Edison Schools: 

Privatization"s swan song?

Privatization"s swan song?
Since Perry Township hired Edison Schools, Inc. last October, much has happened to that for-profit company (See NUVO, Aug. 23-30, 2001).This is important because many observers see the fate of school privatization tied to the fate of Edison. Formed in 1992 by Chris Whittle, Edison is the largest EMO (Education Management Organization) in the nation. Whittle, who has made and lost fortunes in various ventures, calls Edison his "dearest business child." In spite of losses of a quarter billion dollars, Edison is touted as a way to inject market efficiencies into bloated school bureaucracies and produce a better-educated student. Investors on Wall Street went along until this spring, when it became obvious that a certain "business child" needed spanking. Let"s look at some of the antics of Whittle"s troubled "offspring": As of last fall, Edison had loaned over $12 million to corporate officials and an astonishing $83 million to various charter schools around the country. The generous folks at Edison don"t charge those schools any interest on at least $15 million, and $21 million of those loans have no collateral. The business wizards at Edison"s trendy Fifth Avenue headquarters then have to turn around and borrow heavily to cover losses. Last fall, Edison had to pledge $61 million in assets as collateral for a $20 million loan. Other recent loans to Edison are costing up to 20 percent interest. Overhead at the smart Manhattan office ate up an incredible 17 percent of revenue last year. In May, a secret three-month investigation by the federal Securities & Exchange Commission (SEC) found that Edison was consistently overstating revenues by as much as 48 percent and that its internal accounting controls are inadequate. Subsequently, 10 class action suits have been filed against Edison charging the company with misleading investors. One of these suits was filed by Milberg Weiss, the firm pursuing a major stockholder action against Enron. More bad news has come in the form of disenchanted school boards severing ties with Edison: ï The crown jewel of the Edison charter movement, Boston Renaissance Charter, terminated its Edison contract three years early citing poor test scores (69 percent of the eighth-graders flunked the state math test). ï Edison lost a community vote last year to manage five New York City schools. Education reformer Barbara Miner notes, "This is the only instance where Edison"s future has been decided by the votes of parents, not politicians." ï In San Francisco, Edison"s charter was revoked when its charter school turned in the worst performance of all 75 city schools. ï In Wichita, Kan., Edison lost two of the four schools it operates in the 49,000-student district. Citing disappointing test scores, the Wichita superintendent said, "Our board put Edison on notice that if it didn"t show greater interest in Wichita public schools, then further action could occur." ï Districts in Texas, Michigan, Minnesota and New Jersey have also booted Edison for various reasons, including high cost and poor performance. One bright point for Edison this year was being awarded management of 20 schools in Philadelphia. Even that didn"t keep Edison"s stock from tanking the same day the Philadelphia announcement was made. Shares have plummeted from a high of $36 in February 2001, to close at a bleak 42 cents on Aug. 9, 2002. Thanks to its woeful stock price, the company now faces "delisting" (being kicked off the NASDAQ stock exchange). To become delisted, a company"s stock must trade below $1 for 30 consecutive days. Drained of liquidity, the company then has 90 days to breathe some life into their stock price. After delisting, the shares must then be traded on the over-the-counter bulletin board. Trader Michael Shadkin of TraderPulse.com warns, "When a stock gets below $1, its pretty clear that the company"s in trouble." As with other corporate horror stories this year, Edison"s top brass seem to have escaped with their bank accounts not only intact, but bursting at the seams with loot. Consider that just before parents voted to keep Edison out of the New York City schools in March 2001, certain Edison officials cashed stock options worth over $30 million. Whittle"s share of that was $16 million. Whittle has benefited in less obvious ways, also. Edison has a management agreement with a mysterious firm, WSI, Inc., of Knoxville, Tenn. Gerald Bracey, an education columnist for the Phi Delta Kappan, notes that "between 1995 and 1998 Edison paid WSI $1,848,742 for consulting. In 2001, WSI owned 3,809,826 shares of Edison." Guess who is WSI"s president and sole employee? Chris Whittle! New York business writer Chris Byron states that between 1995 and 1999 (when the company went public), Whittle "paid himself perhaps as much as $23.3 million in compensation and fees." Last year, Byron charged that Whittle had apparently pocketed "as much as $100 million and possibly a lot more" by unloading 4.2 million shares. Other Edison executives have profited nicely from their stock options since November 2000: Chris Cerf (chief operating officer) $774,925; John Chubb (chief education officer) $508,678; Kathleen Hamel (executive vice president) $696,367. So where does this leave Perry Township in their Edison venture? The district is spending $839 more per Edison student, which works out to $1,258,500 per year when both schools open. Assistant Superintendent Max Oldham said the whole idea of hiring Edison is to avoid redistricting and keep charter schools out of Perry Township. Administrators at Perry say that since they already have the Edison model, Edison"s fate is irrelevant. As we"ve seen, Edison"s fate is also irrelevant to corporate insiders like Whittle who have already salted away fortunes while ordinary investors take a bath. Like the many other corporate scandals, that was the real idea all along.

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