Beleaguered O.C. Marketer of Reading Kit Plans Comeback : Literacy: CEO vows Gateway Educational Products will recover from bankruptcy, bad publicity over Hooked on Phonics.

By DAN MARGOLIS

Oct. 31, 1995 12 AM PT

SPECIAL TO THE TIMES

ORANGE — John Shanahan seems incredibly confident for a chief executive who has placed his company in bankruptcy, laid off 400 workers and seen his Hooked on Phonics learn-to-read kits attacked by the educational Establishment.

“Don’t worry,” he bellowed to a property management official who had called to ask whether Shanahan’s Gateway Educational Products would be able to pay the rent on its corporate offices in Orange. “You will get every nickel you got coming to you.”

In the corridors of Gateway’s headquarters, Shanahan’s back-slapping, glad-handing enthusiasm never seems to wane, despite the company’s struggles.

Gateway recently sought protection from its creditors by filing for Chapter 11 bankruptcy reorganization. The company later submitted a list of 4,700 creditors, including many radio and television stations that carried Hooked on Phonics commercials, that are owed more than $14.2 million. The Orange company has assets of $8.5 million, according to bankruptcy documents.

But the gregarious 55-year-old chief executive vows that the company, which now has 135 employees, will bounce back.

“I feel no embarrassment whatsoever about the negative publicity,” he said, feet propped across two conference-room chairs. “I know what we have accomplished.”

Shanahan, a former composer of music jingles, founded the company in 1985 to market the Hooked on Phonics package, which uses tapes of simple words set to music, along with flash cards and workbooks, to teach reading phonetically. Over the next nine years, annual revenue soared to $130 million as customers ordered the kit through the company’s “1-800-ABCDEFG” hot line.

In late 1994, Gateway’s fortunes began to unravel. First, the privately held company agreed to a Federal Trade Commission order barring Gateway from making sweeping promises that the program could teach anyone to read, regardless of their limitations. Gateway admitted no wrongdoing in the settlement and paid no penalties.

Then “Dateline NBC” reported that Gateway could not support advertising claims that Hooked on Phonics could help people with learning disabilities. Gateway said that the piece, which aired in December, 1994, was false and defamatory and threatened to sue.

Gateway had relied heavily on advertising to build its sales. In 1993, the company spent $35 million--more than half of its total revenue that year--to put its message across the airwaves.

Shanahan said his plan to revive Gateway will de-emphasize telemarketing and rely mainly on sales in retail outlets, an area that the company had virtually ignored. He said he has already lined up more than 2,900 stores, mostly small educational outlets.

The company will also begin marketing new products, including a Hooked on Math program and its Classic Achievement Series, a set of illustrated books and audio narration for a variety of literary works ranging from “Hamlet” to “Black Beauty.”

So far, retail outlets report mixed results.

Myrna Greer, manager of Teacher’s Pet in Orange, said that she sold her first shipment of 10 Hooked on Phonics kits in a few weeks. Other retail stores, including Learning Is Fun in Las Vegas and Manning’s School Supplies in Beaumont, Tex., said that sales have been brisk. But Teacher’s Pet in Laguna Hills and Imaginarium in Los Angeles said that they have sold only a handful of the reading kits.

“I think it’s a good product as long as there is a teacher,” Greer said. “But I think they got into trouble when their ads said anyone could learn how to read, without any help.”

For years, Hooked on Phonics has been criticized by some teachers and other educators as a program that overstates its benefits and overcharges its customers.

“I think it’s a question of how people define reading,” said Linda Clinard, a literacy expert at UC Irvine. “It’s not just sounding out words. We want them not just to say it but understand it.”

Barbara Kiefer, an associate professor at Columbia University’s Teachers College in New York, questioned whether Hooked on Phonics makes a difference.

“There’s nothing magical in it,” she said. “There are so many other ways to introduce children to literacy.”

Vivian Shannon, principal of Centinela Elementary School in Inglewood, believes that the critics are being unfair. “Hooked on Phonics does work,” Shannon said. “It’s fast-paced, so the children don’t get bored.”

She said that Hooked on Phonics helped slower students develop their reading skills.

In 1993, Gateway provided the $200 reading kits for about 100 students at Centinela and another school in the Inglewood Unified School District as part of a pilot program. At the time, the company saw the Inglewood project as the first step toward placing the reading system in thousands of classrooms across the United States.

Jean Arnold, head of a program to help illiterate San Quentin inmates learn how to read, is also a Hooked on Phonics supporter. She said that many prisoners who started the program knowing no more than the alphabet were able to read and comprehend at the fifth-grade level within four months.

The company had donated $500,000 to the project but was forced to cut its portion of the funding last fall. The Centerforce Literacy Project continues to receive other private donations.

Richard Creason, president of the National School Supply and Equipment Assn. in Silver Spring, Md., said that Gateway has taken a bad rap because it began marketing Hooked on Phonics before testing the program in traditional educational channels.

“Their [biggest] mistake was not first testing it in the ivory-tower mode,” he said.

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Road to Bankruptcy

Gateway Educational Products’ decline started with Federal Trade Commission restrictions on its claims about Hooked on Phonics’ ability to teach reading. Key events:

* Aug. 29, 1994: Gateway signs FTC agreement restricting advertising claims; firm pays no penalties and admits no wrongdoing.

* Dec. 13: “Dateline NBC” questions validity and legitimacy of Hooked on Phonics as an educational tool; Gateway defends product.

* Oct. 11, 1995: Faced with declining revenue, Gateway files for Chapter 11 bankruptcy protection; firm had previously laid off 400 workers.

* Oct. 19: Court documents show Gateway with assets of $8.5 million and debts of $14.2 million to 4,700 creditors, most of which are television and radio stations.

GATEWAY’S TOP 10 CREDITORS

Gateway owes $4.3 million to its top 10 creditors alone. Creditor and amount owed (in thousands):

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Firm Location Amount Graphic Arts Center Portland, Ore. $1,202 AT&T; Megacom 800 Service Dallas 1,200 Beneficial National Bank USA Wilmington, Del. 970 Multi-Media Chatsworth 402 Aaron Thomas Co. Garden Grove 142 Riordan & McKinzie Los Angeles 113 Science Research Associates Worthington, Ohio 91 University Accounting Service Brookfield, Wis. 66 NBC-TV New York 61 Michael Q. Eagan San Francisco 55

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Source: U.S. Bankruptcy Court, Times reports; Researched by JANICE L. JONES / Los Angeles Times