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Despite Election Win, EAI's Business Picture Is Still Far From Clear

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Education Alternatives Inc. may have dodged a bullet in Hartford, Conn., last week, but the pioneer in private management of public schools remains in the line of fire.

The stock price of the Minneapolis-based company jumped 13.3 percent the day after the Nov. 7 elections in Hartford, where candidates who vowed to end the district's contract with EAI failed to win control of the school board. (See related story.)

But the elections left EAI backers with a majority of just 5-4, down from a 7-2 split before, and the company still faces an uncertain future in Hartford and elsewhere.

  • EAI has yet to receive any payment for its services in Hartford, although it is supposed to manage the 24,000-student district's budget as well as six schools this year.

    The company has spent as much as $9 million on equipment, renovations, management consulting, and other expenses in the district, but negotiations with district officials over how it should be paid have stalled.

  • In Baltimore, where EAI runs nine public schools and helps manage three others, officials of the cash-strapped district are trying to wring as much as $10 million out of the company's $44 million contract for this year. Both sides were in the midst of intense negotiations last week.
  • EAI has lost two top executives this year, leading some critics to question its management stability. Its president, David Bennett, resigned in July, but remains a consultant to the company. Late last month, Chief Operating Officer William F. Goins quit, citing a disagreement with Chairman and Chief Executive Officer John T. Golle over responsibilities.

But some observers of the nascent education-management industry say it may be too early to write the company off.

"I don't believe it is the end of the company if either the Baltimore or Hartford contracts were to be terminated," said John M. McLaughlin, an education professor at St. Cloud State University in St. Cloud, Minn., and the editor of the Education Industry Report. "I think they are learning about how future contracts may be shaped better for both EAI and school districts."

Interested Observer

Despite a continuing barrage from critics and uncertainties in Hartford and Baltimore, Mr. Golle was upbeat about EAI's prospects in an interview last week.

Mr. Goins' departure was on friendly terms and his role with EAI "just didn't work out," Mr. Golle said. "To try to go beyond that would be to contrive something that just isn't there."

Mr. Golle emphasized that the company did not get involved in the Hartford school board races, even though most people viewed the election as tantamount to a referendum on whether to continue the contract.

"We will deal with whoever the local people elect," he said. "Our contract is very clear. We have to produce meaningful results or they will cancel it."

Last month, however, EAI raised the prospect of terminating the Hartford contract on its own if it is not paid soon.

The five-year contract there allows EAI to recover its expenses from any budgetary savings it generates in the district.

In a filing with the U.S. Securities and Exchange Commission last month, EAI said that if contract issues with the Hartford district could not be resolved, the "contract could change significantly or be terminated."

Mr. Golle said he expects those issues to be worked out soon. "We continue to remain optimistic that we will recover our expenses."

Budget Blues

In Baltimore, school officials are struggling to find ways to address a projected $32 million shortfall in a budget of $647 million. Mayor Kurt L. Schmoke, whose administration controls the district's finances, this month suggested trimming $10 million from EAI's $44 million contract this year.

"Either they are to be here for less money, or they are not going to be here at all," he told reporters Nov. 2. But last week, as EAI and city officials negotiated, Mr. Schmoke appeared to soften his stance.

"We're trying to reach a final number with them on how much they will contribute to the deficit-reduction plan," the mayor told The Sun newspaper. District officials declined last week to comment further.

Mr. Golle said he expected an agreement by as soon as the end of last week. "I think it's fair to say the mayor has concluded that there is not $10 million there" to be cut from the contract, he said.

Mr. Golle said things should settle down soon with both major contracts and a new client could be added within months. He cited a request last week by the District of Columbia schools for proposals to run schools under a new plan that allows individual schools to hire companies such as EAI.

"We only do about one contract a year," he added. "We said there would not be another contract while we digest Hartford."

EAI's publicly traded stock has taken a beating from the recent developments. It closed at $8.125 per share on the NASDAQ market on Nov. 9, far below its historic high of $48.75 in 1993.

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