Knowledge Learning Corporation

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Knowledge Learning Corporation

4340 Redwood Highway, Building B
San Rafael, California 94903-2121
U.S.A.
Telephone: (415) 444-1600
Fax: (415) 444-1664

Wholly-Owned Subsidiary of Knowledge Universe, Inc.
Incorporated: 1983 as Children’s Discovery Centers of America
Employees: 1,000 +
Sales: $93 million (1997)
NAIC: 611110 Elementary and Secondary Schools

Knowledge Learning Corporation is a fast-growing subsidiary of Knowledge Universe, an educational company founded by Michael Milken of Drexel Burnham Lambert fame, his brother Lowell, and Oracle CEO Larry Ellison. Based in San Rafael, California, Knowledge Learning operates more than 350 childcare, preschool, kindergarten, and primary school facilities in 24 states under a variety of names, such as Knowledge Beginnings, Children’s Discovery Centers, Magic Years, Learning Universe, and Hildebrandt Learning Centers. In addition, the company provides before- and after-school care, and some of its centers offer camps during the summer months when school is not in session. A large portion of Knowledge Learning’s childcare centers are funded by corporate clients for the benefit of their employees, including IBM, Travelers, and the Internal Revenue Service. Underpinning all of the programs developed by Knowledge Learning is an adherence to the educational philosophy of Swiss psychologist Jean Piaget.

Company Origins Date to 1983

Knowledge Learning, originally known as Children’s Discovery Centers of America (CDC), was established in the small town of Monroe, Connecticut, in 1983 by an entrepreneur named Tommy Thompson who had been previously involved in a number of successful startups. He was attracted to the industry because of the rising need for day care. With backing from New York venture capitalists, he acquired a small Connecticut chain of day care centers, operating as Children’s Discovery Centers, then used that name to create Children’s Discovery Centers of America, Inc. Thompson became the chairman and CEO of CDC, with James DeSanctis serving as his chief financial officer. Within a year they were running 12 facilities, and by 1985 took the company public. Around the same time as the IPO, CDC made a major acquisition, the purchase of Mary Moppets Day Care Schools, an Arizona chain that combined company-owned with franchised units. The timing of both the IPO and the entry into the Arizona market, however, proved disastrous. A change in Arizona regulations mandated a higher ratio of personnel per child in day care facilities, resulting in much higher labor costs and adversely impacting the entire industry in the state.

With the Mary Moppets subsidiary draining the resources of CDC, Thompson resigned and DeSanctis took over as chairman and CEO. Under his leadership, the company continued to struggle, posting a significant loss in 1986. DeSanctis and CDC’s backers agreed that a change was needed, and a search was conducted to find a new chief executive with experience in turning around troubled companies. The man chosen was Richard A. Niglio, who was installed as chairman, CEO, and president in March 1987. He had considerable experience in turning around multi-unit operations, albeit in the restaurant field. He served as president and CEO of Mr. Donut of America from 1971 until 1982, then became chairman and CEO of the San Francisco-based Victoria Station restaurant chain after it entered bankruptcy in 1982. In May 1988, Niglio moved CDC’s headquarters to San Rafael, California, where he had previously relocated while heading Victoria Station.

Although Niglio planned to maintain CDC’s presence in New England, he saw California as an even more promising market. In reality, the childcare industry across the country held great potential. America’s birthrate was increasing steadily, an echo effect of the post-World War II baby boom, and with more mothers now entering the workforce, the need for childcare facilities was growing at a fast rate. According to statistics compiled by the National Association for The Education of Young Children, childcare center enrollment increased 400 percent from 1976 to 1990. Moreover, the industry was highly fragmented. Operating just 53 facilities, CDC was already the fifth largest childcare company. The five largest companies combined controlled less than 10 percent of the estimated 40,000 to 50,000 centers operating in the United States. The top two companies, Kinder-Care (with over 1,000 centers) and La Petite Academy, achieved growth by opening new centers. Niglio opted instead to acquire established childcare centers. Further, he focused on providing affordable, quality child care. “Safety, supervision and cleanliness are the minimums,” he told the San Francisco Business Time in 1988. “Above and beyond those, it gets down to curriculum and program and that can make a substantial difference with children. We’ve spent a great deal of our resources developing what we think is the greatest curriculum that exists.”

Magic Years Acquired in 1990

To support his expansion plans, Niglio raised $4.5 million in a private placement of stock. CDC became profitable in 1988 and 1989 but in 1990, with the economy faltering, it fell into financial difficulties, mostly related to the Mary Moppets operation, which was finally sold off. As a result of a one-time charge against earnings, CDC lost $1.8 million on revenues of $16.5 million in 1990. Nevertheless, the fundamentals of the business remained sound, and by the end of 1990 Niglio was able to complete the company’s largest deal, a tax-free stock swap for Magic Years Child Care and Learning Centers Inc. The move also expanded CDC’s scope. While most of its 59 facilities were community-based, Magic Years’ 32 centers were located at work sites, primarily hospitals and other health care facilities. Eighteen of the units were employer-sponsored centers. CDC now operated in 13 states with a total license capacity of its units standing at 8,000. Niglio was eager to maintain the company’s momentum, especially in light of the problems suffered by its chief rivals. Kinder-Care, for instance, was lapsing into bankruptcy after making poor investments in high-yield bonds with Drexel Burnham Lambert, an ironic situation given Milken’s eventual purchase of CDC. La Petite Academy would suffer its own problems and ultimately be taken private. As a result of these developments, CDC found itself the only company in the field capable of making sizeable acquisitions.

After completing the Magic Years merger, CDC made another stock offering of $4 million to be used in making further purchases. Niglio’s targeted operations with six to ten centers that were on the verge of needing a more sophisticated infrastructure. While they would keep their local names and retain management, the acquisitions would adapt CDC’s curriculum and employ its computer management systems. In 1992, the company added 41 facilities, ending the year with a total of 131 in operation and generating revenues of $25.7 million. The company was also on the verge of returning to profitability after posting losses in three consecutive years, due in large measure to CDC’s rapid expansion.

CDC continued to add childcare centers in 1993, adding 26 new facilities while closing three. Niglio floated another stock offering, this time selling 1.3 million shares at $10 a share. Just a year earlier CDC’s stock traded in the $3 range. The rise in value to $10 was in many ways a reflection of investor recognition that the childcare business was likely to continue to expand for a number of years. CDC picked up the acquisition pace in 1994, adding 42 facilities while closing three. With 193 facilities in operation by the end of 1994, the company grew revenues to $55.3 million, a significant increase over the 1993 total of $38.6 million. Moreover, net profits more than doubled, growing from $1.1 million in 1993 to $2.8 million in 1994. In addition to day care, CDC was also becoming involved in managing before- and after-school programs for older children, ages 6 to 12, as well as operating a few private elementary schools.

In January 1995, CDC completed a major acquisition that began to diversify its interests—the cash and stock purchase of Prodigy Consulting Inc. and its affiliated partnerships. In addition Prodigy added some $6 million in annual revenues to CDC’s balance sheet. Founded in 1988, Prodigy operated seven child development centers in suburban Atlanta. It also managed ten employer-sponsored facilities spread across seven states, a segment of the childcare market in which CDC was eager to make inroads. Prodigy concentrated its efforts on such blue chip clients as Amoco, Chrysler, General Motors, IBM, UAW, and Xerox. In the first two months of 1995, CDC won five additional contracts to operate employer-sponsored childcare facilities, including an agreement with the Federal Aviation Administration in Seattle. Moreover, CDC acquired eight community-based childcare facilities during the first quarter of 1995. By the end of the year, the company added 52 units and closed six, for a net increase of 46 and bringing the total operation to 239 facilities. As a result revenues also continued a steady climb, reaching $77.6 million for the year, along with a $2.6 million profit.

Even before the completion of 1995, however, business conditions began to change. The field became more competitive, leading to much higher prices for available acquisitions. Moreover, CDC was having trouble digesting all of its 1995 purchases. Due to these factors, CDC slowed its rate of growth in 1996, adding only nine facilities for the year. Although revenues improved to $87.8 million in 1996, profits fell significantly, dipping below $1 million. One area where CDC remained aggressive was in elementary school programs, adding five operations in 1996, as well as 26 new kindergarten program. The company was also eager to create internal growth by adding grades to some operations, a simple way to boost total enrollment and revenues.

Company Perspectives:

Knowledge Learning Corporation (KLC) is a family of child development centers dedicated to meeting the growing needs of our nation’s families. We provide quality early childhood education in several hundred centers nationwide, along with innovative services that help families achieve balance between work and home life.

Knowledge Universe Acquires Company in 1998

Although profits rebounded in 1997, improving to $2.5 million, CDC’s revenues only grew at a modest rate, reaching $93 million. After a period of retrenchment, CDC was poised to return to a growth mode in 1998. The company was particularly anxious to continue its entry into elementary education, with the goal of offering all elementary grades, and possibly higher. With the poor state of the country’s education system becoming a salient topic of public discussion, CDC was clearly beginning to position itself as an education company rather than a day care chain. To realize these aspirations, however, required funding, and CDC was not alone in recognizing the potential of the for-profit private education business. One of the new players in the field was Knowledge Universe, and rather than compete against it, CDC decided to join forces when the Milken-led corporation came calling. In May 1998, a subsidiary of Knowledge Universe took CDC private. As part of a transition to a new management team, Miglio agreed to step down and accept a two-year consulting contract.

The driving force behind the creation of Knowledge Universe was Michael Milken, the controversial king of junk bonds who served 22 months in federal prison and paid a $1 billion fine for six counts of felony securities fraud. After his release from prison in 1993, much of his attention was spent on the Milken Family Foundation, which was involved in education through the awards granted to top teachers and minority students. He also came to see for-profit education as a business opportunity, revealing to Fortune magazine in 1996 his vision for a “cradle to cane” enterprise, encompassing not only schooling for children but also technical training and continuing education for adults. Even capturing a small percentage of this vast market could mean tens of billions of dollars. To make his vision a reality he contacted Lawrence Ellison, founder and CEO of Oracle. A subsidiary of Oracle was already one of the world’s largest computer training companies, making Ellison a likely partner. Milken also enlisted his brother Lowell, and together the three men formed Knowledge Universe with $500 million in financing. The company essentially served as a vehicle for investing in the education industry.

The initial focus of Knowledge Universe was in an area with which Ellison already felt comfortable: IT training. The first acquisition took place in September 1996, a United Kingdom-based IT training company called CRT, followed by similar purchases over the next two years. It was because of Lowell Milken’s interest in early childhood education that the company began to look for a suitable investment in the childcare business. They settled on CDC, then paid $80 million to take the company private. It took on the name of the acquiring subsidiary before becoming Knowledge Learning. With the deep pockets of its corporate parent to back it, and free of shareholder pressure to produce short-term results, the company was again positioned to grow rapidly through acquisitions. Instead of targeting single units or small chains, however, Knowledge Learning was now able to consider buying operations that were larger than itself. Aside from this shift in strategy, the company also began to focus more on children’s education, an area that had originally been an offshoot of its childcare operations.

Staking out market share and building a mega-brand were of greater concern than becoming highly profitable in the immediate future. Knowledge Universe was spreading in all directions, quickly becoming a billion-dollar company in annual revenues. Moreover, no other company was attempting to vertically integrate the education market, leaving it virtually unopposed. While Knowledge Universe was very much interested in acquiring more childcare facilities and developing private schools, extending its reach from pre-school through high school, the real opportunity lay with the public schools, which represented about half of America’s $665 billion education market. The increasing popularity of charter schools provided a wedge into the public K-12 market. These schools were publicly funded but were operated by foundations or community groups, and in some cases private enterprise. In much the same way that for-profit hospital chains have become a major factor in health care, companies like Knowledge Universe might one day do the same thing with public schools. Regardless, the company was committed to Milken’s “cradle to cane” vision, and Knowledge Learning was positioned to play a key role. Through its day care and pre-school operations, the subsidiary would be able to establish the Knowledge Universe brand with both children and parents, who thereafter would be more inclined to turn to affiliated elementary schools, secondary schools, and so on down the line. Such full market coverage of education was an enticing prospect, so much so that it appeared inevitable that major mass-media companies like Disney or AOL-Time Warner would begin to provide some stiff competition. Clearly the real battle for educational dollars had yet to be fully joined, but Knowledge Learning was sure to play a major role in the success of its corporate parent.

Principal Competitors

ARAMARK; Bright Horizon Family Solutions; Childcare Network; Kaplan; KinderCare; La Petite Academy.

key Dates:

1983:: Children’s Discovery Centers of America (CDC) is founded.
1985:: CDC goes public and acquires Mary Moppets Day Care School.
1987:: Richard Niglio becomes chairman and CEO.
1990:: CDC acquires Magic Years Child Care and Learning Centers, Inc.
1996:: Knowledge Universe is founded.
1998:: Knowledge Universe acquires CDC and renames it Knowledge Learning Corporation.