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Published in Print: June 7, 2000, as Losing Money, Tesseract Sells Charters, College

Losing Money, Tesseract Sells Charters, College

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The Tesseract Group Inc., the education management company once known as Education Alternatives Inc., has sold two Arizona charter schools and its for-profit business college in recent weeks in an effort to stem its mounting financial losses.

Nobel Learning Communities Inc. of Media, Pa., which operates 151 private schools and public charter schools in 16 states, bought the charter schools and a preschool from Phoenix-based Tesseract late last month.

Earlier this spring, Tesseract sold its Academy of Business College, also in Phoenix, to Corinthian Colleges, a Santa Ana, Calif.-based chain of for-profit postsecondary institutions. Sale prices were not disclosed for either transaction.

Tesseract officials did not return phone calls seeking comment. But in a written statement, Chief Executive Officer Lucian Spataro Jr. said the sales would allow the company to restructure its debt and settle litigation surrounding the construction of one of the charter schools, which is scheduled to open in the fall.

"Both Nobel and Corinthian are respected, experienced providers, and these sales will allow us to focus our energies and resources on our more mature, well-established schools and preschools," Mr. Spataro said in the May 23 statement.

Mr. Spataro became Tesseract's CEO on May 11, replacing company founder John T. Golle, who remains the chairman of the board.

Management turnover is only one of the troubles that have beset Tesseract. The company was known as Education Alternatives through much of the 1990s, when it managed public schools in Dade County, Fla., and Baltimore and was hired to manage the entire Hartford, Conn., school system. The Dade County contract was not renewed, and the company was dismissed from Baltimore and Hartford amid conflicts over finances and questions about the efficacy of its methods.

A Fresh Start

It sought a fresh start in recent years under the new corporate name and a change in focus to managing charter schools and preschools. Tesseract moved its headquarters from Minnesota to Arizona, where it won several charter contracts.

Following the recent sales, Tesseract operates 33 preschools, charter schools, and private schools, enrolling about 5,000 students.

In February, Tesseract's stock was removed from the Nasdaq stock market because the company's financial assets dropped below the market's criteria. ("Private Firms Tapped to Fix Md. Schools," Feb. 9, 2000.)

Since then, its problems have continued to mount. At the end of March, Tesseract defaulted on a $5 million loan it had received from one of its investors and board member, Benjamin Nazarian of the Pioneer Venture Fund. Tesseract said in a May 22 filing with the Securities and Exchange Commission that it was negotiating the matter with Mr. Nazarian, who resigned from Tesseract's board of directors in April.

Meanwhile, Tesseract's financial losses are growing. For the fiscal quarter that ended March 31, the company lost $2.5 million on revenues of $11.8 million. It lost $9.4 million on revenues of $33.1 million for the nine months ending March 31, and its accumulated deficit had reached $48.9 million by that date.

In its May 22 SEC filing, Tesseract says: "Should the company be unable to refinance or restructure its liabilities or raise additional equity, it may be forced to seek protection under applicable bankruptcy law."

Nobel Expansion?

The company's stock, which reached a high of $48.50 per share in 1993, was trading last week over the counter at 37.5 cents a share.

Tesseract's sale of assets could stave off more drastic measures, such as filing for bankruptcy, at least for the short term, according to one Arizona educator who is knowledgeable about Tesseract but who asked not to be identified.

Meanwhile, the sale provides a foothold into the freewheeling Arizona charter market for Nobel, which is best known for its ownership of more than 100 private preschools and elementary schools in suburban areas across the country.

"Hopefully, this is the start of a major expansion into Arizona," A.J. Clegg, Nobel's chairman and chief executive officer, said last week.

The two Arizona charter schools, in Peoria and Glendale, could generate revenue of more than $7 million per year if operated at full capacity, Nobel said.

Nobel had revenues of $109 million in fiscal 1999 and $92 million for the nine months ending March 31.

Vol. 19, Issue 39, Page 5

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