested in 1995 could not pass a basic skill test in reading and
AchieveGlobal (subsidiary of Times Mirror) math. As consequence, corporations are spending tens of billions of dollars
annually on training, providing tremendous opportunities for training
companies that can provide efficient, effective training solutions.
• Illustrating the heightened importance of training is the growth of Chief
Knowledge Officers (CKO) at corporations. Approximately 11%, or 55, of
the Fortune 500 companies have Chief Knowledge Officers today, up from
virtually none five years ago.

Table 76: Megatrends Shaping the Training Industry

Trend Impact
Demographics With the aging of the U.S. workforce (median age of US worker expected to
increase from 35.3 in 1976 to 40.6 in 2006) and technology automating a large
percentage of unskilled jobs, training is necessary to remain relevant in today’s
knowledge-based economy.
Technology Technology-based training can enhance employee performance by delivering
immediate, job-related content right to the desktop. Employee Performance Support
Systems, Knowledge Management Programs and other technology-based training
programs can enhance productivity.
Globalization We are truly in a global economy. One piece of evidence is the growing number of
offices US companies have located around the world. Accordingly, corporations
need training companies that have the ability to deliver consistent, effective training
solutions worldwide.
Branding In such a highly fragmented industry made up of thousands of “mom and pop”
shops, we believe companies will rely on reputable brand name training providers
with a national presence to serve their training needs.
Consolidation Corporations want more products and services from fewer vendors. In short, they
want the convenience of one-stop-shopping. We believe the performance
improvement industry is ripe for consolidation and are seeing lots of movement by
both small and large players in the market.
Privatization/Outsourcing In today’s fast changing market environment, corporations are increasingly relying
on the expertise of third party specialists to provide the training and education
necessary to prepare their employees. As companies focus on core competencies
and increasingly view training as an investment, we believe the rate of outsourcing
of training functions will only accelerate.

134

Corporations are struggling to
reinvent themselves in the face
of structural change in our
economy—an economy that is
increasingly shifting rewards to
service and technology
companies made up of
“knowledge workers.
Not surprisingly, improving the
education levels of employees
has become mission critical for
companies.
The corporate-sponsored
training market is huge
measuring over $60 billion.
Including Government training
expenditures we estimate the
size of the market to be
approximately $98 billion.
The Book of Knowledge – 9 April 1999
Large and Growing Corporate Training Market
Corporations are struggling to reinvent themselves in the face of structural change
in our economy—an economy that is increasingly shifting rewards to service and
technology companies made up of “knowledge workers. Not surprisingly,
improving the education levels of employees has become mission critical for
companies. Adults and corporations are increasingly realizing that education is a
lifelong process that no longer stops after graduation from high school or college.
In today’s knowledge-based economy, a four-year degree is just a prerequisite to
participating in the industries of the future.
Education is the next industrial era institution to go through a complete
overhaul, starting in earnest in 2000. The driving force here is not so much
concern with enlightening young minds as economics. In an information
age, the age of the knowledge worker, nothing matters as much as the
worker’s brain.
—Peter Schwartz
Wired Magazine, The Long Boom
Consequently, employers in the new economy are spending tens of billions of
dollars to increase employee skill levels, offering everything from remedial
education to job training to executive education. The corporate-sponsored training
market is huge, measuring over $60 billion for formal training in 1998 and serving
approximately 54.5 million individuals. Including Government training
expenditures, which we estimate to be $38 billion, the training market is
approximately $98 billion in size. Of this amount, we estimate approximately $19
billion are earmarked for outside expenditures, a figure growing at 13% annually.
Chart 64: Large and Growing Corporate Training Market ($ billions)
$65.0 $60.7
$58.6
$60.0 CAGR: 5%
$55.7
$52.2
$55.0
$50.6
$48.2
$50.0 $45.0
$43.2
$45.0
$40.0
$35.0
1991 1992 1993 1994 1995 1996 1997 1998
Source: Training Magazine
Illustrating the heightened profile and importance of training is the rising number
of corporate “universities.” Corporate universities are formalized corporate
education programs that cut across all company divisions. By the year 2000,
expectations are for approximately 2,000 corporate universities, up from only 200
in 1970. To put this figure in perspective, there are currently approximately 3,700
postsecondary institutions in the United States.
135
The Book of Knowledge – 9 April 1999

Chart 65: Corporate Universities Up 10-fold in 30 years

2,000
By year 2000 expectations are 2,000 10x in 30 Years 1,600
for approximately 2,000
corporate universities, up from
1,500
only 200 in 1970

1,000
400
500 200

0
1970 1980 1997 2000E

Source: Corporate University Xchange, Inc.

Changing Perception of Training from a Cost to

Motorola calculates that for
every $1 it spends on training
translates to $30 in productivity
gains within three years.
A recent study found that
corporations that employed a
workforce with a 10% higher-
than-average educational
attainment level enjoyed 8.6%
higher-than-average
productivity.
an Investment
The perception of training is changing from one of “cost center” to one of
“revenue-generating investment.” The shift in perception is fueled by the
emergence of solid conclusive evidence correlating training with productivity
improvements. Motorola, for example, calculates that every $1 it spends on
training translates to $30 in productivity gains within three years.
A recent study found that corporations that employed a workforce with a 10%
higher-than-average educational attainment level enjoyed 8.6% higher-than-
average productivity. In contrast, capital investments that were 10% higher than
the average capital investment only yielded a 3.4% higher payoff than average.
This illustrates the clear shift our economy has made to favor human capital over
physical capital.
Chart 66: Education Increases Productivity

In contrast, capital investments

8.6%
that were 10% higher than the
10%
average capital investment only
yielded a 3.4% higher payoff
Increase in Productivity

8%
than average
6% 3.4%

4%

2%

0%
10% Higher Level in Education 10% Higher Level in Capital Stock

Source: The National Center for Educational Quality of the Workforce

136

General Electric allocates
upwards of $800 million a year
on training and leadership
development—about half what
it spends on R&D.
We estimate that $14 billion of
corporate training markets of
which is outsourced, a figure
growing at 12% annually per
year.
As companies focus on core
competencies, and increasingly
view training as an investment,
we believe the rate of
outsourcing training functions
will only accelerate.
Corporate America is facing a
shortage of one of the most
valuable resources in our
global knowledge based
economy – skilled labor
The Book of Knowledge – 9 April 1999
Smart companies have not missed the positive connection between training and
productivity. General Electric, one of the most respected corporations of the last
decade, allocates upwards of $800 million a year on training and leadership
development—about half of what it spends on R&D.
“Corporations downsizing is being replaced by upthinking.”
—Lester Wunderman
Training’s heightened role in a company’s success and the emphasis on return on
investment calculations bodes well for the training industry as companies continue
to invest in their workforce’s education. In our opinion, training providers that
have products and services that produce measurable results will be well positioned
to succeed in this new market environment.
Outsourcing Megatrend
The training industry is benefiting from the outsourcing megatrend, with
corporations increasingly relying on the expertise of third-party specialists to
provide the training and education necessary to prepare their employees. Of the
$60 billion spent annually on training, $14 billion is outsourced, a figure growing
at 12% annually per year. Including government training expenditures, we
estimate that $19 billion of training is outsourced. As companies focus on core
competencies, we believe the rate of outsourcing training functions will only
accelerate.
Chart 67: Trend Towards Outsourcing By Corporate Training Market
1995 1998
$10.3 billion $14.3 billion
11.6% C A G R 23.2%
19.7%
3.4% C A G R $46.4 B illion
$41.9 B illion
$52.2 billion $60.7 billion
Source: Training Magazine
Critical Skills Shortage
Corporate America is facing a shortage of one of the most valuable resources in
our global knowledge-based economy – skilled labor. While the reasons for the
skill shortage are many, the dismal state of our K-12 education system and its
failure to prepare our children for the workforce is certainly at its core. The
unprepared state of our high students has expensive consequences for U.S.
companies.
• The Washington Post reports that approximately 33% of job applicants tested
in 1995 by U.S. companies could not pass a basic skills test in reading and
math.
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The Book of Knowledge – 9 April 1999
Corporations want more
products and services from less
vendors. In short, they want the
convenience of one stop
shopping.
138
• According to PriceWaterhouseCoopers, 70% of the fastest growing
companies say they are faced with serious problems finding skilled,
experienced workers.
• A survey conducted by the National Association of Manufacturers found that
37% of respondents were having difficulty introducing productivity
improvements and 36% were having problems upgrading production
technology due to employee skill shortages.
Chart 68: Skill Deficiencies in Workforces At Alarming High Levels
Basic Math Skills 60%
Language Skills 55%
Technical Skills 48%
Computer Skills 30%
Ability to Work in Teams 28%
0% 10% 20% 30% 40% 50% 60%
Source: Forbes Magazine, July 1998
”In an increasing global economy...l do not like our chances. We are already
seeing the collapse of our public schools, and all of us – states and business
alike – are bearing the costs of failure. There is a direct link between
education and income. People who have a better education have better jobs
and get better pay. Countries that have better education systems have stronger
economies and are tougher competitors in the worldwide marketplace.
America is becoming a nation of educated and uneducated.”
—Louis Y. Gerstner, Jr. Chairman and CEO
IBM
Performance Improvement Market
We broadly define performance improvement training as any form of non- IT
related training. Thus, this includes a wide range of training from general business
skills such as sales, customer service, and communication training as well as more
mission-critical training such as employee selection, managing change and
diversity training. Also included is tuition reimbursement programs and remedial
education. While in-house training departments are currently the largest providers
of performance improvement training, we believe that as corporations increasingly
viewing training as an investment and chose to focus on core competencies, they
will look to outside providers who have quality content, breadth and depth of
products and services, wide range of delivery options and a national presence.

Corporations want the
convenience and ease of
working with one diversified
provider
Accordingly, we believe the
performance improvement
industry is ripe for
consolidation and are seeing
lots of movement by both small
and large players in the market.
The Book of Knowledge – 9 April 1999
“We all get heavier as we get older because there’s a lot more information in
our heads.”
—Vlade Divac, Los Angeles Lakers
In our view, corporations want more training products and services from fewer
vendors. In short, they want the convenience and ease of working with one
diversified provider. In response to this demand, training providers, who in the
past found success by focusing on a narrow niche, now are scrambling to add
content through internal development, acquisitions and/or partnership with peers
in the industry.
Accordingly, we believe the performance improvement industry is ripe for
consolidation and are seeing lots of movement by both small and large players in
the market. Illustrative of this fact is last year’s initial public offering of
PROVANT, which was formed by the union of seven leading training companies.
The company was founded in 1998 by Paul Verrochi (founder and former CEO of
the highly successful American Medical Response) and Jack Zenger (former
Chairman of Times Mirror Training Group). Since its formation, the company has
acquired eight more companies. PROVANT’s goal is to be the one-stop
performance improvement training provider for Corporate America. As a leading
provider of performance improvement training to the Fortune 500, government
entities and small to mid size companies, PROVANT is well on its way on
successfully fulfilling its mission.
Franklin Covey, a second leading performance improvement training company,
has built not only a solid business, but also a powerful brand name around two key
training programs – time management and 7 Habits of Highly Effective People
seminars. Given today’s market environment, the company realized the need to
expand its offerings to respond to client’s demand, as well as profit by leveraging
client relationships. Thus, it has recently expanded its content to include sales
training through the acquisition of Khalsa Associates.
We believe that as corporations evaluate and develop their training programs they
will increasing look to outside providers of performance improvement training
who have quality content, breadth and depth of products, a wide range of delivery
options and a national presence to provide them with a complete training solution.
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The Book of Knowledge – 9 April 1999

Corporate and Government Training Scorecard

We have created a corporate training scorecard that summarizes some of the key
issues we look at when evaluating companies in this industry.

Table 77: Training Scorecard

1. Breadth and Depth of Products Corporations want more products and services from fewer 15 pts
and Services vendors. In short, they want the convenience of one-stop
shopping
2. Use of Technology Technology delivered training is not only convenient and 15 pts
inexpensive, but in many cases, more effective.
3. Measurable Results – The changing perception of training from a "cost center" to 15 pts
a revenue generating investment has made return on
Return on Investment investment calculations on training a requirement
4. Brand Name Content In such a highly fragmented market, companies rely on 10 pts
brand name training providers.
5. National Presence In today's global economy, training providers must be able 10 pts
to deliver consistent, effective training solutions worldwide.
6. Training Management System Employee performance support systems, knowledge 10 pts
management programs and other training management
systems enhance productivity
7. Long term contracts Multi-year contracts provide predictable, visible revenues 10 pts
8. Effective Sales and Marketing Companies that have a strategy to sell to all levels of an 5 pts
Strategy organization from the CFO or CKO to the human resources
department will have an advantage.
9. Client Base Fortune 500 companies, due to their large size, provide 5 pts
training companies with tremendous opportunity.
10. Margins Scale enables companies to leverage fixed costs across a 5 pts
larger revenue base providing opportunity for margin
improvements.
Total 100 pts
Source: Merrill Lynch.

140
 The Book of Knowledge – 9 April 1999

Table 78: Performance Improvement Training Companies

Company Ticker Website Description
AchieveGlobal Sub: TMC www.achieveglobal.com Provides training programs and consulting services in four key areas:
sales performance, leadership, customer loyalty and teamwork.
Blanchard Training and Development Private www.blanchardtraining.com Provider of leadership, management, team building, quality, customer
service and managing change training.
Blessing/White Private www.blessingwhite.com Provider of performance improvement training in a wide range of topics
including leadership, team building, project management, employee
retention and employee development training, among others.
Career Track Private www.careertrack.com Provider of performance improvement training on a wide range of topics
delivered via public seminars, on-site training, audio and video training
programs. The company is owned by ETC, a subsidiary of TCI.
Dale Carnegie Training Private www.dale-carnegie.com With over 170 offices in more than 70 countries, Dale Carnegie specializes
in communication, leadership, customer service, and sales training.
Development Dimensions International Private www.ddiworld.com Provides corporate clients with performance improvement training in areas
such as change management, customer service and leadership training.
With offices worldwide, the company’s products and services are available
in 19 languages.
EPS Solutions Private www.epscorporation.com Integrated business service provider of profit recovery, cost reduction, and
performance improvement products and services. The company has 120
national and 10 international offices.
Franklin Covey FC www.franklincovey.com Provider of training seminars and products designed to improve
productivity and fulfillment through effective time and life management.
Forum Corporation Private www.forum.com Provider of performance improvement training including courses such as
sales, customer service, leadership, problem solving training, among
others. Serving the Fortune 1000, Forum has offices located worldwide.
General Physics Corporation GPX www.genphysics.com Provider of performance improvement training services designed for all
levels of an organization. Clients include Fortune 500 companies,
manufacturing and process industries, electric power utilities and other
commercial and governmental customers.
Learning Insights Private www.learninginsights.com Provider of interactive, multimedia courses in business related topics such
as financial and risk management.
OnTarget, Inc. Private www.tmsnet.com Develops and implements advanced sales and marketing training and
consulting programs for sales organizations competing in complex,
multilevel sales campaigns.
Personnel Decisions Private www.pdi-corp.com Global management and human resources consulting firm specializing in
assessment-based selection and development of managers and
organizations
PROVANT, Inc. POVT www.provant.com Provider of performance improvement training solutions to Fortune 1000
clients in areas such as employee selection, recruitment and retention,
enhancing employee work skills, developing employee management and
leadership skills and facilitating organizational assessment, direction and
change.
Wilson Learning Corporation Private www.wilsonlearning.com Provider of performance improvement to the Fortune 500 and emerging
organizations internationally, with operations in the U.S. and over 50
countries worldwide.
Source: Public Documents

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The Book of Knowledge – 9 April 1999

10. IT Training: Keeping Up With The Fast

Pace Of Technological Change
IT Training Market Statistics • The corporate IT training market is a $19 billion market, which we project
will grow at approximately 12% CAGR over the next several years, reaching
Size of Market $28 billion by 2002.
Corporate: $19 billion
Government: $7 billion • Over the past 30 years, technology has become so essential to corporations
Total: $26 billion
that expenditures have grown from 5% of total capital spending in 1970 to
For-Profit: $10 billion
nearly 50% today. Corporations now need IT specialists to both manage these
Market Growth Rate
investments and wring expected productivity gains from them, thus creating a
Overall: 10%
need for continuous training and retraining in the IT professions.
Corporate: 12% • It is estimated that we will need 1.3 million new computer scientists, systems
For-Profit: 14% analysts and computer programmers by 2006 in the United States. Yet,
Largest Public Companies currently one out of every ten IT positions, or approximately 350,000 jobs,
CBT Systems are open today. We believe corporations will look to IT training companies to
New Horizons help narrow the growing supply/demand imbalance for IT professionals.
ARIS Corporation
• In an industry when “the only thing certain is change,” training will be
Learning Tree International
necessary for corporations to keep pace with rapid technological innovation.
We believe there is tremendous opportunity for IT training companies that
have scaleable solutions, national presence, quality content, and a wide range
of delivery options.

Table 79: Megatrends Shaping the IT Training Industry

Trend Impact

Demographics With the aging of the U.S. workforce (median age of US worker increasing from 35.3 in 1976 to
40.6 in 2006) and the fast pace of technology revolutionizing how we do things, ongoing training
is necessary for today’s workforce remain relevant in our knowledge-based economy.

Technology Over the past 30 years, technology has become so essential to corporations that expenditures
have grown from 5% of total capital spending in 1970 to nearly 50% today. Corporations now
need IT specialists to both manage these investments and wring expected productivity gains
from them, thus creating a need for continuous training and retraining in the IT professions.

Globalization Technology-based training enables companies to provide its employees with consistent, timely
training regardless of where they are around the world.

Branding The IT training market is highly fragmented, made up of thousands of “mom and pop” shops. We
believe companies will rely on reputable brand name providers with a national presence to serve
their training needs.

Consolidation The growing number of varied software applications and technologies has required IT
professionals to be proficient across multiple vendors. We believe IT training companies will
acquire IT content and/or technology to “fill in the holes” in the areas that they are lacking.

Privatization/ Corporations are increasingly relying on the expertise of third party specialists, especially in the
Outsourcing IT area where things change so quickly. As companies focus on core competencies, and
increasingly view training as an investment, we believe the rate of outsourcing training functions
will only accelerate.

142

In the past 30 years, technology
has become so essential to
corporations that expenditures
have grown from 5% of total
capital spending in 1970 to
nearly 50% today. Thus, it is
not surprising that the growth
and demand for IT training is
huge
Today the corporate IT training
is a $19 billion market and is
projected to grow at 12% over
the next several years, reaching
$28 billion by 2002.
In an era when “the only thing
certain is change,” training will
be necessary for companies to
keep pace
The Book of Knowledge – 9 April 1999
Growing Demand for IT Training
Technology has transformed our society and economy. In the past 30 years,
technology has become so essential to corporations that expenditures have grown
from 5% of total capital spending in 1970 to nearly 50% today. Thus, it is not
surprising that the growth and demand for IT training is huge, driven by a number
of factors:
• The fast pace of technological change. Accordingly to Moore’s Law, the
capacity of a computer chip doubles every 18 months enabling more powerful
hardware and software applications to emerge, thus creating a need for
continuous training and retraining in the IT professions.
• The increasing complexity of information technologies. Continuous
innovation and improvements in hardware, operating systems and software
require ongoing training and retraining.
• The explosion of Internet/Intranets. According to IDC, over 80% of
medium and large companies have Intranets, linking employees around the
world and allowing for instantaneous communication and community
building.
• Growing number of technology vendors – A growing number of varied
hardware platforms and software applications requires professionals to have
knowledge of technologies across multiple vendors.
Today the Corporate IT training is a $19 billion market, which we project to grow
at approximately 12% CAGR over the next several years, reaching $28 billion by
2002.
Chart 69: Growth in Corporate IT Training
$30 $28.3
$28 CAGR: 12%
$25.8
$26 $23.4
$24
$20.9
$22
$18.8
$20
$16.7
$18
$16 $14.7
$14
$12
$10
1996 1997 1998 1999E 2000E 2001E 2002E
Source: International Data Corporation
The IT training industry is highly fragmented with the largest IT training provider
being IBM Global Services with $520 million in revenues in 1997 and only 3%
market share. Learning Tree and CBT Systems are the two largest pure play
public IT training companies in the industry with revenues in 1998 of $187.2
million and $162.2 million, respectively. In an era when “the only thing certain is
change,” training will be necessary for companies to keep pace. As such, we
believe there is tremendous opportunity for IT training companies that have
scaleable solutions, national presence, quality content, and wide range of delivery
options to gain market share very quickly.
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The Book of Knowledge – 9 April 1999
The IT training industry is
highly fragmented. The largest
IT training provider is IBM
Global Services at $520 million
and only 3% market share.
In 1999 alone, IDC estimates
that there will be the need to
hire 772,000 IT professionals in
the U.S.
Ironically, while our economy
is creating more computer-
related positions, the number of
students graduating with
computer science majors are
decreasing.
144
Table 80: Top Ten IT Training Companies Only Have 13.7% Market Share
1997 Market
Millions Share
IBM Global Services $520 3.1%
Oracle Education 333 2.0%
SAP Education 325 1.9%
KnowledgePool 276 1.6%
Global Knowledge Network 255 1.5%
Hewlett-Packard Education Services 180 1.1%
Learning Tree International 175 1.0%
Sun Educational Services 135 0.8%
CBT Systems 119 0.7%
Cap Gemini 81 0.5%
13.7%
Source: International Data Corporation, 1998
The IT Skills Shortage Is Severe
With unemployment at its lowest level in 25 years, the shortage of qualified
workers cuts across all corporate functions. Even so, no group has been hit harder
then the IT division. It is estimated that we will need 1.3 million new computer
scientists, systems analysts and computer programmers by 2006 in the United
States. In 1999 alone, IDC estimates that U.S. employers will need to hire 772,000
IT professionals.
“If the automotive industry had progressed during the last two decades at the
same rate as the semiconductor industry, a Rolls-Royce would today costs
only three dollars and there would be no parking problem because
automobiles would be one quarter of an inch on a side.”
—George H. Heilmeier
Vice President, Texas Instruments
Demand for IT professionals in this white-hot market environment is far
outstripping the current supply. In a recent survey conducted by Information
Technology Association of America (ITAA):
• One of every ten IT positions, or approximately 350,000 jobs, is open today.
• Approximately 50% of IT company executives cited the lack of skilled
workers as the most significant barrier to growth during the next year.
• Approximately 70% of IT companies said that "few" or "some" applicants for
IT jobs have the skills the companies are seeking.
Ironically, while our economy is creating more computer-related positions, the
number of students graduating with computer science majors is decreasing. From
1985 to 1995 the number of computer science majors declined 72%, from 41,889
to 24,404 graduates.
The shortage of skilled IT professionals can be costly for Corporate America,
causing cancellations and delays in new product introductions and eating away at
management resources and time as a result of additional recruiting demands.
 The Book of Knowledge – 9 April 1999

Chart 70: Impact of Skills Shortage on IT organizations

84%
90%
66%
80% 63% 60%
57%
70%
60%
50%
40%
30%
20%
10%
0%
Increased IT projects were Increased salary Hired temporary or Spent more time
workload on delayed level for new IT contract personnel on recruiting
existing staff hires

Source: Computerworld Magazine

Strong employment demand, coupled with lack of supply has also resulted in
compelling monetary incentives for students. Salaries for professionals working
in the information technology field have skyrocketed in the last few years. A
recent survey showed the increases in salary in 1996-1997 were more than triple
the increases in salary in 1995-1996.

Table 81: Compelling Economics For IT Professionals

% Change
1995 1996 1997 95-96 96-97
We see tremendous opportunity CIO/VP of IS/IT $ 91,600 $ 96,400 $123,100 5% 28%
for IT training companies to Systems analyst/administration $ 45,400 $ 44,500 $ 51,000 -2% 15%
help solve the skills shortage Programmer/analyst $ 37,200 $ 38,800 $ 43,000 4% 11%
problem and narrow the Director of systems development $ 73,000 $ 74,400 $ 82,200 2% 10%
supply/demand imbalance for Computer operator/Data processing manager $ 49,500 $ 50,600 $ 55,500 2% 10%
IT professionals. Senior systems programmer $ 51,700 $ 51,700 $ 56,500 0% 9%
Source: Computerworld Magazine

We see tremendous opportunity for IT training companies to help solve the skills
shortage problem and narrow the supply/demand imbalance for IT professionals,
including companies such as Learning Tree International, New Horizons
Worldwide and Aris Corporation.

The Increasing Importance of Certification

One of the major trends in the IT services industry is certification. Certification
training is growing at a rapid pace, with the number of exams growing at over
30% annually, transforming what is currently a relatively small $900 million
industry to $2.1 billion by 2001. There are now 150+ technical certifications
available with the number of industry certified professionals continually rising.

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The Book of Knowledge – 9 April 1999
Certification in the IT testing
market is growing at a rapid
pace, with the number of exams
growing at over 30% annually,
transforming what is currently
a relatively small $900 million
industry to $2.1 billion by 2001.
Certifications provide a
benchmark for quality, allowing
company’s to quickly assess its
employees’ knowledge base and
ensure they have the
qualifications needed to
accomplish their jobs.
For individuals, certification
provides the basis for a higher
salary and increased job
opportunities.
More than 80% of IT managers
report that certified employees
are more productive in all
areas.
146
Chart 71: Overall IT Training Dollars Spent on Certification is Growing
$2.1 billion
$2.5
$2.0
$0.9 billion
$1.5
Billions
$1.0
$0.5
$0.0
1995 2001
Source: Wave Technologies
IT certification provides individuals and employers with a standardized
measurement of one’s understanding of a specific technical area. From an
employer’s standpoint, certification provides it a benchmark for quality, allowing
companies to quickly assess employees’ knowledge and ensure they have the
qualifications necessary to accomplish their jobs. This then translates to increased
productivity as well as reduced hiring and training costs associated with turnover.
According to IDC, more than 80% of IT managers report that certified employees
are more productive in all areas.
From an individual employee’s perspective, certification provides him or her with
instant credibility and a competitive advantage over non-certified employees. This
is particularly important in an economy where skilled workers are highly mobile
and manage their own career paths. Certification also provides the basis for a
higher salary and increased job opportunities. A recent survey showed that 42%
of certified professionals received promotions and 21% received salary increases.
Chart 72: Certification is a Win-Win for Both Employers and Employees
Push from Employers Pull By Employees
Benchmark for quality Competitive Advantage
Provides as a standardized measurement for Basis for higher compensation and
competencies in changing technologies Increased job opportunity
Increases productivity Establishes immediate credibility
Could potentially reduce number of “bad hires”
The growth in the number of certificates offered, coupled with the heightened
importance placed on certification by employers has created tremendous
opportunities for IT training companies such as Global Knowledge Network, CBT
Systems and Learning Tree, to name a few, as well as testing providers such as
Sylvan and National Computers Systems.
 The Book of Knowledge – 9 April 1999

Just a Few Companies Capitalizing on Opportunities in IT Training

CBT Systems is a global leader in the design and delivery of interactive education software develops interactive training
courseware that meets the information technology training needs of business, education, and government organizations
worldwide. CBT Systems publishes and markets a comprehensive library of more than 835 interactive education
software titles covering a range of client/server, mainframe, Internet, and intranet technologies. These courses, which
represent more than 3000 hours of self-paced technology instruction, are used by the world's leading corporations to train
employees to develop and apply mission-critical technologies in the workplace. The company also offers training for
certifications in Microsoft, Novell, Lotus, Oracle, Cisco, A+, Intel, Project Management and many more.
ExecuTrain Corporation is a leader in business technology training. The company's comprehensive, customer-focused
solutions include instructor-led and multimedia training for popular desktop applications plus course development and
training on client-specific software applications. Technical training and business skills training keep professionals
current on the latest technologies and techniques. Headquartered in Atlanta, the company has over 200 locations in 28
countries, and has trained more than 5.4 million people around the world.
Global Knowledge Network is the fifth largest provider of information technology training with centers in major cities
in North America and international offices in 21 counties worldwide. The company offers over 350 instructor led courses
covering a wide range of IT topics, which are taught in 18 different languages around the world. The company also
offers over 1,500 self-paced and multimedia programs in CD-ROM, videotape and audiotape formats.
Learning Tree International is currently the largest publicly traded IT training company with a primary focus
delivering instructor-led training to IT professionals. The Company develops, markets and delivers a broad, proprietary
library of instructor-led course titles focused on information technology topics such as client/server systems,
intranet/Internet technologies and computer networks. The Company also tests and certifies IT professionals in 27 IT job
functions, as well as offers 115 multimedia CBT course titles.
New Horizons is a leading provider of IT training educating over 2.7 million students each year. The company offers
more than 300 applications courses and 200 technical training courses, a customized courseware library of more than 800
titles that span nine languages, and multimedia computer-based training. With over 200 centers in 28 countries, New
Horizons offers courses on Microsoft, Novell, Lotus, Corel, Adobe, Aldus, Apple Computer, Symantec, Sun
Microsystems and UNIX, among other products.
Productivity Point International is a leading provider of customized technology learning solutions. Training over one
million students last year, PPI designs and delivers training solutions from desktop to enterprise-wide applications
including local area networks, application development, system migrations and client/server computing. The company
has over 130 locations throughout North America and offers over 700 courses crossing many technology disciplines.

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The Book of Knowledge – 9 April 1999
Table 82: IT Training Companies
Company
Aris Corporation
Canterbury Corporate Service CITI
CBT Group PLC
DigitalThink, Inc.
Executrain
Global Knowledge Network
ITC Learning Corp.
Learning Tree International
New Horizons Worldwide
NETg
Productivity Point International Private
Prosoft I-Net Solutions
ViaGrafix
Wave Technologies
International
Ziff-Davis Inc.
Source: Public Documents.
148
Ticker Website Description
ARSC www.aris.com Provides IT training through instructor-led, online, self-paced and computer-based
formats as well as IT consulting services.
www.canterburyxcel.com Provides computer-based training software and web-based training for both “off-the-
shelf” and customized training.
CBTSY www.cbtsys.com Publishes a library of more than 800 training titles covering a range of IT topics that
are delivered via CD-ROM or the Web.
Private www.digitalthink.com Offers Web-based IT training courses and online tutor support directed at computer
programmers, developers, and system administrators.
Private www.executrain.com Provider of instructor-led and technology based training in the area of information
technology with over 200 locations in 28 countries.
Private www.globalknowledge.com Fifth largest provider of information technology training courses for corporations
worldwide with over 350 instructor led courses and over 1,500 CD-ROM titles.
ITCC www.itclearning.com Provides educational multimedia, administrative software and approximately 600 CD-
ROM, intranet- and internet-delivered multimedia courses.
LTRE www.learningtree.com Develops, publishes and delivers advanced technology training courses for IT
professionals worldwide.
NEWH www.newhorizons.com Provider of IT training with over 300 applications courses and 200 technical training
courses, and a customized courseware library of more than 800 titles that span nine
languages.
Sub: H www.netg.com Provider of IT training with more than 600 training titles serving over 2,000 customers
worldwide. NETg is a subsidiary of Harcourt.
www.propoint.com Provider of instructor-led and technology based training in the area of information
technology with over 130 locations in North America and 700 titles. Productivity Point
is a subsidiary of Knowledge Universe.
POSO www.prosofttraining.com Provides Web-based training on Internet skills, including a certified Internet
Webmaster program.
VIAX www.viagrafix.com Provides IT training products and graphics software products for a variety of computer
software that is delivered on CD-ROM, LAN, and/or over the Web.
WAVT www.wavetech.com Designs, develops, markets, and delivers training and instructional products
addressing data communications, networking and client/server computing
technologies.
ZD www.ziffdavis.com Publishes over 500 IT training courseware titles, provides Internet and computer-
based training.
 The Book of Knowledge – 9 April 1999

11. Technology-Based Training: What the

HTML is Going On Here!?!
Technology Based Training • The same technology that is fueling our economy and increasing our need for
Market Statistics lifelong education and training has, not surprisingly, had significant
implications on how we deliver training. Total technology delivered-
Size of Market education is projected to grow from $3.0 billion in 1998 to $8.2 billion in
$3 billion 2001, a CAGR of nearly 40%. The IT technology based training component
Market Growth Rate is $2 billion and is expected to reach $7.7 billion by 2002.
40% • Recognizing the opportunities for cost savings as well as the benefits of
Public Companies convenience from the use of technology in training, a manager of a very large
CBT Systems training program told us, “we are done putting people on planes.” We believe
Asymetrix corporations will increasingly demand the use of technological solutions to
deliver content to employees, instead of vice versa.
• Web-based training is a growing component of technology based training and
is expected to grow from $197 million in 1997 to $5.5 billion by 2002,
representing explosive growth of 95% annually.
• Technology based training is projected to represent 55% of all training by
2002, up from 21% in 1998. We ultimately see the industry embracing a
hybrid solution, with an individual’s education combining the best of
technology-delivered education and classroom-based instruction.

Table 83: Megatrends Shaping the Technology-Based Training

Trend Impact
Demographics Generation X and Y is more tech savvy than any group before with computers essentially being
their second language.
Technology With the introduction of technology such as the Internet, video-conferencing and satellite systems,
corporations have strongly embraced the use of technology in their training programs as they now
can access training in a myriad of ways.
Globalization Technology-based training enables companies to provide its employees with consistent, timely
training regardless of where they were around the world.
Branding In such a highly fragmented industry made up of thousands of “mom and pop” shops, we believe
companies will rely on reputable brand name providers with a national presence to serve their
training needs. Moreover, brands will be more important over the Internet.
Consolidation Right now we are witnessing lots of “dating” between training content companies and technology
providers. Ultimately, we expect to see some merger and acquisition activity occur as companies
partner to provide effective technology-delivered training solutions.
Privatization/Outsourcing Companies depend on outside training companies who have the requisite expertise and are able to
provide effective technology based training solutions.

149
The Book of Knowledge – 9 April 1999

Technology-Based Training Is Taking Off

The same technology that is
fueling our economy and
driving our need for lifelong
education and training, not
surprisingly also transformed
how we deliver training
The technology that is fueling our economy and driving our need for lifelong
education and training, is, not surprisingly, also transforming how we deliver that
training. Corporations, more than any other group, have strongly embraced the
use of technology in for training, and this has created a dynamic group of
companies offering solutions in this sector.
Total technology delivered-education is projected to grow from $3.0 billion in
1998 to $8.2 billion in 2001, a CAGR of nearly 40%. The IT technology based
training component is $2 billion and is expected to reach $7.7 billion by 2002.
The demand for technology-delivered training (where content is delivered via CD-
ROM, the Internet or satellite) is driven by compelling economics and the
potential for greater effectiveness. Where employees once had to congregate in
one location to receive training, sometimes flying in from around the country or
even the globe, the training can now come to them. Anytime, anywhere
education can greatly increase student retention and satisfaction. Moreover,
companies increasingly prefer the convenience and cost effectiveness of learning-
on-demand versus learning in the traditional classroom.

Chart 73: Impressive Growth in IT Technology-Based Training

IT technology delivered- $7.7 Billion

education is projected to grow
from $2.0 billion in 1998 to CAGR 40%
$8.0
$7.7 billion in 2002, a CAGR of
$7.0
nearly 40%.
$6.0
$5.0
$2.0 Billion
$4.0
$3.0
$2.0
$1.0
$0.0
1998 2002

Source: International Data Corporation, 1998

Web-based training is a rapidly growing component of technology-based training,

expected to increase from $197 million in 1997 to $5.5 billion by 2002,
representing an explosive growth rate of 95% annually.

Chart 74: Web-Based Training Projected to Enjoy Explosive Growth

Web-based training is a
growing component of $5.5 Billion

technology based training and $6.0

is expected to grow from $197 $5.0 CAGR 95%
million in 1997 to $5.5 billion
$4.0
by 2002, representing explosive
growth of 95% annually. $3.0

$2.0 $197 Million

$1.0

$-
1997 2002

Source: International Data Corporation, 1998

150

Technology-based training is
forecasted to increase,
representing 55% of U.S.
training by 2002, up from 21%
in 1998, displacing classroom
training.
We ultimately see the industry
embracing a hybrid solution,
with an individual’s education
combining the best of
technology-delivered education
and classroom-based
instruction.
At the beginning of this decade
it cost $300 for an hour of
instruction using the traditional
classroom for delivery. By
2005, that same hour will cost
$0.03, an astonishing four
orders of magnitude difference.
The Book of Knowledge – 9 April 1999
IT training, in particular, lends itself to technology-based instructional methods,
and in this segment, technology-enabled training is expected to take off.
Classroom-led instruction currently dominates the IT training market in dollar
terms, capturing $7 billion, or 75.2% of the U.S. IT training market. Still, we
believe technology-based training, estimated to grow annually at 40%, will
quickly gain market share. According to IDC, the market share of instructor led
training is expected to decrease to 42% of U.S. IT training in 2002, down from
75% today. The winner is technology-based training, which is forecast to capture
a 55% share of the U.S. IT training market by 2002, up from 21% in 1998. Long
run, we don’t expect classroom training to disappear altogether; we ultimately see
the industry embracing a hybrid solution, with an individual’s training involving a
combination of the best of technology-delivered and classroom-based instruction.
Chart 75: Technology-Based Training Gaining Market Share in IT Training Industry
75%
80%
55%
70%
60% 42%
% of US Training
50%
40% 21%
30%
20%
10%
0%
Traditional Instructor Led Technology Based Training
1998 2002
Source: International Data Corporation, 1998
Big Benefits of Technology-Based Training Driving
Growth
Technology-based training has several significant benefits:
Reduces cost of training, both direct and indirect: Computer-based training
(CBT) and online training can reduce training costs over instructor-led training. A
congressionally mandated review of 47 comparisons of multimedia instruction
with more conventional approaches to instruction found time savings of 30%,
improved achievement and cost savings of 30-40%. According to Bill Raduchel,
Chief Strategy Officer for Sun Microsystems, at the beginning of this decade it
cost $300 for an hour of instruction using the traditional classroom for delivery
(not including course development). By 2005, Raduchel predicts, the same hour
will cost $0.03 when delivered through technology, an astonishing four orders of
magnitude difference. Recognizing the opportunities for cost savings as well as
the benefits of convenience from the use of technology in training, a manager of a
very large training program told us, “we are done putting people on planes.” We
believe corporations will increasingly demand the use of technological solutions to
deliver content to employees, instead of vice versa.
151
The Book of Knowledge – 9 April 1999
As a result of the immediacy of
technology-based training,
retention may be up to 250%
greater than the classroom-
based model.
Customized training programs
can be tailored for individual
employees, structured only to
cover the materials they need.
The organization that can link
training and performance can
use training as a powerful
competitive tool.
152
Table 84: Compelling Economic Benefits of Technology Based Training
Reduced costs per class . . .
• Three years ago it cost Novell $1,800 for a four day certification course that now costs $700-900
over the web. This doesn’t even capture the costs of the employee’s travel, lodging and time away
from job.
• The cost of a Cisco Systems instructor-led course is $1,200-$1,800, compared to only $120 over the
web.
Equates to tremendous savings . . .
• Hewlett Packard saved $150,000 in outside testing costs alone through online learning.
• The FBI’s National Security Division saved $2 million when it developed a distance learning course
to replace one full week of training at the FBI academy.
Source: Asymetrix Learning Systems
Increases relevance and retention of training: Technology can deliver education
“just in time,” at the moment an employee needs that information. In our view,
this is far superior to situations where employees attend hours of training classes
“just-in-case” the materials are needed at some point in the future. As a result of
the immediacy of many forms of technology-based training, employee retention of
information is frequently far superior to traditional forms of training. Studies have
indicated that retention of certain subject matter may be up to 250% greater with
computer-based or online training than the classroom-based model.
Individualizes training: One of the strengths of technology is its ability to collect
and interpret large amounts of information. Given this, some technology-based
training programs employ pre-training diagnostic studies to determine an
employee’s areas of strength and weakness. Then a customized training program
can be designed for that individual, structured only to cover the materials he or she
needs. This provides for more effective and efficient training.
“Information technology will bring mass customization to learning too . . .
Workers will be able to keep up to date on techniques in their fields. People
anywhere will be able to take the best courses taught by the greatest
teachers.”
—Bill Gates
The Road Ahead
Enables Knowledge Management: Technology also provides the opportunity to
collect and re-deploy knowledge throughout an organization. This highly
customized form of training, literally built by an organization, takes best practices
from one person or group, and distributes them to others within the same
company. The organization that can link training and performance can use
training as a powerful competitive tool.
 The Book of Knowledge – 9 April 1999

Chart 76: Benefits of Online Learning Versus Classroom Training

Classroom Online Learning

Access Limited 24 X 7

Quality Varied Consistent

Results Measurement Difficult Automatic

Retention of Information Varied High

Relative Cost High Low

Source: Asymetrix Learning Network

Technology-Based Training: The Basic Elements

Content is and always will be
king, whether in a classroom
setting or through the Internet.
We believe pure content
companies will increasingly
seek partnerships with
technology providers and vice
versa as both are looking for
ways to deliver what Corporate
America wants – convenient,
cost effective, technology-based
training solutions.
The basic elements of technology-based training are not earth, air, fire and water
but rather content, technology and service.
n Content
Content is and always will be king, whether in a classroom setting or through the
Internet. Many content owners, such as classroom-based training companies,
publishers and authors, are re-purposing their content for the digital world. The
best content takes advantages of the possibilities of the new medium rather than
simply putting text on an HTML page.
We believe pure content companies will increasingly seek partnerships with
technology providers and vice versa as both are looking for ways to deliver what
Corporate America wants – convenient, cost effective, technology-based training
solutions. For example, Pensare, a leading provider of engaging, interactive
intranet-based courses in performance improvement, has partnered with
universities such as Harvard, Wharton and the University of Southern California
giving companies access to best-in-class content from top universities delivered
directly to employee desktops.

Pensare
Pensare, a leading provider of engaging, interactive intranet-based courses in performance improvement, is one of the
first companies to enter into the “unifier arena”. Pensare combines the convenience of intranet delivery with first rate
content and interactive, engaging collaboration tools creating “knowledge communities”, where employees take
courses, learn from each other and share best practices. Results generated by each participant within the Knowledge
Community are automatically captured and organized within an accessible, intuitive library for participants to use and
benefit from. Through partnerships with top-class institutions, educators and experts such as Harvard Business School
Publishing, the Wharton School, the University of Southern California, a professor from Duke University's Fuqua
School of Business and leading author Anthony Parinello, Pensare offers courses in areas such as general
management, sales, marketing, finance and customer service. The company’s unique training model has already
attracted premier customers, such as Unisys, Hallmark and Fujitsu, to adopt Pensare technology.

153
The Book of Knowledge – 9 April 1999
Technology providers offer
software and hardware
programs to convert, deploy,
deliver and manage training
content.
The decision regarding which
delivery platform to use
depends on a number of
variables including the type of
content to be delivered, the
target audience, and the
technology resources available.
154
n Technology
Technology providers offer software and hardware programs to convert, deploy,
deliver and manage training content.
• Authoring Software – These software programs enable the development of
computer and web-based courses.
• Collaborative Software Tools – These software programs enable people to
work together over the Internet and include “virtual classrooms,” and
“meetingware” such as Microsoft’s NetMeeting, streaming media programs,
and “demoware” that enable employees at dispersed locations to
simultaneously review the same documents.
• Training Management Software – Also called Enterprise Training
Software, these programs provide corporate training coordinators with the
ability to manage the training process, with such features as employee
registration, monitoring and testing across the entire spectrum of offered
courses.
• Delivery Platforms – Technology-based training can be delivered in a variety
of ways including via CD-ROM, synchronous satellite, synchronous Internet
or asynchronous Internet.
The decision regarding which platform to use depends on a number of variables
including the type of content to be delivered, the target audience, and the
technology resources available. Asynchronous learning (two-way communication
in which there is a time delay between when a message is sent and received) is the
most flexible. When communication is accomplished via e-mail, voice mail, chat
rooms and threaded discussions, students are not forced to adhere to anyone’s
schedule and can participate when it is convenient for them. Synchronous
courses, on the other hand, are conducted in real time and require students to log
onto the Internet or join a video conference system and/or a conference call at a
specific time in order to participate in the instruction. Currently, companies are
choosing these two delivery options fairly equally.
Chart 77: Asynchronous Training Has A Small Market Share Over Synchronous Training
Synchronous
42%
Asynchronous
58%
Source: Training Magazine
While many companies participating in this industry found their start in just one
technology categories, many have evolved to now provide complete training
technology solutions that encompasses multiple capabilities.

We think technology providers
that offer a high-degree of
customer support will have the
happiest customers
Companies are now seeking to
“Webify” business functions,
from procurement to customer
service
Chart 78: Steps to Webify Training – Digify, Qualify & Quantify, Then Unify It
Content
Ideas
Words
Text
Source: Merrill Lycnh
To “digify” means to enable
transfer over the Internet.
To “qualify & quantify” is to
enable higher-order
management functions
The Book of Knowledge – 9 April 1999
n Service
Sorting through the diverse training options can be time consuming at best.
Several companies have sprung up to service corporate training organizations,
offering training program needs assessments as well as design and implementation
services. Other service providers will custom build courses using a third party’s
authoring software. Finally, service is an important component of any technology
sale. We think technology providers that offer a high-degree of customer support
will have the happiest customers.
Internet-Based Training: What the HTML Is Going
On Here!?!
The Internet has spread like wildfire, reaching a 25% market penetration in seven
years, faster than any new technology. Companies are now seeking to “Webify”
business functions, from procurement to customer service. Internet-based training
is growing like everything else associated with the new medium– at lightning
speed. To understand what Webifying training entails, we have put together a
simple graphic detailing the three degrees of web-based training.
UNI F Y
• Bring Together Variety of Content
• Provide Consulting and Technical Service
Digify Qualify &
Quantify
• Convert content to • Register employees
a digital format • Assess performance
• Manage content
portfolio
Digify: Put simply, to “digify” means to enable transfer over the Internet. This
might involve programming in an Internet language like HTML, using a software
program from RealNetworks to deliver lectures or videos, or using an Internet-
based conferencing software.
Qualify & Quantify: To “qualify & quantify” is to enable higher-order
management functions over the web, such as registering employees in a Web-
based course, assessing their skills, tracking their performance and designing
customized course schedules for these students. These programs enable training
coordinators to manage these activities across a portfolio of courses.
155
 The Book of Knowledge – 9 April 1999
To “Unify” is to determine a
comprehensive technology-
based solution specific to a
company’s needs
Service and content will become
increasingly important, with
technology and tools becoming
increasingly commoditized.
The marketplace is crowded
with several forms of
technology training and dozens
of providers offering “a total
technology training solution.”
Unifyers, in our view, who can
select the technology, digitize
content and service the system
have the competitive advantage
Currently we are witnessing a
lot of “dating” between
companies and technology
providers in the form of small-
scale and pilot programs.
We see significant opportunities
for many players in this
evolving industry.
156
Unify: To “Unify” is to determine what a comprehensive technology-based
solution looks like for a company based on their training needs, bring together
training content to meet those needs, and to deploy and manage the training
technology.
Technology-Based Training Providers: Living in the
Wild, Wild West
The history of Web-based training is short. Even so, we think it is not too early to
identify the likely winners. In particular, where early activity in this sector
focused on tools and technology, benefiting “digifyers” and “quantifyers &
qualifiers,” we believe there will be a strong shift in power to “unifyers” and to
content providers over the next couple of years.
Service and content will become increasingly important, with technology and tools
becoming increasingly commoditized. In these groups, we believe a few notables
will remain standing, those who have become or who have partnered with service
and content companies. Likewise, we would advise content providers to evaluate
their technology strategies. They may find themselves better off in a partnership
rather than heading into uncharted territory alone.
In the Wild West of technology-based training, lots of companies are “heading for
the hills” to stake their claims. While Corporate America seems convinced of the
effectiveness and benefits of technology, the marketplace crowded with several
forms of technology training (multimedia, internet/intranet and satellite-based, for
example) and dozens of providers offering “a total technology training solution.”
The confusion about which system and provider to use is palpable. This
environment gives an edge to Unifyers who can select the technology, digitize
content and service the system, taking the decision-making about implementation
out of the equation for a corporate customer, particularly for clients that do not
need a significant amount of custom content. Brand name companies like Arthur
Andersen and KPMG have identified this opportunity, and have begun to offer it
as a solution to their extensive customer list. We see other companies such as
Pensare, DigitalThink and Ninth House quickly entering into this market,
attempting to seize the opportunity.
The following chart highlights a few of the companies in this industry. As we
noted above, we believe there will be a lot of movement “upstream” as companies
seek to become the compete outsourced provider of a client’s training program
and as partnerships form between companies in these different areas. The
situation is still in flux, however, and we see significant opportunities for many
players in this evolving industry.
 The Book of Knowledge – 9 April 1999

Examples of Digifiers, Quantifiers &Qualifiers, and Unifiers

n Digifier
Asymetrix Learning Systems - Asymetrix is a provider of online enterprise learning solutions that enable organizations
to author, deploy and manage Internet-based training and education. For instance, Asymetrix started as an authoring
company with its ToolBook product line. Since then the company has expanded its offerings to include needs analysis,
learning management products, process consulting, custom content, and off-the-shelf content. Asymetrix offers a single
source training solution incorporating learning management and authoring software products with professional services,
including custom development, strategic consulting and integration services.

n Quantifiers & Qualifiers

Docent, Inc. - Founded in 1997, Docent, Inc. provides enterprise learning solutions to help organizations deliver,
manage, and measure organizational learning. Docent’s solution allows companies to assess existing employee
competencies; collect user profile data; create new, customized courses easily and effectively; integrate existing materials
such as CBT courses, word documents or powerpoint slides; register students online; deliver and manage enterprise-wide
learning, assessment, and certification online via a variety of learning technologies and measure training's effectiveness,
competency, and impact on business objectives. Docent enterprise learning solutions are currently installed at more than
70 corporate customer sites, including AT&T, Boeing, Lucent Technologies, and Veritas and Sun Microsystems.
KnowledgeSoft Inc. – KnowledgeSoft develops, delivers and hosts Web-based, enterprise workforce performance
systems that enable companies to use the Internet to align employee competencies and development to the company’s
business needs. KnowledgeSoft's three integrated workforce development systems — Competency Management,
Assessment Management and Training Management – allows the company to define the competencies and skills required
for the job, assess employee's understanding of subject material and manage the administrative functions.

Saba Software - Saba Software offers a complete, integrated enterprise training system that includes “front end” that
enables employees and customers to browse catalogs, register for courses online, and track their progress toward specific
goals. And a back end that measures the success of learning programs in terms of student achievement. It also tracks the
financial performance of the global system in terms of revenue and cost. Saba has an open architecture and can be
integrated with existing mission critical systems from SAP, Oracle, PeopleSoft, Baan, and other enterprise application
providers.

n Unifers
DigitalThink
DigitalThink is a provider of web-based training courses for programmers, developers, system administrators and end
users. DigitalThink designs, develops and delivers custom training for all types of students, from customer-focused sales
personnel to highly technical engineers. Course topics include Java, Windows NT Certification, Web programming and
publishing, database concepts and Internet literacy. DigitalThink's courses are easy to access, update and manage since
content is maintained on one server. The company’s training management system allows companies to track student
progress and assessment on a daily basis. Clients include Adobe Systems, Cirent Semiconductor, FedEx, Informix, Intel
Corporation, Johnson & Johnson, Merrill Lynch, Motorola, Raytheon, Silicon Graphics, Sun Microsystems and Texas
Instruments.

157
 The Book of Knowledge – 9 April 1999
Table 85: Technology-Based Training Companies
Company
7th Street.com
Allen Communication
Arthur Andersen Virtual
Learning Network
Asymetrix Learning Systems
Caliber Learning Network
Centra Software
Course Technology
Digital Enterprises
Docent
Eloquent, Inc.
Headlight.com
ILINC
Integrity Training
Interactive Media Corp
Internal & External
Communication Inc.
ITC Learning Corp.
IXL
KnowledgeSoft
Learning Byte International
Macromedia
Micro Training Associates
m-Powa
Multi Media Team Training
NetSage Corporation
NIIT, Inc.
Ninth House
Source: Public Documents
158
Ticker Website Description
Private www.7thStreet.com Develops Internet software tools and technologies for the preparation and
streaming of real-time, intelligent, interactive animated content and characters
over the Internet and other networks.
Sub: TEMP www.allencomm.com Provides multimedia training software to corporate and education clients,
including authoring and course management tools.
Subsidiary www2.aavln.com Offers a comprehensive web-based learning solution including consulting,
content and technology.
ASYM www.asymetrix.com Provides multimedia training software to corporate and education clients,
including authoring and course management tools.
CLBR www.caliberlearning.com Provides a nationwide network of satellite-linked professional learning
campuses that offers corporations and employees a classroom environment
featuring live, real-time instruction.
Private www.centra.net Created a Web-based collaboration system that enables people to work
together in real-time for training and other purposes.
Subsidiary www.course.com As publisher of electronic textbooks, the company has over 800 titles used at
thousands of colleges, universities, technical schools and vocational schools
worldwide. The company is a division of International Thomson Publishing.
Private www.digitalenterprises.com Develops computer-based training (CBT) and interactive communications
products and services.
Private www.docent.com Provides software that enables corporations to create, deliver, and administer
training programs as well as link training to corporate performance.
Private www.eloq.com Produces digital video content for corporate applications, transforming live
speech into multimedia presentations delivered via CD-ROM or the Internet.
Private www.headlight.com Distributes Web-based training from multiple vendors through an e-commerce site.
Offers information technology, softskills and certification training as complete
courses as well as smaller lessons ranging in length from 2 to 20 minutes.
Private www.ilinc.com Provides online learning solutions for the Internet, Intranet and wide area
network environments.
Private www.integritytraining.com Provider of training management system that allows corporations to track,
administer and deliver Web-based training
Sub: AATI www.aati.com Creates technology- and Web-based training using leading-edge multimedia
technologies.
Private www.iec.com Designs interactive multimedia training programs and electronic performance
support systems.
ITCC www.itclearning.com Provides educational multimedia, administrative software and approximately
600 CD-ROM, intranet- and internet-delivered multimedia courses.
Private www.ixl.com Produces an integrated suite of services and tools to design, create and
manage online learning and performance support programs.
Private www.knowledgesoft.com Develops and builds enterprise knowledge management systems for training
programs.
Private www.iatusa.com Provides customized, online learning solutions utilizing sound instructional
design and multimedia technology resulting in an interactive learning
environment
MACR www.macromedia.com Delivers Internet tools and technologies applicable to training program
development.
Private www.microtrain.com Provides custom instructional design and development services using CBT,
multimedia and web-based alternatives.
Private www.m-powa.com South African company that provides interactive web-based solutions using
intranet technologies, multimedia education training and electronic
performance support systems.
Private www.multimediateamtraining.com Authors multimedia computer-based training programs for corporate clients.
Private www.netsage.com Develops intelligent, animated software agents called “Sages” that make
computer-based training more personalized, efficient and entertaining.
(Bombay: www.niit.com A global IT services company, develops educational multimedia software and
NIIT.IN) conducts instructor-led and technology-based training.
Private www.ninthhouse.com Created an online learning network delivering interactive business-skills using
experiential learning and multimedia.
 The Book of Knowledge – 9 April 1999

Table 85: Technology-Based Training Companies (Continued)

Company Ticker Website Description
One Touch Sub: GMH www.onetouch.com Provider of Interactive Distance Learning (IDL) Systems that fully integrate
video, voice, and data to deliver live, real-time training and education.
Pathlore Software Private www.pathlore.com Offers an integrated training software solution that includes authoring tools,
course content, course administration software and course delivery to
corporate clients.
Pensare Private www.pensare.com Creates intranet-based performance improvement courses in partnership with
first class business schools and well-recognized seminar providers.
Prosoft I-Net Solutions POSO www.prosofttraining.com Provides Web-based training on Internet skills, including a certified Internet
Webmaster program.
RealNetworks RNWK www.realnetworks.com Develops software products and services enabling real-time transmission of
audio and visual broadcasts within the current network infrastructure.
SABA Software Private www.sabasoftware.com Provides a fully integrated suite of web-based enterprise applications for
creating learning environments in global organizations.
Skillsoft Corporation Private www.skillsoft.com SkillSoft Corporation develops and markets a comprehensive library of
technology-based education products focused on a wide range of business
and professional development skills such as management, leadership,
communication, finance and marketing.
Spyglass, Inc. SPYG www.spyglass.com Develops, markets and distributes Internet enabling technologies, content and
professional services that allow non-PC devices to work with the Internet.
VSI Holdings VIS www.vsiholdings.com Offers education and training systems design and development as well as
education through satellite and Internet.
WBT Systems Private www.wbtsystems.com Offers a web-based education and training management solution for higher
education and the corporate markets.
Source: Public Documents

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The Book of Knowledge – 9 April 1999

12. Early Education and Child Care: The

Beginning of Learning
• The child care market is huge, at $34 billion, and is still growing at a healthy
Child Care Market Statistics
6% annually. The market is extraordinarily fragmented, with over 100,000
Size of Market centers.
Overall : $34 billion • Only one-third of child care facilities are operated on a for-profit basis.
Corporate: $2 billion Remarkably, the largest 50 companies offering this service represent just 6%
For Profit: $11.5 billion of the market, and only twenty-three of these operators have more than 25
Market Growth Rate centers. Just seven companies manage 100 or more centers.
Overall: 6%
Corporate: 20% • As the American workforce evolves, so does the American workplace,
For-Profit: 10%
moving to accommodate the new American family. In 1992, work-site
childcare accounted for $700 million of the industry total. This sector has
Public Market Capitalization grown at 25% annually, to $2 billion in 1997. Bright Horizons Family
$400 million Solutions is by far the largest provider of work-site childcare with 278 total
Largest Companies
centers and revenues of approximately $210 million.
(# of Centers) • Due to the realities of today’s marketplace we predict in the next 10 years that
KinderCare corporate-sponsored child care will be a standard benefit for employees
La Petite (whether that care is delivered at the work-site or at a community center),
ARAMARK much like health care coverage is today, providing even more momentum to
Tutor Time this segment.
Knowledge Beginnings
• Savvy, well-capitalized investors, such as KKR, Knowledge Universe and
Bright Horizons Family Solutions Chase Ventures have all invested in this segment recently. We view this as a
very positive sign for the industry.

Table 86: Megatrends Shaping the Early Education & Child Care Industry
Trend Impact
Demographics Today only 7% of families resemble the stereotypical Ozzie and Harriet model of a never-divorced working father and stay-at-
home mother. Over 60% of mothers with children under age 6 are working outside the home compared to 19% in 1960,
creating a growing demand for child care. Access is a particular problem for the 20% of our children who live below the
poverty line.
Technology Child care remains a human-intensive business, and caregivers will not be displaced by computers. Still, high-end child care
centers now introduce children to computers, preparing them for technology literacy, the most important second language of
the next century.
Globalization The corporate need for talented employees is rising, fueled by a knowledge-based economy and an increasingly mobile
workforce. Unemployment is at its lowest rate in 25 years, putting additional pressure on businesses to attract and retain top
talent. This combination of these two forces creates a compelling market opportunity for high-quality child care providers.
Branding Parents are shifting their children to center-based child care programs, away from home-based care. A strong movement
toward accreditation and an intensifying awareness of the educational quality of childcare programs will enable companies to
increasingly differentiate themselves.
Consolidation The childcare industry is a highly-fragmented cottage industry, with few large players. As scale, branding, curriculum and the
need to attract quality teachers become more important and as parents increasingly look to center-based care, we believe
there will be consolidation.
Privatization/ As the knowledge worker is increasingly freed from the corporate organization, companies seeking to attract and retain them
Outsourcing are providing family-friendly benefits such as sponsoring high-quality child care. Due to growth in working mothers, many
parents “outsourcing” a portion of the children’s early education to child care providers.

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 The Book of Knowledge – 9 April 1999

The Growing Child Care Industry

Over 60% of married mothers
with children under age 6 are The trends shaping child care are similar to those shaping the overall education
industry, although the industry has been particularly affected by demographic
working outside the home changes. Today only 7% of families resemble the stereotypical Ozzie and Harriet
compared to 19% in 1960. model of a never-divorced working father and stay-at-home mother. Over 60% of
married mothers with children under age 6 are working outside the home
compared to 19% in 1960. More than three out of four married employees have
spouses who are also employed—an increase from 66% to 78% over the past 20
years. Nearly one in five employed parents is single, and among employed single
parents, 27% are men.
During this period of significant demographic change, the child care industry has
grown substantially, growing from $18 billion in 1990 to $35 billion in 1998.
During this period of Chart 79: Child Care Industry Enjoying Strong Growth
significant demographic
change, the child care industry
has grown substantially, 40
34.0
growing from $18 billion in 35
28.5
1990 to $35 billion in 1998 30
25
18.3
20
15 11.5
10 5.7
5
0
1982 1985 1990 1995 1998

Source: Marketdata Enterprises, Inc. and Merrill Lynch.

This market is wildly fragmented, with about 100,000 centers in the U.S.
Incredibly, the largest 45 companies in this sector only capture 5% of the market.
For-profit chains overall capture just 6%.

Chart 80: For-Profit Chains Only Capture 6% of The Child Care Market

For-Profit Chains
6%
This market is wildly
fragmented, with about 100,000 25% Independent For-
centers in the U.S. Incredibly, Profits
the largest 50 companies in this Head Start
29%
sector only capture 5% of the
market. Church Housed

8% Public School

8% Other Sponsored
9% Non-Profit
15% Independent Non-
Profit

Source: Willer, Barbara, et. al., The Demand and Supply of Child Care in 1990, NAECY, as cited by Child Care
Information exchange. We do not believe the for-profit/not-for-profit percentage allocation has changed materially since
this study was published.

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The Book of Knowledge – 9 April 1999

Only one-third of child care
facilities are operated on a for-
profit basis
Only one-third of child care facilities are operated on a for-profit basis. The
largest 50 companies offering this service represent just 5% of the market, and
only twenty-one of these operators have more than 25 centers. Just seven
companies manage 100 or more centers. KinderCare is the largest for-profit
provider, followed by La Petite Academy, Children’s World Learning Centers and
Childtime Learning Centers.

Table 87: Leading For-Profit Child Care Providers

Company Capacity Centers
KinderCare Learning Centers, Inc. 144,000 1,150
La Petite Academy 98,477 742
Children’s World Learning Centers 65,545 548
Childtime Learning Centers 34,818 278
Bright Horizons Family Solutions 33,963 272
Knowledge Beginnings (was Children’s Discovery Centers) 27,183 271
Nobel Education Dynamics, Inc. 27,000 141
New Horizon Child Care 11,363 81
Childcare Network 10,327 81
The Sunshine House 8,710 61
Source: Child Care Information Exchange. Data as of January 1, 1997.

Higher income families are
now much more likely to enroll
their preschooler in a center-
based program
One of the subsectors of the
industry that has shown
tremendous growth, has been in
worksite child care
Whether because of cost, convenience or quality of care, higher income families
are now much more likely to enroll their preschooler in a center-based program
than to rely on relatives or home-based care. Families with incomes between
$40,000 and $50,000 who utilized child care for their 3-5 year old chose center-
based care 55% of the time. This increased to 82% for families with incomes
above $75,000.
One of the subsectors of the industry that has shown tremendous growth, has been
in worksite child care. As the American workforce evolves, so has the American
workplace, moving to accommodate the new American family. In 1992, work-site
childcare accounted for $700 million of the industry total. This sector has grown
at 25% annually, to $2 billion in 1997.

Chart 81: Corporate Child Care Growing at 25%

In 1992, work-site childcare

accounted for $700 million of
the industry total. This sector $700 million $2 billion
has grown at 25% annually, to $700 million
$2 billion in 1997.
1992 1997
1992

$23 billion
$23 billion $30 billion

Work-site Industry

Source: Child Care Information Exchange.

Bright Horizons Family Solutions is by far the largest provider of work-site

childcare, with 248 centers, versus 81 for the next largest competitor, Knowledge
Beginnings.

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 The Book of Knowledge – 9 April 1999

Table 88: Top Corporate Child Care Management Organizations

Bright Horizons Family Company # of Corporate
Solutions is by far the largest Centers (1)
provider of work-site childcare, Bright Horizons Family Solutions 248
with 248 centers, versus 81 for Knowledge Beginnings (was Children’s Discovery Centers/Hildebrandt) 81
the next largest competitor, Childtime Learning Centers 35
Knowledge Beginnings. ARAMARK Educational Resources 30
KinderCare Learning Centers 43
Mulberry Child Care Centers 15
La Petite Academy 29
Nobel Learning Communities 3
Source: Child Care Information Exchange, March 1999.
(1) Excludes Developer-sponsored centers and office-park centers, generally constructed for multiple employers. BFAM,
for example, has 30 such centers.

Backup care, offered to
corporations by companies such
as Bright Horizons Family
Solutions and ChildrenFirst,
Inc., can be a highly cost-
effective way to reduce
absenteeism and stress on the
job.
Emergency back-up child care is another offering corporations are making
available to employees. A major cause of employee absenteeism is child care
arrangements falling through, such as when the normal caregiver is sick or on
vacation. Backup care, offered to corporations by companies such as Bright
Horizons Family Solutions and ChildrenFirst, Inc., can be a highly cost-effective
way to reduce absenteeism and stress on the job. As the following Hewett
Associates study shows, 15% of large corporations offer some form of backup
care, up from 8% in 1993.
Chart 82: % of Large Companies Offering “Family Friendly” Benefits

As the following Hewett

Employee Assistance Programs
Associates study shows, 15% of
large corporations offer some Child Care Assistance (1)
form of backup care, up from
Flexible Sheduling
8% in 1993.
Elder Care Programs

Adoption Benefits

0% 20% 40% 60% 80% 100%

1992 1997

(1) 97% of participating companies offered a dependent care spending account. 42% of companies offered some type
of resource and referral service. Sick or emergency child care programs identified as “an emerging trend,” with
15% of these employers offering this benefit.
Source: Hewitt Associates.

Case Study — Bright Horizons Family Solutions

Bright Horizons is a leading provider of early childhood education and family support services to the corporate market.
The company works with more than 200 employers, including 68 of the Fortune 500, companies such as Johnson &
Johnson, IBM, Chase Manhattan and Time Warner. Bright Horizons helps its clients develop family friendly work
environments through the additions of such services as work place child care and education, emergency backup child care,
before and after school care, and other family support programs. These programs work — 40 of Working Mother’s “100
Best Companies for Working Mothers” are clients of Bright Horizons Family Solutions.
Bright Horizons Family Solutions is three times larger than its nearest competitor in the corporate pre-schools market, and
is the only large provider that focuses exclusively on corporate clients. The company has a sterling reputation and has the
highest percentage of centers accredited by the National Association for the Education of Young Children (80% of all
centers) of any child care organization. Bright Horizons serves 35,000 children at its 274 centers.

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The Book of Knowledge – 9 April 1999
At the same time that fewer
mothers are staying at home
full-time with their children,
educators and scientists are
recognizing the critical
importance of the learning
environment in the first few
years, even months, of a child’s
life.
A 1996 Carnegie Foundation
study on child care found that a
majority of pre-schoolers are
enrolled in substandard
programs
We cannot hope to solve the K-
12 problem (i.e. the fact that
43% of fourth graders can’t
pass a basic reading test, for
example) until we solve the “0-
5” problem.
164
Parents, Corporations and Politicians Increasingly
Concerned About Child Care
At the same time that fewer mothers are staying at home full-time with their
children, educators and scientists are recognizing the critical importance of the
learning environment in the first few years, even months, of a child’s life. We
have long known the relationship between what children learn in the third grade
and how well they perform in the eleventh grade, and that their achievement in
high school is highly correlated with how they fare later in life. Increasing
evidence now indicates that what an infant learns at three months and three years
affects how he or she does in the third grade. The experiences of early childhood
are critical links to a successful future. The problem is that the learning a child
had traditionally done at home with mother as a teacher is increasingly being
“outsourced” to a child care center, many of which are ill prepared to provide
children the early education they need. This reality is affecting parental decisions
about child care, and, increasingly, decisions about where (and for higher income
families, whether) to pursue a career.
A 1996 Carnegie Foundation study on child care found that a majority of pre-
schoolers are enrolled in substandard programs. Only one out of seven programs
was rated good or excellent, while four out of five programs flunked quality
standards. An far worse, one out of eight children in child care is in a situation
that endangers their health or safety.
Millions of children are "preschoolers" in name only — they are not being
given the preparation and tools they need to be ready to learn.
—Marian Wright Edelman
Children’s Defense Fund
Child care providers should help children develop the learning skills that had
traditionally been cultivated at home under a parent’s watchful eye. In analyzing
education reform, it becomes obvious that we cannot hope to solve the K-12
problem (i.e. the fact that 43% of fourth graders can’t pass a basic reading test, for
example) until we solve the “0-5” problem. However, as the chart below shows, it
is “reverse economics” when it comes to the education of our nation’s youngest
citizens.
Chart 83: Reverse Economics In Education — Are We Spending Our Money
In the Right Place?
20,000 18,800
18,000
Annual Expenditure per Pupil
16,000
14,000
12,000
10,000
8,000 6,600
6,000
4,000 3,000
2,000
-
Under 5 Ages 6-18 Over 18
Source: Digest of Education Statistics, 1996.
 The Book of Knowledge – 9 April 1999

We Predict Corporate Child Smart companies are taking advantage of parental concern over childcare by
Care Will Be A Standard sponsoring pre-school programs, whether it be on-site day care, back up care or
Benefit in 10-20 Years tuition sponsorship at quality neighborhood sites. These benefits have proven
valuable in attracting, retaining and increasing the productivity of talented workers
today, not to mention educating the workforce of tomorrow. The bottom line is,
family friendly benefits help build better companies.

A stock price index of Bright Corporate-sponsored child care is a “nice” thing to do for employees, but it is far
Horizons Family Solutions’ more than that. We believe it has also helped these companies achieve top
performance in the public markets. To provide substance to this thesis, we created
client was up an impressive a stock price index of the public companies served by Bright Horizons Family
124% compared to 100% for the Solutions, the leading provider of corporate family services, such as on-site child
S&P 500 care and back up day care, and compared it to the performance of the S&P 500
over the past three years (1996-1998). While the S&P 500 showed a very strong
99.6% return over the past three years, the BFAM client index performed even
We believe the high correlation better. It was up an impressive 124.4%, with total return exceeding the S&P by 25
between providing critical percentage points.
family benefits to the We believe that what these results show is that there is nothing contrary (in fact
knowledge worker and return just the opposite is true) with showing innovative and progressive solutions for
on investment will catalyze the employees and delivering returns for shareholders. The results of our analysis
corporate child care industry. give credence to our thesis that providing family services is not a “feel good”
initiative but an indicator of companies that “get it” and understand the value of
human capital and how to have a more happy, productive and loyal workforce.

Chart 84: BFAM Clients Outperform the S&P 500

240
220
200
180
160
140
120
100
Dec-95

Feb-96

Jun-96

Oct-96

Dec-96

Feb-97

Jun-97

Oct-97

Dec-97

Feb-98

Jun-98

Oct-98
Apr-96

Aug-96

Apr-97

Aug-97

Apr-98

Aug-98

BFAM Clients S&P 500

Source: Merrill Lynch. Equal-weighted index of shares of the 76 public companies served by Bright Horizons Family Solutions.

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The Book of Knowledge – 9 April 1999
In 1997 the White House held
a Spring conference on early
childhood development and a
Fall conference on child care.
Savvy, well-capitalized
investors, those that are always
early and usually right, have
added up the trends and clearly
identified the opportunity in
early childhood education.
The average cost of child care
in the U.S. is just over $5,000
per year, or approximately $100
per week (although this varies
widely from city to city, and
care for younger children is
more expensive).
166
We think that a lot of companies are going to wrestle with attracting and retaining
employees from a workforce where 80% of the families are single parent or dual
income. We believe the conclusion that there is a high correlation between
providing critical family benefits to the knowledge worker and return on
investment will catalyze the corporate child care industry. Due to the bottom-line
benefits of corporate-sponsored care, we predict in the next 10 years that
corporate-sponsored child care will be a standard benefit, much like health care
coverage is today, providing even more momentum to high quality companies
providing center-based care.
Politicians are getting into the game too. In 1997 the White House held a Spring
conference on early childhood development and a Fall conference on child care.
President Clinton proposed a five-year $21.7 billion initiative aimed at improving
the quality and accessibility of early education and childcare, including tax credits
for corporations that pay for child care. The proposal was not legislatively
approved (it was tied to the ill-fated tobacco bill), but was instrumental in raising
the profile of this issue. A few high-profile legislators have since expressed
interest in championing federal tax breaks for employer-sponsored child care, and
the President’s fiscal 2000 budget includes a five-year $500 million tax credit for
corporations providing child care services for their employees. Such legislation
has the potential to benefit child care providers in the future.
Savvy, well-capitalized investors, those that are always early and usually right,
have added up the trends and clearly identified the opportunity in early childhood
education. KKR’s purchase of Kindercare was the first evidence of this, although
KKR was followed by Knowledge Universes’ acquisition of Children’s Discovery
Centers and Chase Ventures’ purchase of La Petite Academy.
Key Issues In Child Care
Unforgiving Center Economics. The average cost of child care in the U.S. is just
over $5,000 per year, or approximately $100 per week (although this varies widely
from city to city, and care for younger children is more expensive). Given the
labor intensity of this business, it can be a challenge for center operators to
achieve profitability. Labor accounts for 60% of revenues for for-profit
companies, and occupancy costs consume nearly another 20%. (Not-for-profit
centers often enjoy lower facilities costs because they receive subsidies from
churches or other sponsors). Under such an economic structure, ensuring that
children come in the door every morning is paramount – two fewer children over
the course of the year would nearly eliminate a company’s profitability under the
following cost structure.
Table 89: Average Child Care Center Economics
Dollars All Centers For Profit Centers
Annual Revenue $330,000
# of Children 65
Variable Costs
Labor 227,700 69% 60%
Food 13,200 4% 4%
Supplies/Service 26,400 8% 10%
Other 6,600 2% 2%
Operating Margins 273,900 83% 76%
Occupancy Costs 42,900 13% 19%
Pre-Tax Margin 13,200 4% 5%
Source: Suzanne Helburn. Cost, Quality and Child Outcomes in Child Care Centers, as cited by Child Care Information
Exchange.

In a 1997 survey, 80% of CEOs
reported that the shortage of
qualified teachers was a “major
threat” to their organizations,
by far the most pressing factor
identified.
A growing number of child care
providers are seeking to qualify
their centers for accreditation
by the National Association for
Young Children, putting an
official stamp of quality on
these centers.
Currently, fewer than 10% of
child care centers nationally
are formally accredited.
We predict accreditation will be
increasingly important and
that accredited providers will be
able to premium price their
services.
The Book of Knowledge – 9 April 1999
We note that the average capacity for the ten largest for-profit child care
companies is 140 children, significantly more than the industry average of 65.
The larger centers provide companies with greater leverage over fixed facilities.
Illustrating a recognition of this trend is, for example, the fact that new facilities
(post-1991) in the KinderCare network are 25%+ larger than the average center
built before 1991. The strategy at Tutor Time, the country’s fourth largest
provider, also reflects a clear understanding of this opportunity. Tutor Time
centers, with an average capacity of 180 children, are much larger than the typical
center and are built using a standard layout that is designed to accommodate the
optimal student-teacher ratio.
Vigilance in Staffing & Training. Finding and keeping qualified teachers is a
perennial concern of child care executives. In a 1997 survey, 80% of CEOs
reported that the shortage of qualified teachers was a “major threat” to their
organizations, by far the most pressing factor identified. In 1990, pre-school
teachers in centers earned approximately $11,500 per year compared to a public
school teacher’s salary of $36,900. Many teachers are paid hourly and
compensation may or may not include benefits. Turnover in the business is
significant.
Attracting and retaining the right staff, however, is the primary determinant of the
quality of a child’s experience in preschool. In 1994, when a panel of childcare
executives rated the factors contributing to quality in a center, the first four factors
were staff related—center leadership, teacher training, teacher-student ratios and
teacher morale. Bright Horizon Family Solutions, the leading provider of
corporate-sponsored child care, has made building a strong staff a mission. Not
only does the company pay 20-30% above market rates for directors and teachers,
it offers full benefits, stock options to its center directors, and a comprehensive
training program. We believe its proactive approach to staffing is a prime reason
Bright Horizons is acknowledged as providing exceptionally high quality services
to its corporate clients, and earns the market valuation it does.
Accreditation A Competitive Advantage. Just as parents tend to overestimate the
quality of their local public school, parents are not always able to differentiate the
quality of child care programs beyond a simple visual evaluation. To respond to
what we see as a clear market opportunity, a growing number of child care
providers are seeking to qualify their centers for accreditation by the National
Association for Young Children (NAECY), putting an official stamp of quality on
these centers. To be accredited by NAEYC, the one accrediting body for child care
programs, a center must meet low student-teacher ratio requirements and teach
children in a way that addresses all aspects of their development – emotional,
social, physical and cognitive. Fewer than 10% of child care centers nationally are
formally accredited.
Table 90: NAECY-Accredited Centers Demonstrate Higher Quality
Lower teacher-child ratios than most state licenses require
(2-3 infants, 5-7 toddlers or 8-10 preschoolers per teacher)
Staff specialized in early childhood education
A developmentally appropriate environment with age appropriate activities
A child-centered physical environment
Better health and safety provisions, including nutrition and food service
Source: National Association for Young Children
We believe parents will increasingly view accreditation as essential when
choosing their child’s preschool and that accreditation will enable these centers to
premium price their services and develop distinctive brands. Awareness of this
yardstick is rising, and as the shift to center-based care continues, we expect to see
accreditation increasingly used as a means of differentiating quality child care
centers from those that simply meet minimum safety standards. Educated parents
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The Book of Knowledge – 9 April 1999
Many child care companies are
formally integrating the
findings of scientists and early
education specialists into a
educational “curriculum” for
infants and toddlers.
We see significant opportunities
for companies at the top end of
the quality spectrum to leverage
their assets to increase both
revenues and margins.
We believe child care
companies can build on the
positive experience enjoyed by
their preschool aged children
by increasing services for
children in grades K-12, such
as after-school programs,
summer camps, or tutoring
programs.
The majority of funding for
childcare is a family’s own
resources. The Census Bureau
reports that at $5,000 annually,
child care consumes between
7% and 27% of a family’s
budget.
168
are increasingly considering the learning environment when placing their children,
seeking programs with structured curriculum, high-quality facilities, increased
social interaction, and experienced, educated personnel. Over 80% of children
who have attended a child care center are children of college graduates, and
parents are increasingly viewing this experience as a way to give their kids’
education a jump start. Bright Horizons Family Solutions operates all its centers
to meet NAECY standards and is in the process of accrediting all of its centers.
Children’s World has also actively sought accreditation, with 40% or more of its
centers accredited so far.
Growing Early Education Focus: Many child care companies are formally
integrating the findings of scientists and early education specialists into a
educational “curriculum” for infants and toddlers. Tutor Time, KinderCare, and
Bright Horizons, for example, have an education specialist on staff to design and
deploy learning programs for children and training for teachers. Most are
following a learning-by-doing philosophy that draws together elements that
provide each child with developmentally appropriate learning opportunities, such
as mastering motor skills or gaining a love for language well before reading.
Adding Additional Products and Services To the “Box”. We see significant
opportunities for companies at the top end of the quality spectrum to leverage their
assets to increase both revenues and margins. These companies serve a highly-
targeted demographic of kids ages 0-5 and their parents, with whom they have a
powerful, trust-based relationship. Age-appropriate or education-oriented
software, toys, books or lessons could be sold through their networks, increasing
the leverage on “bricks and mortar” facilities.
In addition, these companies can build on the positive experience enjoyed by their
preschool aged children, as well as better utilize its facilities by increasing services
for children in grades K-12, such as after-school programs, summer camps, or
tutoring programs. This provides an opportunity to serve the approximately 25%
of their students that previously “graduate” at age five. The TesseracT Group has
taken this concept further, recognizing that childcare is conducted primarily five
days a week, during the hours of 7 am to 5 pm, has implemented the most
comprehensive strategy we have seen to leverage its facilities, brand name and
customer base. In Phoenix, the company has several Sunrise preschools that
funnel students to its proprietary and charter K-12 schools in the area. And in the
evenings, the company offers IT training for adults at these same facilities,
significantly increasing utilization of the centers. Nobel Learning Communities is
also pursuing a clustering strategy to serve children from zero to eight grade. We
believe the increased flexibility of charter school legislation will further enable
these types of opportunities.
Access for Low-Income Children. Unlike K-12 education, by far the majority of
funding for child care is a family’s own resources. Religious or non-profit
organizations may subsidize some care, and public school sponsored centers can
also reduce parental costs. Head Start, available for children as young as three,
requires no parental outlay. However, these programs only reach a fraction of the
children who could benefit from an educationally enriched environment at an early
age. One of the most, if not the most, vexing problems in child care today is the
inability of lower-income families to access quality care. This is increasingly
difficult in an era of welfare reform, where capable parents are given no choice but
to work outside the home, creating additional pressure to find affordable care. The
Census Bureau reports that at $5,000 annually, child care consumes between 7%
and 27% of a family’s budget. At the lowest end of the income scale, however,
center-based care is simply unattainable.

We see employer-sponsored
care as a big idea, creating a
win-win-win situation where
employers, families and society
benefit.
We have created a childcare
and preschool scorecard that
summarizes some of the key
issues we look at when
evaluating companies in this
industry.
The Book of Knowledge – 9 April 1999
We believe that employer-sponsored care, which is provided as a benefit to
working parents (from the CEO to the cleaning staff) can increase access for all
children. We see employer-sponsored care as a big idea, creating a win-win-win
situation where employers, families and society benefit.
Childcare Scorecard
We have created a childcare and preschool scorecard that summarizes some of the
key issues we look at when evaluating companies in this industry.
Table 91: The Preschool Scorecard
Metric Relevance Importance
% of Centers Accredited Powerful indicator of quality of care that enables companies
15
to premium price.
Pricing Flexibility Quality and breadth of services gives pricing flexibility, as
15
does corporate sponsorship.
Annual Teacher Lower turnover rates decrease recruiting and training costs
10
Turnover Rates and increase quality.
Formal Curriculum Parents want a place where children can learn, not just be
10
cared for.
Facility Utilization Increasing utilization has tremendous bottom-line benefits. 10
Business Model Who pays, and how frequently? Indicator of revenue
10
visibility.
Margins A key indicator of operating efficiency— and potential for
10
future growth.
Return on Investment Child care can be capital intensive. How productive are
10
these investments?
Use of Technology Computer usage at an early age can engage children as
5
well as give them a head-start in our tech-based society.
Ancillary Services Additional products and services increase leverage and
5
capitalize on parent relationships.
Source: Merrill Lynch.
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The Book of Knowledge – 9 April 1999
Table 92: Child Care and Early Education Companies
Company
Bright Horizons Family
Solutions
Ceridian Performance Partners Sub: CEN
Children First
Children’s World Learning
Centers
Childtime Learning Centers
Crème De La Crème
DCC/Dependant Care
Connection, Inc.
Kids 'R Kids International
KinderCare Learning Centers, KDCR
Inc.
Knowledge Beginnings
La Petite Academy
Lipton Corporate Child Care
Centers, Inc.
Mulberry Child Care Centers
New Horizon Child Care
New Horizon Kids Quest
Nobel Learning Communities
Rainbow Rascals Learning
Center
TesseracT Group, The
Tutor Time Child Care
Systems, Inc.
WorkLife Productions
Source: Public Documents.
170
Ticker Website Business Description
BFAM www.brighthorizons.com Provides workplace services for employers and families including childcare,
early education and strategic worklife consulting
www.ceridian.com Provider of work/life services, including employee assistance programs,
concierge and managerial services. Purchased WFD’s work/life services
business.
Private www.childrenfirst.com Develops and operates backup child care centers for corporate clients
Subsidiary www.childrensworld.com Operates early childhood and elementary educational programs in 24 states.
Owned by ARAMARK.
CTIM www.childtime.com Operates Child care centers in 19 states
Private Not available Operates 7 high end franchise based childcare centers.
Private www.dcclifecare.com National provider of work/life and dependent care counseling, education and
referral services
Private www.kidsrkids.com Child care provider with schools in nine states. Headquartered in Atlanta.
Franchise growth model.
www.kindercare.com Provides child care and pre-school education services at proprietary centers in
38 states and the United Kingdom
Private www.knowledgebeginnings.com Operates child care centers and early education schools in 24 states under
names such as Children's Discovery Centers and Hildebrandt Learning
Centers.
Private www.lapetite.com Second largest operator of for-profit preschool educational facilities in the US
for children aged 6 weeks to 12 years
Private www.lccc.com Provider of emergency back-up child care services
Private www.mulberrychildcare.com Operates child care centers in five states. Headquartered in Brookline, MA
Private Not Available Operates 47 child care facilities in Minnesota
KIDQ Not Available Operates 16 supervised children's entertainment facilities under the name Kids
Quest and 14 traditional child care centers under the name New Horizon
NLCI www.nobellearning.com Provides affordable private education (from preschool to the eighth grade) for
children of middle-income working families.
Private Not Available Operates preschool and learning centers for children from 6 weeks to 5 years
old. Headquartered in Bedminster, NJ
TSST tesseract.pvt.k12.mn.us An integrated education management company, serving private preschool
students, charter school students, and postsecondary students.
Private www.tutortime.com Early learning and child care provider headquartered in Boca Raton, FL. Both
company-owned and franchised centers.
Private www.worklifepro.com Provides a CD-ROM based "tool kit" to help corporations set up work-life
programs.
 The Book of Knowledge – 9 April 1999

13. Educational Products & Services for

Consumer Market Statistics Consumers: Gaining An Edge
Size of Market ($billions) • Parents dismayed at their children’s progress in school, as well as those
$13 billion looking to give their kids a competitive edge, are taking greater
responsibility for their education, purchasing services such as tutoring, test
Market Growth Rate
preparation courses, private schooling or even schooling them at home.
10%
Product purchases include educational software, toys and games, and books.
Leading Companies • The tutoring market is an approximately $2.5 billion market, appealing to
Sylvan Learning Systems time-strapped parents whose children are struggling to learn in overcrowded
Kaplan Educational Services classrooms with thirty kids per teacher or are gifted, and bored in school.
Berlitz This includes private academic test “prep” services to prepare for high-
Gateway Learning stakes college entrance exams. We further estimate that language
LeapFrog Toys instruction is a $1.0 billion industry, and that test delivery is a $1.5 billion
market (including test delivery for IT and professional adults).
• We estimate that education’s share of the consumer software market is $700
million, with personal productivity and reference software rounding out the
group to create a $1.5 billion market. Parents purchase $2.5 billion of
supplemental material each year to help give their children an edge in
school. Educational toys are a $1 billion market, and children and adult
self-improvement books are a $3 billion market.

Table 93: Megatrends Shaping the Consumer Educational Services Industry

Trend Impact
Demographics With Generation Y growing into college, competition for top slots in top universities will intensify, increasing the stakes of K-12
education.
Technology Technology has become more accessible to families as the average selling price of a PC has dropped below $1,000. Now
with rich multimedia capabilities, educational content can be made highly engaging and fun. “Playing” on the computer has
begun to displace watching TV as a child’s after-school activity of choice. In the future, we expect to see technology-rich toys
too.
Globalization Language fluency, particularly English, is essential in our global economy. Moreover, globalization has raised the bar for all of
us, as the field of competitors widens.
Branding With the intense interest in the education industry in general, and relatively lower barriers to entry in this sector in particular,
we believe branding will be an essential strategy to differentiate quality companies with distinctive offerings, and will be part of
the basis on which parents choose providers.
Consolidation Given limited barriers to entry and the importance of brand names as well as scale, we believe there will be increasing
consolidation in many consumer educational sectors, such as we have seen in consumer educational software, publishing and
language instruction.
Privatization/ With 80% of families single-parent or dual income, many parents have less time to work with their children on academic
Outsourcing subjects than before, thus they are turning to outside providers to give their children an educational boost, be it tutoring, test
preparation or after-school care.

171
The Book of Knowledge – 9 April 1999

Parents dismayed at their
children’s progress in school, as
well as those looking to give
their kids a competitive edge,
are taking greater responsibility
for their education
Parents dismayed at their children’s progress in school, as well as those looking to
give their kids a competitive edge, are taking greater responsibility for their
education. Schools that teach to the lowest common denominator, the ever
increasing importance of education in our society, competition for admission to
our top universities, and the potential for affordable, effective technology
solutions is driving the market for consumer-oriented educational products and
services. Moreover, as many adults assume control of their own careers, they too,
become purchasers of educational products and services.

Chart 85: Consumer-Directed Educational Services and Products

Educational Services Educational Products Product Distribution
Special Education Textbooks
At-Risk Education Supplemental Materials Sales Force
Schools Education of Adjudicated Youth Technology & Software Direct Marketing
Teacher Training Retail
Tutoring & Remedial Education
Before- and After-School Programs
Tutoring Books
Consumers Language Instruction Software
Test Preparation Toys and Games Retail
Before- and After-School Programs
Private Schools

Source: Merrill Lynch.

More parents are taking small Many parents are lobbying for school choice, vouchers and charter schools.
steps—supplementing their Charter schools, of course, have grown from zero six years ago to over 1,200
children’s in-class time with today. At the extreme edge of this phenomenon are parents who educate their
children at home, entirely bypassing the public education system. The number of
separate tutoring sessions or students in home school today is estimated to be as high as 1.2 million. Another 5
with additional books, million children attend private schools. Even more parents are taking small
educational games and toys and steps—supplementing their children’s in-class time with separate tutoring sessions
computers and software or with additional books, educational games and toys and computers and software.
Adults are also accessing education markets in record numbers, be it to improve
their English skills, prepare or take a professional certification exam, or purchase
Adults are also accessing self-help books or software.
education markets
"And how is education supposed to make me feel smarter? Besides, every time
I learn something new, it pushes some old stuff out of my brain. Remember
when I took that home winemaking course, and I forgot how to drive?"
—Homer Simpson

n Consumer Products and Services a $13 Billion Industry

Parents are increasingly
turning to private tutors to help
unlock their kids’ potential
Tutoring and Test Preparation
Time-strapped parents with children struggling to learn in classrooms with thirty
kids per teacher or gifted children who are bored in school are increasingly turning
to private tutors to help unlock their kids’ potential. While the phenomenon is not
new, the tutoring industry’s profile has heightened in recent years with the growth
in companies such as Sylvan Learning Systems. We estimate the size of the U.S.
tutoring market at roughly $2 billion, an industry that is still highly fragmented,
dominated by independent tutors who may or may not operate out of a dedicated
center.

172

While most tutoring services
primarily cater toward children,
we may see a growth in adult-
oriented tutoring, as our
economy increasingly rewards
literacy.
Another subsector of consumer
educational services market is
test preparation, which is an
approximately $1.5 billion
business.
The market for test delivery is
approximately $1.5 billion, and
growing strong.
The Book of Knowledge – 9 April 1999
Table 94: Leaders In Tutoring
Company Centers Students
Sylvan Learning Systems 700 Centers in 49 States 120,000
The Huntington Learning Center 180 Centers in 31 States NA
Kumon U.S.A., Inc. 1,000 Centers 90,000
Score@Kaplan 37 Centers in 5 States 13,000
Source: Public Documents and Merrill Lynch estimates.
No longer just for remedial help in reading and math, companies such as Sylvan
are adding enriched curriculum for gifted students, partnering with Johns Hopkins
University and National Geographic to provide challenging, fun learning
experiences for children with a thirst for learning.
While most tutoring services primarily cater toward children, we may see a growth
in adult-oriented tutoring, as our economy increasingly rewards literacy, and as
colleges and universities push back basic skills training to high schools, which
don’t always succeed.
A subsector of this market is parent-paid before- and after-school programs.
Working parents frequently turn to child care providers for these services for their
school-aged children. Public schools are increasingly offering these programs to
their populations to address the needs of younger children who have no one
waiting for them at home. A portion of these programs are “parent pays”
programs, although the majority of for-profit providers are operating programs for
schools funded through Title I and other sources.
Another subsector of consumer educational services market is test preparation
services. Academic test “prep” is approximately a $0.5 billion business. The test
prep segment is dominated by Kaplan (a division of Washington Post) and
Princeton Review, which have served millions of students anxious to score well on
high-stakes exams such as the SAT, GMAT, GRE or LSAT.
Table 95: Test Preparation Companies
Company Courses Offered
Kaplan Served more than 150,000 students in 1997. Test preparation for SAT, PSAT,
ACT, LSAT, GMAT, MCAT, GRE. Classes and publishing.
Princeton Review 30,000 students in 1997. Test preparation for SAT, PSAT, ACT, LSAT, MCAT and
GRE. Classes and publishing.
Sylvan Learning Early college entrance test preparation (ACT and SAT). Supplement to core
remedial tutoring and enriched education business at franchised centers.
Testing and Certification Delivery Services
The market for test delivery is approximately $1.5 billion, and growing strong.
The general lack of accountability of schools for student achievement (and the
hundreds of billions spent annually on our children’s education) has led to a tidal
wave of support for uniform school measurement systems from politicians,
business and community leaders and parents. As they understand, if you can’t
measure it, you can’t manage it. The U.S. college entrance testing market,
estimated at $350-$400 million is dominated by the non-profit Educational
Testing Service. ETS estimates that it has a two-thirds market share in college
admissions testing. Non-profit ACT holds a majority of the remainder.
A major trend in this industry as been toward computerization of exams. We
estimate that only 10-15% of all exams delivered in the U.S. are in a computerized
format. As a consequence we see the greatest potential in companies converting and
delivering computerized tests. Sylvan Learning Systems’ Prometric division is by
far and away the front runner in this effort, currently owning a 90%+ market share.
173
The Book of Knowledge – 9 April 1999

We estimate that only 10-15% Table 96: Test Delivery Companies

of all exams delivered in the
U.S. are in a computerized
format. Sylvan Learning
Systems’ Prometric division is
by far and away the front
runner in this effort, currently
owning a 90%+ market share.
Company
ETS (also owns Chauncey)
ASI (owned by Harcourt
General)
Sylvan Learning
CTB-CAT (owned by McGraw
Hill)
VUE (owned by NCS)
Qwiz (owned by Primedia)
Bookman Testing (owned by
Knowledge Universe)
Description
Not-for-profit. ETS has 40+ centers on college campuses.
Delivers professional tests.
Has 1,200+ U.S. centers and a 90%+ market share in computerized
testing. Delivers academic, professional and IT tests.
Has 300 centers. Focuses on adult credentials market.
Has nearly 1,000 centers globally, including 300 shared with CAT.
Currently focusing on IT testing, began widescale deployment in October
1998.
Focus on skills assessment tied to workplace training.
Owns proprietary brand of computer-based adaptive tests.

We estimate that English
language instruction is a $1
billion industry in the U.S., and
that instruction in other
languages is another $200,000
million.
In our global economy, the
importance of communication
with people of different
languages cannot be
overestimated.
Language Instruction
We estimate that English language instruction is a $1.0 billion industry in the U.S.,
and that instruction in other languages is another $200,000 million. This reflects
instruction by for-profit providers, either in a classroom setting, at the corporate
workplace or offsite in an “immersion” program. (It excludes instruction at the
university level or software sales of language programs. These are embedded in
the “postsecondary” and “consumer software” categories.)
In our global economy, the importance of communication with people of different
languages cannot be overestimated. The dominant language of international
communication is, by far, English. The majority of those that study English in the
U.S. are residents that are not native speaking or who have traveled to the U.S. to
learn English skills. U.S. residents may study language at either a commercial
language center, such as Berlitz, with locations around the U.S., or at their
workplace. Companies that rely on lower-skilled laborers such as manufacturing
or agriculture have found that providing English lessons on-site is a powerful way
to increase the loyalty of its workers as well as a way to identify and groom people
who are suited for promotion to roles of greater responsibility. With the English-
as-a-second-language population growing in our country, this is a growing issue
for many companies.

Table 97: Language Instruction Providers

Company Description
American Language Offers intensive English language training in programs in the U.S. and
Academy Germany.
Berlitz Offers world language and ESL teaching services for children and adults.
Sylvan Learning Systems One Wall Street Institute is located in the U.S., in Miami. Nine of its ASPECT
English language schools are in the U.S., targeting students who can spend
nine weeks of intensive study in an English-speaking environment.

Recently we have seen
indication of language
instruction migrating to the
Internet by companies such as
English Interactive and
Accelerated Learning Systems.
Recently we have seen indication of language instruction migrating to the Internet
by companies such as English Interactive and Accelerated Learning Systems.
Internet-delivered content has the potential to broaden access of language training
to a much greater population, both in the U.S. and abroad. As such, it could serve
to build the market for both English and other languages. Like many industries,
however, we expect that it could have a dislocating effect on some existing
players. However, given the multiple aspects of learning a language we believe
that in-person interaction will continue to be an important part of language
instruction.

174
 The Book of Knowledge – 9 April 1999

Sylvan Learning Systems: Brand Name Provider of Educational Services

Sylvan Learning Systems is the brand name provider of educational and testing services in an industry with few known
brand names. The company’s management, who have taken an “out-of-the-box” view of this industry and its potential,
have created several highly synergistic businesses and have proven to be ahead of the trends. Being in the right place
ahead of time has enabled Sylvan to build up a global infrastructure that has become a major impediment to newer
entrants.
Sylvan has three highly-synergistic business units, each with tremendous growth potential: computer-based testing and
English language training services, tutorial services at learning centers and on-site tutorial contract services for schools and
businesses, comprising 63%, 15% and 22% of revenues, respectively. High-end executive training, teacher education and,
most recently, postsecondary education are also in this mix.
Testing services form the foundation for Sylvan’s strategy. Testing is the tollbooth to the nation’s education infrastructure.
Through its unique position as (in most cases) the only company administering the computerized version of these tests,
Sylvan has exclusive access to consumers at the points in their lives when they are making critical decisions about their
careers and education. At these junctures, the company can also offer many the training to accomplish their goals. The
synergy between English language instruction (a market that Sylvan entered through its purchases of the Wall Street
Institutes and ASPECT language schools) and the Test of English as a Foreign Language (TOEFL) exam is an excellent
example.
Sylvan Learning Centers is the nation’s leader in tutorial services. It offers both remedial and enrichment programs to
students, using a proven instructional method and guarantees its results. Despite the fact that dissatisfaction with our
education system is at an all-time high, the company only taught 120,000 children (less than 0.2% of the market) last year.
Sylvan's Contract Services business markets the company’s core educational services to public and private schools to help
improve student achievement. The company also provides teacher training and education.
Finally, the company recently announced a plan to acquire a network of postsecondary institutions in countries around the
world, to expand the educational opportunities open to students in those countries.

Chart 86: Sylvan Learning Systems Corporate Structure

Sylvan Prometric(a) Core Educational Services (a) Contract Educational Services (a)
•• Sylvan
SylvanTechnology
TechnologyCenters
Centers("STCs")
("STCs") •• Franchise
Franchisetutoring
tutoringand
andtest
testprep
prep •• Title
TitleIIfunded
fundedprograms
programsforforsupplemental
supplementaland
and
•• Authorized
AuthorizedPrometric
PrometricTesting
TestingCenters
Centers •• Company
Companyowned
ownedlearning
learningcenters
centers remedial
remedialeducation
educationatatpublic
publicschools
schools
("APTCs")
("APTCs") •• Services
Servicesto toparochial
parochialprivate
privateand
andschools
schools
Revenues ($mm) $275.1 Revenues ($mm) through
throughpublic
publicschool
schoolcontracts
contracts
Revenues ($mm) $100.5
$187.8 $64.7

$44.3 $66.6
$122.9 $36.8 $58.2
$50.4
$26.1
$61.2

1995 1996 1997 1998 1995 1996 1997 1998 1995 1996 1997 1998

Wall Street Institute Aspect Caliber Learning Network Canter PACE

•• European
Europeanbased
basedfranchiser
franchiserand
and •• Provider
Providerofofinternational
international •• Graduate
Graduatelevel
levellearning
learning and
andprofessional
professional •• Provides
Providesmaterials
materialsand
andtraining
training •• Racial
Racialand
andgender
genderworkplace
workplace
operator
operatorofoflearning
learningcenters
centers education
educationprograms,
programs,primarily
primarily training
trainingdistribution
distributionnetwork
network programs
programsfor
foreducators
educators diversity
diversitytraining
trainingand
andskills
skills
designed to provide English
designed to provide English English
English as asecond
as a secondlanguage
languagetoto •• Joint
Joint venture of MCI and Sylvan; IPO
venture of MCI and Sylvan; IPO •• 1997
1997 revenues of $20.0 million
revenues of $20.0 million improvement programs
improvement programs
classes
classesto
to adult
adultprofessionals
professionals students
studentsworldwide
worldwide completed
completedin inMay
May1998
1998
•• Purchased
Purchasedby bySylvan
Sylvan in
in •• Acquired
Acquiredon onMay
May6,6,1998
1998
December
December1996 1996 •• 1997
1997revenues
revenuesof of$52
$52million
million

Sylvan-at-Work Educational Inroads

•• Provides
Providescore
coreeducational
educational •• Remedial
Remedial andand special
special
services
servicesto
tobusinesses
businessesonsite
onsite education
educationservices
servicesto
topublic
publicand
and
private
privateschools
schools

Source: Merrill Lynch.

175
The Book of Knowledge – 9 April 1999

Kaplan Educational Services: Building a Business Around a Big Brand

Kaplan began its business in test preparation area—helping students succeed on important academic tests. It then leveraged
its brand to deliver books and software. The company than chose to reinvest its profits into building a new business:
Score! This required reaching out beyond its core customer to the under-16 age group. The company is now opening a new
Score! center every week. Kaplan also took the Score! program into schools.
After expanding to a younger age group, Kaplan targeted an older customer base. It acquired several companies in the
career-fair business, taking the natural step from preparing people for tests that are springboards to careers to connecting
graduates with employers. Kaplan is now the largest provider of career fairs in North America.
Building on its relationship with students taking the LSAT, Kaplan has now taken its brand onto the Internet, with the
founding of its online law school: Concord University School of Law.

Kaplan Educational Services

Publishing Score!
Kaplan Centers Publishing Kaplan Professional Learning Services Kaplan International
Educational Centers

Sales of Sub-$1000 PCs have
Increased PC Penetration Into
Homes, Now at 50%, but
growing to 60% by 2002
$1.5 Billion Industry Growing
At 14%, Shaped by . . .
Consolidation (Market Share of
Top Two Players 70%, Vs. 42%
Three years Ago)
Educational Software
The consumer educational software sector has exploded in recent years, virtually
creating an industry that was all but absent before 1990. Based on the trends we
see, we expect growth in this sector to continue at a healthy 14% pace. PC
penetration in the home has grown to 50%, accelerating with the introduction of
the sub-$1,000 PC. This has given parents, especially those with lower incomes,
another tool to help their children learn. More than forty percent of retail PCs sell
for under $1000, with first-time buyers leading the charge in PC purchases. We
expect that with increased investments in PCs will come additional software
spending, particularly among first-time PC buyers, and that this will boost the PC
software market in turn.
We estimate that the consumer software market in the United States was
approximately $7 billion (up from $6.5 billion in 1997), and that it will continue to
grow at 14% for the next few years. We further estimate that education’s share of
this market is $700 million. Other consumer software categories such as “personal
productivity” and reference add an additional $125 million and $550 million,
respectively, to that total In addition to rapid growth and the increase of PCs in the
home, the consumer software industry in general, and the educational software
business in particular, have been shaped by consolidation, falling average selling
prices and technological change.
Three years ago, the U.S. retail market share of the two largest educational
software companies was 42%. With The Learning Company and Cendant
Software leading a consolidation charge, that percentage is now over 70%. These
two companies, of course, have recently fallen to the same trends that they
created, both being acquired by larger partners in the last few months. Cendant’s
acquisition by Havas and TLC’s by Mattel have further changed the competitive
picture in the consumer software market.

176
 The Book of Knowledge – 9 April 1999

Table 98: Consumer PC Software Market Share Leaders

(% Of U.S. Retail Sales)
Education 1997 1998
The Learning Company 41.9 40.9
Cendant (Havas International) 25.3 28.3
Humongous Entertainment 4.2 6.5
Disney 10.8 6.0
Top Four 82.2 81.7

Personal Productivity 1997 1998

The Learning Company 40.5 42.5
Microsoft 18.0 18.9
Cendant (Havas International) 6.5 10.8
Top Three 65.0 72.2

Reference 1997 1998

The Learning Company 25.2 40.0
Microsoft 31.9 29.8
IBM 6.1 11.8
Grolier 3.9 3.1
Infousa 14.2 8.4
Top Five 81.3 93.1
Source: PC Data.

And Decreasing Prices Over this same period, the scramble for market share (and the associated increased
(A Decline of 22% in Two customer base) as well as the desire to gain greater leverage from fixed
Years) investments in R&D have driven down the average selling price of educational
software. During the past two years, average selling prices in the education
software segments decreased 22% and 7%, respectively. At the same time,
reference software prices increased, which we attribute to TLC’s National
Geographic title, released in time for Christmas 1997, which sells for $149, well
above the current ASP of approximately $40.

Chart 87: Average Selling Prices For Industry Segments

$55
$50
$45
$40
$35
$30
$25
$20
8/96 10/96 12/96 2/97 4/97 6/97 8/97 10/97 12/97 2/98 4/98 6/98

Education Productivity Referenc

Source: PC Data. The rising ASP for reference software can be attributed to The Learning Company’s best-selling
National Geographic title, released in time for Christmas 1997, which sells for $149, well above the overall ASP of $40.

177
The Book of Knowledge – 9 April 1999
Children-oriented online
services is one area we expect to
see a great deal of activity in
over the next few years
Only a fraction of toy industry
sales are on educational toy
products, but at 4-5% of a $22.5
billion industry, this makes
educational toys a $1 billion
segment.
Many of these toys are sold
through specialty toy retailers
who have created a niche in a
highly competitive toy retailing
environment
178
We believe that pricing has stabilized and that we will not continue to see
dramatic price declines in the near term. However, we do think that demand will
continue to expand for educational software, making future price reductions likely.
We expect that technological change will continue to affect both product content
and distribution in the educational software market. Kids love computers, and
learning can be enhanced by increasingly rich multimedia content delivered via
CD-ROM, DVD or, increasingly, over the Internet.
Online Services
Online services for children are an emerging area where “fun” and “educational”
can be combined. America Online has been particularly active in this area, with
its AOL Kids “channel” and its investment in the FamilyEducation Network.
Content companies and content aggregators have sprung up with the increasing
penetration of this new media. Safe Internet sites for children, where only kid-
appropriate content can be accessed include Juniornet and Searchopolis. Fun
content sites include Headbone Interactive, Bonus.com and Cyberkids/Cyberteens.
Children-oriented online services is one area we expect to see a great deal of
activity in over the next few years.
Supplemental Materials
Consumers purchase $2.5 billion of the total $6.0 billion or so spent annually on
supplemental materials as discussed in a previous section.
Educational Games and Toys
Only a fraction of toy industry sales are on educational toy products, but at 4-5%
of a $22.5 billion industry, this makes educational toys a $1 billion segment.
Moreover, it is one of the fastest growth areas in the toy industry as parents (and,
of course, grandparents, who buy nearly 15% of all toys) strive to give their
children a head start in a hyper-competitive economy. Given how fun and
engaging many of these toys are, it may be that kids, who spend $24 billion of
their own money annually and have a say in how nearly $200 billion is spent, may
be among the purchasers as well.
While “educational toys” can be broadly applied—blocks are educational toys as,
for that matter, is sand in a sandbox—we think of educational toys falling into the
following classifications:
Table 99: Types of Educational Toys & Games
Activities and Crafts Arts-and-crafts projects or kits for activities
Astronomy Telescopes and projectors to learn about the solar system
Construction Building kits that teach about electricity, magnetism, solar power, physics,
architecture and more
Geography Interactive desktop globes
High-Tech Interactive toys that can be used with a PC
Life Science Bug farms, aquariums and other habitats to see how plants and creatures live (and
die)
Math & Money Tools and games that help children understand numbers
Reading & English Toys that teach the alphabet, symbols, phonics and grammar
Science Kits Sets that allow children to experiment
Source: Orange County Register.
Many of these toys are sold through specialty toy retailers who have created a
niche in a highly competitive toy retailing environment. In general, consumers
don’t look for these toys at Toys-R-Us, which captured an 18.4% share of toy
sales last year, or Wal-Mart, which had a 16.4% market share. Upscale buyers
often look to Noodle-Kidoodle, Learningsmith, Zainy Brainy, Store of Knowledge
and Imaginarium for merchandise with strong educational value. Specialty

Specialty retailers such as these
captured 4% of the toy retailing
market, with their focus on
unique products and excellent
service.
The children’s book component
of the $5.6 billion “trade”
publishing industry is $1.4
billion, or 25%, and is
estimated to grow at 5.7%
As for adult book sales, adult
reference and self-help books
accounted for approximately
$500 million and $438 million,
respectively, in 1997
The Book of Knowledge – 9 April 1999
retailers such as these captured 4% of the toy retailing market, with their focus on
unique products and excellent service.
Table 100: Specialty Retailers Deliver Educational Toys & Games
Company # Stores (Est.)
Zainy Brainy 97
Store of Knowledge 67
Learningsmith 50
Noodle-Kidoodle 42
Imaginarium 40
Source: Public Documents and Merrill Lynch estimates.
The toy manufacturers themselves are a highly fragmented group. Notable players
include:
Table 101: Educational Toy & Game Makers
Company
LeapFrog Toys
Gateway Learning
Wild Planet Toys
Educational Insights
Zowie Intertainment
Source: Public documents and Merrill Lynch.
Educational Books
We include children’s books here since they are almost by definition, educational.
The children’s book component of the $5.6 billion “trade” publishing industry is
$1.4 billion, or 25%, and is estimated to grow at 5.7% annually by Cowles/Simba
Information. In addition, children’s books likely capture a large component of
books sold at mass marketers, book clubs and mail order, which combined account
for an additional $3+ billion of book sales.
As for adult book sales, adult reference and self-help books accounted for
approximately $500 million and $438 million, respectively, in 1997. While the
reference category grew at 7% from 1993-1997, the self-help category grew at
21% over the same period.
179
The Book of Knowledge – 9 April 1999
Table 102: Educational Products and Services Companies
Company
Tutoring/ Test Prep
Achieva College Prep
Huntington Leaning Centers
Kaplan (Washington Post
Company)
Kumon USA, Inc.
Sylvan Learning Systems
Test Delivery
ASI
Bookman Consulting
CTB-CAT
ETS
Qwiz
Sylvan Learning Systems
VUE
Test Prep
Kaplan
Princeton Review
Sylvan Learning Systems
Virtual Learning Technologies Private
Language Training
Berlitz
Sylvan Learning Systems
American Language Academy Private
Summer Programs
Ambassadors International
American Computer
Experience
Education Software
The Learning Company
Humongous Entertainment
Microsoft
InfoUSA
180
Ticker Website Business Description
Private Not Available Provider of one-on-one college counseling, SAT test preparation and private tutoring.
Private www.tutoringhlc.com Offers tutoring programs in over 118 centers.
Sub: WPO www.washpostco.com Provides tutoring and test preparation for students at tutoring centers and through
contracts to schools.
Private www.kumon.com After-school, supplemental math and reading tutoring program with global
distribution.
SLVN www.sylvanlearning.com Offers enriched and remedial tutoring in math, reading, writing, and test
preparation for students of all ages and skill levels
Sub: H www.harcourtbrace.com Provider of assessment services to state regulatory agencies and national
associations, totaling more than 160 clients in all 50 states
Private www.knowledgeu.com Provider of vendor-independent proficiency tests and a subsidiary of Knowledge
Universe.
Sub: MHP www.mcgraw-hill.com Publisher of standardized achievement tests for children and adults
Private www.ets.org Private, nonprofit organization that develops achievement and admissions tests
(GMAT, GRE, SAT) administered in the U.S. and 180 other countries.
Sub: PRM www.primediainc.com Provider of skills testing and training provider to corporate human resource
departments and staffing services worldwide.
SLVN www.sylvanlearning.com Offers computer-based testing in academic, professional and IT subjects.
Sub: NLCS www.vue.com Provides a set of technology-backed program management services for
professional training and testing programs
Sub: WPO www.washpostco.com Provides tutoring and test preparation for students at tutoring centers and through
contracts to schools.
Private www.review.com Offers software, books, and courses for standardized test preparations, and
career resources.
SLVN www.sylvanlearning.com Offers enriched and remedial tutoring in math, reading, writing, and test
preparation for students of all ages and skill levels
www.vlearning.com Provider of enterprise-wide assessment systems.
BTZ www.berlitz.com Offers world language and ESL teaching services for children and adults
SLVN www.sylvanlearning.com Offers English language instruction through its Wall Street Institutes and ASPECT
English Language schools
www.ala-usa.com English language instruction at programs in the U.S. and in Germany
AMIE www.ambassadors.com Organizes, markets and operates international educational travel programs for
students and adults. AMIE also provides performance improvement tools
Private www.computercamp.com Leading operator of summer computer education camps for kids.
TLC www.learningco.com The market share leader in educational, personal productivity and reference
software for the consumer market. Brands include Broderbund, SkillsBank,
Comptons and Mindscape.
Sub: GTIS www.gtinteractive.com "Edutainment" publishing arm of GT Interactive, a global interactive entertainment
software company.
MSFT www.microsoft.com Sells operating systems and applications software to schools; also holds
significant share in reference software
Private www.infoUSA.com Publishes reference software, including CD-ROM based white and yellow pages
for home and business use.
 The Book of Knowledge – 9 April 1999

Table 102: Educational Products and Services Companies (Continued)

Company Ticker Website Business Description
Disney DIS www.disney.go.com Global media and family entertainment company publishes "edutainment"
software.
Havas Interactive Private www.havasinteractive.com Develops, publishes, and distributes multimedia educational software for use in
school and at home. Purchased from Cendant, brands include Knowledge
Adventure and Davidson.

Online Services
Headbone Interactive Private www.headbone.com Produces entertaining and educational content for children including an
interactive website, CD ROMS and television programming.
Bonus.com Private www.bonus.com An Internet site with fun and free content for children, including games, puzzles
and other activities.
America Online AOL www.aol.com Provides Internet online services such as electronic mail, conferencing, software,
computing support, interactive magazines and newspapers, and online classes
JuniorNet Private www.juniornet.com A commercial-free online service created just for kids ages 3-12. Partners with
high-quality children’s publishers.
Searchopolis Private www.searchopolis.com A teen-targeted, education-focused portal site that combines safe searching and
the breadth of the Internet. A unit of N2H2.
Cyberkids/Cyberteens Private www.cyberkids.com An online community for children and teens to share their creative work music
and poetry.

Educational Toys & Games

Educational Insights
Gateway Learning
LeapFrog
(Knowledge Kids Enterprises)
Wild Planet Toys
Zowie Intertainment
Imaginarium
Learningsmith
Noodle-Kidoodle
Store of Knowledge
Zany Brainy
EDIN www.edin.com Designs, develops and markets supplemental educational materials, such as
electronic learning aids, activity books, science kits, etc.
Private www.gatewaylearning.com Sells educational products to teach reading skills in the home.
Subsidiary www.knowledgeu.com Produces a variety of products designed to teach reading skills to children
Private www.wildplanet.com Markets proprietary educational toys through a variety of retail stores, catalog
sellers, and internet toy vendors
Private www.zowieintertainment.com Designs and develops smart toys that interact with PCs and other technology-
based entertainment products.
Private www.imaginarium.com Retailer specializing in educational toys and games
Private www.learningsmith.net/ Retailer specializing in home learning products including, toys, games, books,
video, and software
Private www.noodlekidoodle.com Retailer specializing in educational toys and games
Private www.storeofknowledge.com Retailer specializing in educational games, software, hobbies, and toys.
Affiliations with 25 public television stations.
Private www.zanybrainy.com Retailer offering educational toys and games, CD-ROMs, and teacher’s
resources.

181
The Book of Knowledge – 9 April 1999

14. Merrill Lynch Education and

Training Team

Merrill Lynch Education and Training Team

Name Title E-mail Phone Number
Research
Michael T. Moe, CFA Director of Global Growth mmoe@exchange.ml.com (415) 954-8410
Stock Research
Kathleen Bailey Assistant Vice President kbailey@exchange.ml.com (415) 954-8414
Rhoda Lau Industry Analyst rlau@exchange.ml.com (415) 954-8416
Peter McNally Statistician pmcnally@exchange.ml.com (415) 954-8424

Investment Banking
Deborah Quazzo Managing Director deborah_quazzo@ml.com (312) 906-6248
Keith Koeneman Vice President kk@exchange.ml.com (312) 906-6276
Jim Moore Vice President jim_moore@ml.com (312) 906-6242
Chip McCharen Associate chip_mccharent@ml.com (312) 906-6249
Anurima Bhargava Analyst anurima_bhargava@ml.com (312) 906-6284
Marcus Mollman Analyst marcus_mollman@ml.com (312) 906-6259

Equity Capital Markets

Jim Birle Managing Director jim_birle@ml.com (212) 449-2619
Peter Hoffman Managing Director peter_hoffman@ml.com (212) 449-5309

182
 The Book of Knowledge – 9 April 1999

Appendix A
Table 106: Company Index
Company Ticker Website Business Description
A.D.A.M Software ADAM www.adam.com Creates, publishes and markets educational multimedia software products
that provide anatomical, health related, and medical information
Academic Systems Private www.academic.com Develops engaging instructional software for math and English.
AchieveGlobal Sub: TMC www.achieveglobal.com Provides training programs and consulting services in four key areas: sales
performance, leadership, customer loyalty and teamwork.
ACTV Net IATV www.actv.com Online education services provider for k-12 education
Addison Wesley Longman Sub: PRSNF www.pearson.com Comprehensive programs and materials for primary and secondary school
students and teachers. Addison Wesley Longman is a subsidiary of Pearson.
Advantage Learning Systems ALSI Www.advlearn.com Provides learning information systems to the K-12 market, as well as teacher
training.
Advantage Schools Private www.advantage- Operates eight charter schools. Based in Boston, MA.
schools.com
Allen Communication Sub: TMC www.allencomm.com Provides multimedia training software to corporate and education clients,
including authoring and course management tools.
Ambassadors International AMIE www.ambassadors.com Organizes, markets and operates international educational travel programs
for students and adults. AMIE also provides performance improvement tools
America On Line AOL www.aol.com Provides Internet online services such as electronic mail, conferencing,
software, computing support, interactive magazines and newspapers, and
online classes
American Computer Experience Private www.computercamp.com Leading operator of summer computer education camps for kids.
American Education Corporation AEDU www.amered.com Develops and markets educational software and CD-ROM titles in basic
academic subjects and early childhood development
American Educational Products AMEP www.amep.com Develops and produces hands-on supplemental teaching aids for schools
and teachers
American Language Academy Private www.ala-usa.com English language instruction at programs in the U.S. and in Germany
APEX Private www.apex.netu.com Offers advanced placement courses online.
Apollo Group, Inc. APOL www.apollogrp.com Provider of career-oriented degree programs tailored to working adults.
Apple Sub: AAPL www.clarisworks.com Provides a suite of desktop applications to the education market, including
word processing, graphics and illustration, spreadsheet and presentation
software
Argosy Education ARGY www.argosyeducation.co Provider of doctoral and master’s degrees in psychology, education and
m business, as well as bachelor’s degrees in business, associate degrees in
allied health professions and diplomas in information technology.
Aris Corporation ARSC www.aris.com Provides IT training through instructor-led, online, self-paced and computer-
based formats as well as IT consulting services.
Arthur Andersen Virtual Learning Network Private www2.aavln.com Offers a comprehensive web-based learning solution including consulting,
content and technology.
ASI Sub: H www.harcourtbrace.com Provider of assessment services to state regulatory agencies and national
associations, totaling more than 160 clients in all 50 states
Asymetrix Learning Systems ASYM www.asymetrix.com Provides multimedia training software to corporate and education clients,
including authoring and course management tools.
Beacon Education Management Private www.beaconedu.com Offers contracted administration services, including a complete school
management solution, to traditional public schools and charter schools.
Operates 10 charters, including those operated by subsidiary company.
Berlitz BTZ www.berlitz.com With Berlitz Jr. program, provides world language and ESL teaching services
for K-12 and for administrators and staff.
BIGWORDS.com Private www.bigwords.com Internet bookstore that sells and “rents” new and used textbooks.
Blackboard Inc. Private www.blackboard.net Provider of online learning technologies enabling higher education institutions
to convert curriculum to web-based courses.
Blanchard Training and Development Private www.blanchardtraining.co Provider of leadership, management, team building, quality, customer service
m and managing change training.
Blessing/White Private www.blessingwhite.com Provider of performance improvement training in a wide range of topics
including leadership, team building, project management, employee retention
and employee development training, among others.
Bonus.com Private www.bonus.com An Internet site with fun and free content for children, including games,
puzzles and other activities.
Bookman Testing Private www.knowledgeu.com Provider of vendor-independent proficiency tests and a subsidiary of
Knowledge Universe.

183
 The Book of Knowledge – 9 April 1999

Table 106: Company Index (Continued)

Company Ticker Website Business Description
Books Are Fun Private www.readings-fun.com One of the largest direct marketers of hard cover books in North America.
The company conducts book fairs and book display events at over 30,000
companies and 80,000 schools nationwide.
Boxer Learning Private www.boxerlearning.com Online math tutorial programs for K-12
Bright Horizons Family Solutions BFAM www.brighthorizons.com Provides workplace services for employers and families including
childcare, early education and strategic worklife consulting
Byron Preiss Multimedia Company CDRM www.byronpreiss.com Publishes and distributes educational software and books for the
educational and consumer markets
Caliber Learning Network CLBR www.caliberlearning.com Provides a nationwide network of satellite-linked professional learning
campuses that offers corporations and employees a classroom
environment featuring live, real-time instruction.
California Virtual University Private www.california.edu A clearinghouse of distributed learning courses, acting as a link between
students and online courses offered by California’s accredited colleges
and universities.
Campus America Private Not Available Provider of enterprise applications and services for colleges and
universities.
CampusBooks.com Private www.campusbooks.com Internet bookstore that sells textbooks.
CampusPipeline Private www.campuspipeline.com Creates "home base" for students, faculty and administration at a college
that combines elements of an Internet portal and an intranet that
integrates existing campus applications.
Canter & Associates Sub: SLVN www.sylvanlearning.com Teacher education and professional development through distance
learning.
Canterbury Corporate Service CITI www.canterburyxcel.com Provides computer-based training software and web-based training for
both “off-the-shelf” and customized training.
Career Education Corp CECO www.careered.com Offers career-oriented degree programs in computer technologies, visual
communications and design technologies, business studies and culinary
arts.
Career Track Subsidiary www.careertrack.com Provider of performance improvement training on a wide range of topics
delivered via public seminars, on-site training, audio and video training
programs. The company is owned by ETC, a subsidiary of TCI.
CBT Group PLC CBTSY www.cbtsys.com Publishes a library of more than 800 training titles covering a range of IT
topics that are delivered via CD-ROM or the Web.
Centra Software Private www.centra.net Created a Web-based collaboration system that enables people to work
together in real-time for training and other purposes.
Ceridian Performance Partners Sub: CEN www.ceridian.com Provider of work/life services, including employee assistance programs,
concierge and managerial services. Purchased WFD's work/life services
business.
Challenger Schools Private www.challengerschool.com Operates approximately twenty private schools in California and Utah
Chancery Software Private www.chancery.com Develops and markets student information and library management
systems for K-12.
Channel One Sub: PRM www.channelone.com Provider of television news and educational programs via satellite directly
to 12,000 public and private reaching approximately 400,000 educators
and more than 8 million teenage viewers every school day.
Charter Schools USA Private www.charterschoolsusa.co Operates two charter schools in Florida.
m
Children First Private www.childrenfirst.com Develops and operates backup child care centers for corporate clients
Children's Comprehensive Services KIDS www.ccskids.com Provides a range of services for emotionally disturbed, behavior
disordered, developmentally delayed or learning disabled youths.
Children's World Learning Centers Private www.childrensworld.com Operates early childhood and elementary educational programs in 24
states. Subsidiary by ARAMARK.
Childtime Learning Centers CTIM www.childtime.com Operates Child care centers in 19 states
Cinar Corporation CINRF www.cinar.com Integrated entertainment and education company involved in the quality
educational products for children and families.
Classroom Connect Private www.classroom.com Develops Internet-based curriculum and teacher resources, conducts
interactive learning adventures (such as MayaQuest) and hosts teacher
training programs
CollegeEdge Private www.collegeedge.com A resource on the Internet for the "going to college" market. Students can
apply to leading colleges and universities, including Stanford, MIT and
Berkeley.
CollegeHire Private www.collegehire.com A Internet-based job placement service for college students focusing on
high-tech industries. Each student-candidate is matched with a placement
expert who guides the process.

184
 The Book of Knowledge – 9 April 1999

Table 106: Company Index (Continued)

Company Ticker Website Business Description
COLLEGIS Inc. Private www.collegis.com Offers of IT solutions to higher education institutions with expertise in areas of
administrative, academic, and communications technology functions.
Computer Curriculum Corp. Sub: PRM www.cccnet.com Provider of educational software and services to K-12 schools.
Computer Learning Centers CLCX www.clcx.com Offers associate degrees and non-degree diplomas in area of information
technology.
ComWeb Private Not Available Provider of distributed learning solutions.
Concord University School of Law Sub: WPO www.concord.kaplan. The first major institution offering a Juris Doctorate (JD) degree earned entirely
edu online.
Convene International Private www.convene.com Provider of technology and services to aid universities in developing,
implementing and managing distributed learning programs.
Corinthian Colleges COCO www.cci.edu Provider of career-oriented degrees and diploma programs in the healthcare,
electronics, and business fields.
Cornell Corrections CRN www.cornellcorrectio Provides to governmental agencies the integrated development, design,
ns.com construction and management of facilities for correctional and detention
services.
Correctional Service Corporation CSCQ www.correctionalserv Developer and manager of privatized correctional and detention facilities in the
ices.com U.S. including juvenile corrections.
Corrections Corporation of America Private www.correctionscorp Designs, constructs, finances, and manages juvenile detention and correction
.com facilities.
Course Technology Subsidiary www.course.com As publisher of electronic textbooks, the company has over 800 titles used at
thousands of colleges, universities, technical schools and vocational schools
worldwide. The company is a division of International Thomson Publishing.
Crème De La Crème Private Not available Operates 7 high end franchise based childcare centers.
CTB-CAT (McGraw-Hill) Sub: MHP www.mcgraw- Publisher of standardized achievement tests for children and adults
hill.com
Cyberkids/Cyberteens Private www.cyberkids.com An online community for children and teens to share their creative work music
and poetry.
Dale Carnegie Training Private www.dale- With over 170 offices in more than 70 countries, Dale Carnegie specializes in
carnegie.com communication, leadership, customer service, and sales training.
DDC/Dependant Care Connection Private www.dcclifecare.com National provider of work/life and dependent care counseling, education and
referral services
Development Dimensions International Private www.ddiworld.com Provides corporate clients with performance improvement training in areas such
as change management, customer service and leadership training. With offices
worldwide, the company’s products and services are available in 19 languages.
DeVry Inc. DV www.devry.com Provider of career-oriented degree programs in technology and business,
including MBA courses delivered online.
Digital Enterprises Private www.digitalenterprise Develops computer-based training (CBT) and interactive communications
s.com products and services.
DigitalThink, Inc. Private www.digitalthink.com Offers Web-based IT training courses and online tutor support directed at
computer programmers, developers, and system administrators.
Discourse Technologies Private www.discourse.com Offers a client-server GroupWare application that serves as an instructional
delivery, communication and management tool for student measurement.
Disney DIS www.disney.go.com Global media and family entertainment company publishes "edutainment"
software.
Docent Private www.docent.com Provides software that enables corporations to create, deliver, and administer
training programs as well as link training to corporate performance.
Edison Project Private www.edisonproject.c Manages 51 schools, both traditional public schools and charter schools,
om implementing its extensively researched curriculum and technology programs.
Education Management EDMC www.edumgnt.com Provider of career-oriented programs in areas of design, media arts, culinary
arts, fashion technology, and professional development.
Educational Development Corp EDUC www.edcpub.com Distributor of a line of children's books and related materials to book, toy and gift
stores, libraries and home educators
Educational Insights EDIN www.edin.com Designs, develops and markets supplemental educational materials, such as
electronic learning aids, activity books, science kits, etc.
EduTrek International EDUT www.edutrek.com Provider of career-oriented, int'l focused higher education programs in areas of
IT, international business, multimedia communications, art and design.
Eloquent, Inc. Private www.eloq.com Produces digital video content for corporate applications, transforming live
speech into multimedia presentations delivered via CD-ROM or the Internet.
EMG Sub: PRM www.emg.com Satellite network in K-12 schools. Delivers content over 16 channels for
approximately 19 hours each school day to 4200 schools.
EPS Solutions Private www.epscorporation. Integrated business service provider of profit recovery, cost reduction, and
com performance improvement products and services. The company has 120
national and 10 international offices.

185
 The Book of Knowledge – 9 April 1999

Table 106: Company Index (Continued)

Company Ticker Website Business Description
ETC Sub: T Not Available Professional development programs for teachers and school administrators.
Graduate level instruction via satellite broadcast.
ETS Private www.ets.org Private, nonprofit organization that develops achievement and admissions
tests (GMAT, GRE, SAT) administered in the U.S. and 180 other countries.
Excel Education Centers Private Not Available Operates five charter schools in Arizona.
Executrain Private www.executrain.com Provider of instructor-led and technology based training in the area of
information technology with over 200 locations in 28 countries.
Explore, Inc. Private www.exploreinc.com Before and after school program operator and developer that has academic
focus that teaches through experiential learning, homework and study skills
support, community service and recreation. The two-year old company
operates programs at 80 schools in seven states.
Family Education Company Private www.familyeducation.com An Internet information service that brings local, state and national education
resources together in one place to both parents and schools.
Forum Corporation Private www.forum.com Provider of performance improvement training including courses such as
sales, customer service, leadership, problem solving training, among others.
Serving the Fortune 1000, Forum has offices located worldwide.
Fox River Learning Private Not Available Developed an schoolwide enterprise management software system
Franklin Covey FC www.franklincovey.com Provider of training seminars and products designed to improve productivity
and fulfillment through effective time and life management.
FUTUREKIDS Private www.futurekids.com Trains teachers and children to use technology while engaged in fun,
curriculum-based projects at its network of computer learning centers or at
school.
Gateway Learning Private www.gatewaylearning.com Sells educational products to teach reading skills in the home.
General Physics Corporation GPX www.genphysics.com Provider of performance improvement training services designed for all levels
of an organization. Clients include Fortune 500 companies, manufacturing
and process industries, electric power utilities and other commercial and
governmental customers.
George Von Holtzbrinck Private www.spektrum- Owns majority stake in McMillan publishing.
verlag.com/verlag/impress.ht
m
Global Knowledge Network Private www.globalknowledge.com Fifth largest provider of information technology training courses for
corporations worldwide with over 350 instructor led courses and over 1,500
CD-ROM titles.
Granada Learning Private www.granada-learning.com Supplies multimedia curriculum software and videos to schools
Grolier Private www.grolier.com Publishes reference, educational, and children’s books including educational
multimedia applications
Harcourt General H www.harcourtbrace.com Publisher of textbooks and related multimedia products for K-12 and college
under the Harcourt Brace and Holt, Rinehart & Winston names
Havas Interactive Private www.havasinteractive.com Develops, publishes, and distributes multimedia educational software for use
in school and at home. Purchased from Cendant, brands include Knowledge
Adventure and Davidson.
Headbone Interactive Private www.headbone.com Produces entertaining and educational content for children including an
interactive website, CD ROMS and television programming.
Headlight.com Private www.headlight.com Distributes Web-based training from multiple vendors through an e-commerce site.
Offers information technology, softskills and certification training as complete
courses as well as smaller lessons ranging in length from 2 to 20 minutes.
HOSTS Private www.hosts.com Serves 1,000 mainly public schools serving 60,000 students. Operates a one-
on-one tutoring program, usually after school, by training volunteers from
businesses and the community.
Houghton Mifflin HTN www.hmco.com Publishes print and electronic educational materials for K-12, postsecondary
and corporate markets.
Humongous Entertainment Sub: GTIS www.gtinteractive.com "Edutainment" publishing arm of GT Interactive, a global interactive
entertainment software company.
Huntington Leaning Centers Private www.tutoringhlc.com Offers tutoring programs in over 118 centers.
IBM/Edmark Sub: IBM www.edmark.com Develops and publishes children's educational software under the Edmark
name. Also publishes reference software.
ILINC Private www.ilinc.com Provides online learning solutions for the Internet, Intranet and wide area
network environments.
Imaginarium Private www.imaginarium.com Retailer specializing in educational toys and games
Infonautics INFO www.education.elibrary.com Online information content management services and custom archive
services for business and education under the Electric Library brand.
InfoUSA Private www.infoUSA.com Publishes reference software, including CD-ROM based white and yellow
pages for home and business use.

186
 The Book of Knowledge – 9 April 1999

Table 106: Company Index (Continued)

Company Ticker Website Business Description
Integrity Training Private www.integritytraining.com
Provider of training management system that allows corporations to track,
administer and deliver Web-based training
Interactive Media Corp Sub: AATI www.aati.com Creates technology- and Web-based training using leading-edge multimedia
technologies.
Internal & External Communication Private www.iec.com Designs interactive multimedia training programs and electronic performance
support systems.
ITC Learning Corp. ITCC www.itclearning.com Provides multimedia training products in areas such as personal computer
skills, business productivity, IT skills, regulatory compliance, industrial
technical skills, and basics skills.
ITT Educational Services ESI www.itttech.edu Provider of career-oriented degree programs in technology.
IXL Private www.ixl.com Produces an integrated suite of services and tools to design, create and
manage online learning and performance support programs.
J.L. Hammett Private www.hammett.com Distributes school supplies and supplemental materials
John Wiley & Sons JW.A, JW.B www.wiley.com Publishes, books, journals and electronic products for the educational,
professional, scientific, technical and consumer markets
Jones & Bartlett Private www.jbpub.com Ninth-largest publisher of college textbooks in the US. Also produces
multimedia products in a variety of disciplines
Jones International University Private www.jonesinternational.edu First regionally accredited university to exist exclusively on line. Offers degree
programs in business and communications
Jostens Learning Corporation Private www.jlc.com Develops a comprehensive curriculum software that is installed in over
15,000 schools serving 10 million students.
JuniorNet Private www.juniornet.com A commercial-free online service created just for kids ages 3-12. Partners
with high-quality children’s publishers.
Kaplan Sub: WPO www.washpostco.com Serves 27 public and 6 non-public schools serving 6,000 students. Provides
tutoring and test preparation for students at tutoring centers and through
contracts to schools.
Keller Graduate School of Management Sub: DV www.keller.edu Offers online MBA degrees
Kids ’R Kids International Private www.kidsrkids.com Child care provider with schools in nine states. Headquartered in Atlanta.
Franchise growth model.
Kids1 Private Not Available Specialized schooling for students facing learning, language, social
challenges. Mission is to build confidence and competence.
K-III Communications Sub: PRM www.primediainc.com Provides specialized information for targeted audiences in the education,
business, special interest, and consumer markets
KinderCare Learning Centers KDCR www.kindercare.com Provides child care and pre-school education services at proprietary centers
in 38 states and the United Kingdom
Knowledge Beginnings Private www.knowledgebeginnings. Operates child care centers and early education schools in 24 states under
com names such as Children’s Discovery Centers and Hildebrandt Learning
Centers.
KnowledgeSoft Private www.knowledgesoft.com Develops and builds enterprise knowledge management systems for training
programs.
Kumon USA, Inc. Private www.kumon.com After-school, supplemental math and reading tutoring program with global
distribution.
La Petite Academy Private www.lapetite.com Second largest operator of for-profit preschool educational facilities in the US
for children aged 6 weeks to 12 years
LeapFrog Toys Subsidiary www.knowledgeu.com Produces a variety of products designed to teach reading skills to children.
LeapFrog is a subsidiary of Knowledge Universe.
Learingstation.com Private www.learningstation.com Offers a subscription-based "thin-client" network that enables schools to run
modern software on obsolete machines over the Internet serving the K-12
and adult learning markets.
Learning Byte International Private www.iatusa.com Provides customized, online learning solutions utilizing sound instructional
design and multimedia technology resulting in an interactive learning
environment
The Learning Company TLC www.learningco.com The market share leader in educational, personal productivity and reference
software for the consumer market. Brands include Broderbund, SkillsBank,
Comptons and Mindscape.
The Learning Contract Private www.projectachieve.com Develops a comprehensive information management systems for K-12
schools
Learningsmith Private www.learningsmith.net/ Retailer specializing in home learning products including, toys, games, books,
video, and software
Learning Tree International LTRE www.learningtree.com Develops, publishes and delivers advanced technology training courses for IT
professionals worldwide.
Learning Ventures Private www.aprisa.com Provides custom and standard online education including Ph.D. and Masters
(M.S.) programs in a variety of fields

187
 The Book of Knowledge – 9 April 1999

Table 106: Company Index (Continued)

Company Ticker Website Business Description
The Leona Group Private www.leonagroup.com Operates 24 charter schools in Michigan and in Arizona.
Lotus/DataBeam Sub: IBM www.lotus.com/home.nsf/t Provides real-time remote collaboration and distance learning software. A
abs/learnspace subsidiary of IBM.
Macromedia MACR www.macromedia.com Delivers Internet tools and technologies applicable to training program development.
Mathsoft Private www.mathsoft.com Develops, markets, and supports technical calculation and data analysis
software productivity tools for professionals, students, and educators.
MC2 Learning Systems ASE: NCZ.A www.mc2.sfu.ca Provides educational groupware that enables teachers to organize, structure
and share Internet-based projects.
McGraw-Hill Publishing MHP www.mcgraw-hill.com Publishes print and electronic educational materials for K-12, postsecondary
and corporate markets. Also offers Internet and CBT-based courses.
Media Seek Private www.mediaseek.com Provider of print, video, and electronic resources for curriculum planning and mapping
Micro Training Associates Private www.microtrain.com Provides custom instructional design and development services using CBT,
multimedia and web-based alternatives.
Microsoft MSFT www.microsoft.com Sells operating systems and applications software to schools; also holds
significant share in reference software
Mosaica Education Private www.mosaicaeducation.com Operates two charter schools, one each in Pennsylvania and Michigan.
m-Powa Private www.m-powa.com South African company that provides interactive web-based solutions using
intranet technologies, multimedia education training and electronic
performance support systems.
Mulberry Child Care Centers Private www.mulberrychildcare.co Operates child care centers in five states. Headquartered in Brookline, MA
m
Multi Media Team Training Private www.multimediateamtraini Authors multimedia computer-based training programs for corporate clients.
ng.com
N2H2 Private www.n2h2.com Offers an internet filtering device to prevent children from accessing
inappropriate content and manages a kid-oriented Internet search engine
(Searchopolis.com).
National Computer Systems NLCS www.ncs.com The leading provider of administrative teacher software. The largest
academic test processing company, catering to education and corporate
markets.
National Heritage Academy Private www.heritageacademies.co Operates16 charter schools primarily in Michigan.
m
National Technological University Private www.ntu.edu Offers a wide range of satellite-delivered instructional television courses taught by the
top faculty of more than 50 of the nation’s leading engineering schools and other
organizations and institutions selected because of their special expertise.
Nebraska Book Company Private www.nebook.com One of the largest used and new book distributor in North America. The
company’s products and services include: Textbooks, Retail College
Bookstores, Information Systems, and Consulting Services
NETg Sub: H Www.netg.com Provider of IT training with more than 600 training titles serving over 2,000
customers worldwide.
NetSage Corporation Private www.netsage.com Develops intelligent, animated software agents called “Sages” that make
computer-based training more personalized, efficient and entertaining.
NetSchools Corporation Private www.netschools.com Developed and supports a complete education technology solution for K-12
schools, including a specially-designed laptop for kids, academic software,
wireless infrared networking, and teacher training.
New Horizon Child Care Private Not Available Operates 47 child care facilities in Minnesota
New Horizon Kids Quest KIDQ Not Available Operates 16 supervised children's entertainment facilities under the name
Kids Quest and 14 traditional child care centers under the name New Horizon
New Horizons Worldwide NEWH www.newhorizons.com Provider of IT training with over 300 applications courses and 200 technical
training courses, and a customized courseware library of more than 800 titles
that span nine languages.
NIIT, Inc. (Bombay: www.niit.com A global IT services company, develops educational multimedia software and
NIIT.IN) conducts instructor-led and technology-based training.
Ninth House Private www.ninthhouse.com Created an online learning network delivering interactive business-skills using
experiential learning and multimedia.
Nobel Learning Communities NLCI www.nobellearning.com Provides affordable private education (from preschool to the eighth grade) for
children of middle-income working families
Noodle-Kidoodle Private www.noodlekidoodle.com 42 retail stores specializing in educational toys and games
NovaNet Private www.novanet.com Computer-based education and communications network that offers self
paced interactive curriculum for secondary and adult learners
NYU On-line Inc. Private www.nyuonline.com For profit subsidiary of New York University that will sell continuing education
courses delivered online.
Ombudsman Alternatives Private Not Available Operates two charter schools in Arizona.
One Touch Sub: GMH www.onetouch.com Provider of Interactive Distance Learning (IDL) Systems that fully integrate
video, voice, and data to deliver live, real-time training and education.

188
 The Book of Knowledge – 9 April 1999

Table 106: Company Index (Continued)

Company Ticker Website Business Description
OnlineLearning.net Private Supplier of continuing higher education for professionals and postsecondary
www.onlinelearning.net
education. Offers UCLA extension courses.
OnTarget, Inc. Private www.tmsnet.com Develops and implements advanced sales and marketing training and
consulting programs for sales organizations competing in complex, multilevel
sales campaigns.
Pathlore Software Private www.pathlore.com Offers an integrated training software solution that includes authoring tools,
course content, course administration software and course delivery to
corporate clients.
Pensare Private www.pensare.com Creates intranet-based performance improvement courses in partnership with
first class business schools and well-recognized seminar providers.
Pentamation Private www.pentamation.com Provides administrative application software to K-12 schools
Personnel Decisions Private www.pdi-corp.com Global management and human resources consulting firm specializing in
assessment-based selection and development of managers and
organizations
PineCrest Schools Private www.pinecrestschools.com Private school that offers 11 campuses in the LA area that focuses on
modern teaching methods and mastering basic skills
Primedia PRM www.primediainc.com Broadcasts news and educational content. Develops and delivers education
and skill development programs to teachers using multimedia technologies.
Princeton Review Private www.review.com Offers software, books, and courses for standardized test preparations, and
career resources.
Productivity Point International Private www.propoint.com Provider of instructor-led and technology based training in the area of
information technology with over 130 locations in North America and 700
titles. Productivity Point is a subsidiary of Knowledge Universe.
Prosoft I-Net Solutions POSO www.prosofttraining.com Provides Web-based training on Internet skills, including a certified Internet
Webmaster program.
PROVANT, Inc. POVT www.provant.com Provider of performance improvement training solutions to Fortune 1000
clients in areas such as employee selection, recruitment and retention,
enhancing employee work skills, developing employee management and
leadership skills and facilitating organizational assessment, direction and
change.
Quest Education QEDC www.questeducation.com Provider of diploma and/or associate degree programs in the areas of
healthcare, business, fashion and design, and photography.
Qwiz Sub: PRM www.primediainc.com Provider of skills testing and training provider to corporate human resource
departments and staffing services worldwide.
Rainbow Rascals Learning Center Private Not Available Operates preschool and learning centers for children from 6 weeks to 5 years
old. Headquartered in Bedminster, NJ
Ramsey Youth Services RYOUD www.ramsay.com An operator and manager of diversified treatment and education programs for
at-risk and troubled youth in residential and non-residential settings
nationwide.
Real Education Private www.realeducation.com Offers technology solutions for postsecondary institutions seeking to build
and distribute on-line educational courses.
RealNetworks RNWK www.realnetworks.com Develops software products and services enabling real-time transmission of
audio and visual broadcasts within the current network infrastructure.
Res-Care RSCR www.rescare.com Provides residential, training, educational and support services to persons
with developmental and other disabilities and at-risk and troubled youths.
SABA Software Private www.sabasoftware.com Provides a fully integrated suite of web-based enterprise applications for
creating learning environments in global organizations.
SABIS Educational Systems Private www.sabis.net Operates private schools around the world, including one in the U.S. and
manages 5 charter schools in the U.S.
Scholastic Corporation SCHL www.scholastic.com A global children publishing and media company, Scholastic publishes
original print and Internet-based curriculum for grades K-8.
School Specialty SCHS www.schoolspecialty.com Distributor of non-textbook educational supplies and furniture for grades pre-
kindergarten through 12 to school districts, administrators and teachers
through its catalogs
Scientific Learning Corporation Private www.scilearn.com Develops neuroscience-based education software and designed to increase
human learning and performance, especially for individuals with language
and reading problems.
SCT (Systems & Computer Technology SCTC www.sctcorp.com Provider of enterprise software and IT services for higher education and
Corp.) business. SCT provides administrative applications to about half of the U.S.
universities with over 2000 students.
7th Street.com Private www.7thStreet.com Develops Internet software tools and technologies for the preparation and
streaming of real-time, intelligent, interactive animated content and
characters over the Internet and other networks.
Simon & Schuster Sub: PRSNF www.pearson.com Leading publishing company. Prints under the Addison Wesley Longman,
Prentice Hall, and Allyn & Bacon, Simon & Schuster imprints.

189
 The Book of Knowledge – 9 April 1999
Table 106: Company Index (Continued)
Company
Skillsoft Corporation
Spyglass, Inc.
Store of Knowledge
Strayer Education
Sunburst Communications
Sylvan Learning Systems
Teacher Universe
TesseracT Group, The
Theatrix Interactive
Thomson Publishing
Torstar
Touchstone Applied Science Assc.
Tribune Education
TRO Learning
Tutor Time Child Care Systems
UNEXT.com
Universal Technical Institute
University Access
University of Phoenix
UOL Publishing, Inc.
Varsitybooks.com
ViaGrafix
Virtual Learning Technologies
Virtual University Enterprises
Voyager Expanded Learning
190
Ticker Website Business Description
Private www.skillsoft.com SkillSoft Corporation develops and markets a comprehensive library of
technology-based education products focused on a wide range of business
and professional development skills such as management, leadership,
communication, finance and marketing.
SPYG www.spyglass.com Develops, markets and distributes Internet enabling technologies, content
and professional services that allow non-PC devices to work with the Internet.
Private www.storeofknowledge.com 67 retail stores specializing in educational games, software, hobbies, and
toys. Affiliations with 25 public television stations.
STRA www.strayer.edu Postsecondary institution that offers career-oriented degree programs in
Washington, D.C., Maryland, and Virginia, including an online program.
Private www.nysunburst.com Creates and publishes video and computer based teaching materials for K-12
SLVN www.sylvanlearning.com Provider of tutoring, testing, and English language instruction.
Private www.knowledgeu.com Provides teachers with instructional technology planning, professional
development, instructional tools, and career and life services. Teacher
Universe is a subsidiary of Knowledge Universe.
TSST tesseract.pvt.k12.mn.us An integrated education management company, serving private preschool
students, charter school students, and postsecondary students.
Private www.ah-hah.com Publishes entertaining educational CDs and Web-based digital media
experiences for kids.
Toronto: itp.thomson.com Publisher of textbooks and related multimedia products for high-school and
TOC college.
Toronto: www.teachsp.com Develops and publishes educational software designed for grades K-12 in the
TS:B areas of science, social studies, mathematics, and language
TASAD www.tasa.com Develops, publishes, and distributes a proprietary line of custom reading tests
to elementary, secondary schools and universities nationwide
Private www.tribuneeducation.com A leading publisher of K-12 supplemental materials.
TUTR www.plato.com Develops interactive, self-paced instructional courseware geared toward
adolescent and adult learners.
Private www.tutortime.com Early learning and child care provider headquartered in Boca Raton, FL.
Both company-owned and franchised centers.
Private www.unext.com Plans to deliver postgraduate-level training electronically to corporations
around the world. Has signed agreement with Columbia Business School.
Private www.universaltech.com Provider of programs in autobody repair and painting, auto mechanics,
commercial art, refrigeration, heating and air conditioning, and travel and
tourism.
Private www.universityaccess.com Provider of high-quality business courseware for distance learning utilizing
the television and the Internet.
Sub: APOL www.apollogrp.com Offers one of the largest distributed learning programs with more than 9,000
students enrolled as of February 1999.
UOLP www.uol.com Publishes interactive, Web-based courseware for corporate training and
education markets.
Private www.varsitybooks.com Internet bookstore that sells textbooks. Has booklists from over 50 of the
nations largest schools.
VIAX www.viagrafix.com Provides IT training products and graphics software products for a variety of
computer software that is delivered on CD-ROM, LAN, and/or over the Web.
Private www.vlearning.com Provider of enterprise-wide assessment systems.
Sub: NLCS www.vue.com Provides a set of technology-backed program management services for
professional training and testing programs
Private www.iamvoyager.com Offers activity-based summer and before-and-after curricula for elementary
and middle school children. Curriculum partners include NASA, Discovery
Channel, Smithsonian Institution and Polaroid.

Table 106: Company Index (Continued)
Company
VSI Holdings
W.W. Norton
Wackenhut Corrections
Wave Technologies International
WBT Systems
Western Governors University
White Hat Management
Whitman Education Group
Wild Planet Toys
Wilson Learning Corporation
Winnebago Software
Wolters Kluwer
WorkLife Productions
Zany Brainy
ZapMe!
Ziff-Davis Inc.
Zowie Intertainment
The Book of Knowledge – 9 April 1999
Ticker Website Business Description
VIS www.vsiholdings.com Offers education and training systems design and development as well as
education through satellite and Internet.
Private www.wwnorton.com College and professional textbook publisher
WHC www.wackenhut.com Developer and manager of privatized correctional and detention facilities in
the U.S., Puerto Rico, Canada, the United Kingdom and Australia
WAVT www.wavetech.com Designs, develops, markets, and delivers training and instructional products
addressing data communications, networking and client/server computing
technologies.
Private www.wbtsystems.com Offers a web-based education and training management solution for higher
education and the corporate markets.
Not-for-profit www.wgu.edu/wgu/index.ht An independent, non-profit organization of governors from 17 states and one
ml territory that offers a growing list of more than 300 college-level distance
learning courses from 35 affiliated universities and education providers from
those states.
Private Not Available Operates five charter schools in Ohio.
WIX Not Available Provider of graduate, undergraduate and non-degree programs primarily in
the fields of information technology, healthcare and business.
Private www.wildplanet.com Markets proprietary educational toys through a variety of retail stores, catalog
sellers, and internet toy vendors
Private www.wilsonlearning.com Provider of performance improvement to the Fortune 500 and emerging
organizations internationally, with operations in the U.S. and over 50
countries worldwide.
Private www.winnebago.com Provides software, support, and service for proprietary library automation
software.
WTKWY www.wkap.nl Netherlands-based publishing company active in academic and professional
fields.
Private www.worklifepro.com Provides a CD-ROM based "tool kit" to help corporations set up work-life
programs.
Private www.zanybrainy.com 97 retail stores offering educational toys and games, CD-ROMs, and
teacher’s resources.
Private www.zapme.com Gives schools a complete Internet-connected computer lab at no cost through
partnerships with technology companies, corporate advertising and school e-
commerce.
ZD www.ziffdavis.com Publishes over 500 IT training courseware titles, provides Internet and
computer-based training.
Private www.zowieintertainment.co Designs and develops smart toys that interact with PCs and other
m technology-based entertainment products.
191
The Book of Knowledge – 9 April 1999

Appendix B
Table 104: Education Bookmarks
Booksmarks Company, Organization or Association

Education Statistics
http://www.census.gov/population/www/socdemo/educ-attn.html US Census Educational Attainment Statistics
http://nces.ed.gov National Center for Education Statistics

General Education
http://www.leg.state.nv.us/Interim/NonLegCom/EdComm Education Commission of the States
http://www.ed.gov US Department of Education
http://www.ACENET.edu American Council on Education
http://www.edindustry.com Education Industry Report
http://www.eduventures.com EduVentures
http://www.milken-inst.org Milken Institute

Postsecondary Education
http://www.ed.gov/offices/OPE/index.html Office of Postsecondary Education
http://chronicle.com Chronicle of Higher Education
http://www.highereducation.org National Center for Public Policy and Higher Education
http://www.ihep.com The Institute for Higher Education Policy
http://www.aacu-edu.org Association of American Colleges and Universities,
http://www.wiche.edu Western Interstate Commission for Higher Education
http://www.nca.asu.edu North Central Association of Colleges and Schools Commission on Schools
http://www.ed.gov/offices/OERI/PLLI National Institute on Postsecondary Education, Libraries, and Lifelong Learning
http://www.literacyonline.org The National Center on Adult Literacy

Distributed Learning
http://192.52.179.128/.index.html Educom
http://www.educause.edu Educause
http://www.usdla.org US Distance Learning Association
http://www.wested.org/tie/dlrn The Distance Learning Resource Network (DLRN)
http://www.uwex.edu/disted/home.html Distance Education Clearing House

K-12 Education
http://www.edweek.com Education Week
http://www.nea.org National Education Association
http://ascd.org Association for Supervision & Curriculum Development
http://www.aacte.org American Association of Colleges for Teacher Education
http://www.nmsa.org National Middle School Association
http://www.nsta.org National Science Teachers Association
http://www.nsba.org National School Boards Association
http://www.nctm.org National Council of Teachers of Mathematics
http://www.ira.org International Reading Association
http://www.nsdc.org National Staff Development Council
http://ojjdp.ncjrs.org Office of Juvenile Justice and Criminal Prevention

K-12 Education Technology

http://www.techlearning.com Technology+Learning Magazine
http://www.cue.org Computer Using Educators
http://www.aace.org Association for the Advancement of Computing in Education
http://www.acm.org/education Association for Computing Machinery
http://www.aect.org Association for Educational Communications and Technology

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 The Book of Knowledge – 9 April 1999

Table 104: Education Bookmarks (Continued)

Bookmark Company, Organization or Association

K-12 Reform
http://edreform.com The Center for Education Reform
http://www.csus.edu/ier/charter/resources.html Institute for Education Reform
http://aepp.org Association for Educators in Private Practice
http://brook.org Brookings Institution
http://www.heritage.org Heritage Foundation
http://www.hudson.org Hudson Institute
http://www.naschools.org New American Schools Corporation
http://www.friedmanfoundation.org Milton & Rose D. Friedman Foundation for Educational Choice
http://www.edexcellence.net Fordham Foundation

IT Training
http://www.itta.org Information Technology Training Association
http://www.itaa.org Information Technology Association of America
http://www.computerworld.com Computer World
http://www.cedma.org Computer Education Management Association

Corporate Training
www.astd.org American Society for Training & Development (ASTD)
http://www.trainingsupersite.com Training Supersite
http://www.trainingnet.com Training Net
http://www.corpu.com/clofrm.htm Chief Learning Officer Exchange
http://www.brandon-hall.com Brandon Hall Resources
http://www.masie.com/trlinks.htm The MASIE Center
http://www.ollo99.com Online Learning ’99
http://www.shrm.org/hrmagazine/articles/0597bl.htm HR Magazine
http://www.shrm.org Society for Human Resource Management
http://www.ed.gov/offices/OVAE Office of Vocational and Adult Education (OVAE)
http://www.hudson.org/wf2020/frame4.html Workforce 2020
http://www.careered.com Career Ed
http://www.alx.org America’s Learning Exchange
http://www.brint.com/km Virtual Library on Knowledge Management
http://www.salt.org Society for Applied Learning Technology
http://www.ccl.org Center for Creative Leadership

Early Education and Child Care

http://naecy.org National Association for the Education of Young Children
http://nccic.org/research.html National Child Care Information Center
http://childrensdefensefund.org Childrens Defense Fund

International
http://www.unesco.org/iau International Association of Universities
http://www.ispi.org International Society for Performance Improvement
http://www.ostd.ca Ontario Society for Training and Development (OSTD)
http://www.udel.edu/bateman/acei The Association for Childhood Education International
http://www.iste.org International Society for Technology in Education
http://www.globalSchoolnet.org Global SchoolNet

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The Book of Knowledge – 9 April 1999

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194
Merrill Lynch Education and Training Team
Name Title E-mail Phone Number

Research
Michael T. Moe, CFA Director of Global Growth Stock Research mmoe@exchange.ml.com (415) 954-8410
Kathleen Bailey Assistant Vice President kbailey@exchange.ml.com (415) 954-8414
Rhoda Lau Industry Analyst rlau@exchange.ml.com (415) 954-8416
Peter McNally Statistician pmcnally@exchange.ml.com (415) 954-8424

196