Baltimore is EAI's make-break chance

9 SCHOOLS START TO MEND

November 15, 1992|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- When Dick Perkins envisions the company of the future, he sees Education Alternatives Inc.

It's small, lean and could make tons of money managing public schools -- it already has a $133 million, five-year contract in

Baltimore -- says the head of the Minneapolis investment firm Perkins Capital Management Inc. The firm owns 15.4 percent of Education Alternatives' stock.

But that breathless description may be a tad optimistic for a 6-year-old company that has yet to turn a profit.

Education Alternatives has burned up millions of dollars while hopscotching among corporate goals -- first planning a nationwide network of private schools, then shifting to public school management. One foray into public schools has produced rave reviews; another ended amid heavy criticism.

Now, in Baltimore, Education Alternatives faces a make-or-break project.

Success would provide an impressive entree to the nation's $220 billion education budget; failure could threaten the company's survival.

Meanwhile, hopes -- and fears -- cloud any view of Education Alternatives.

Its product, education, leads some to view the company as the modern equivalent of the huckster in the "Music Man," with 76 trombones hyping suspicious achievements.

Others see it as a model for the Clinton administration -- a savior for cash-starved public schools.

John Golle, Education Alternatives' chairman and chief executive officer, is confident that the company can improve the nine Baltimore schools it manages. "We've run schools for six years. This isn't conjecture on our part."

Still, Education Alternatives has yet to prove that its widely admired educational methods can generate profits.

And the company's experience in Baltimore will go a long way toward determining whether it thrives -- or even survives.

A mixed record

Education Alternatives was founded when Mr. Golle bought USSA Private Schools, a subsidiary of computer company Control Data Corp., which had decided against branching into ++ education.

His ambitious strategy was to open a nationwide network of 100 private schools.

Within two years, the company opened "Tesseract" schools in affluent suburbs of Minneapolis and Phoenix. The name, which suggests new ways of thinking, was derived from Madeleine L'Engle's children's book, "A Wrinkle In Time." The schools emphasized non-competitiveness, group work, interaction and high-tech equipment.

"It's very important to understand that these communities were chosen demographically as able to support a new private school. They are white, affluent and do not have many competing private schools nearby," said Joe Nathan, director of the center for school change at the University of Minnesota.

Despite such demographic considerations, the schools were plagued by low enrollment in their early years.

They lost money until this year, when Mr. Golle reported that they had started to break even.

Those losses prompted Education Alternatives to backtrack on plans for a nationwide school network, and the company changed its focus to managing public education.

In 1991, Education Alternatives made its formal break with the two Tesseract schools but continued to manage the schools through a contract. The company turned over the schools' property -- and debts of more than $4 million -- to two companies run by Mr. Golle, while agreeing to provide $898,010 in loans and cash, as well as options to buy 100,000 shares of Education Alternatives stock for $1 each. The stock shares, which were worth about $5 apiece when the deal was made, now trade for $15.25 each.

Tesseract Development Corp., which Mr. Golle owns with Minneapolis real estate investor George Welsh, was given the Arizona Tesseract school. The more stable Minnesota school was given to the Tesseract Foundation, a company that is applying for non-profit status.

That deal eased the financial pressure on Education Alternatives, which lost $5.8 million in its first four years. It also allowed the company to continue showcasing its teaching methods while seeking management contracts for public schools.

Public education

Even as it was racking up losses at the Minnesota and Arizona schools, Education Alternatives had moved into public education. In 1990, it won a $1.2 million contract to implement the Tesseract system in a new elementary school being built in South Pointe, Miami Beach. As part of the deal, the company promised to raise $2.5 million in private funding for the school.

That contract was important. It marked a breakthrough into public schooling, even though the company acted only as a consultant and much of the school's funding came from private sources.

South Pointe has been Education Alternatives' most successful project.

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