By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
Like most other places of young learning, drawings hang on the walls and a general sense of happiness abounds. So it's difficult to believe the school is a prime exhibit in the battle being fought locally and nationally over the future of public education -- a conflict spilling down Interstate 75 and pouring into Dallas.
Five years ago, Washington became the nation's first school to be managed by the for-profit management firm Edison Schools Inc., which brought in its special curriculum and design. School officials hired Edison as a way to build enthusiasm for a districtwide reform effort. Since 1996, Edison has also run one-third of Sherman's Dillingham Intermediate school, which has experienced fewer problems than Washington Elementary -- though test-score data for the school's Edison section has never been compiled.
Now Edison is being chased out by school officials and townsfolk who say the company has botched the job of educating Washington's little ones, even as some of the school's parents and teachers insist Edison is doing a good job and demand the company stay.
On a recent morning, Chuck Holliday, the school's new principal, takes a visitor to a reading class where children are reading stories from picture books aloud together. On a wall hangs a sign featuring the "Edison Excellence Pledge," the company's in-house recitation. "We are friendly and kind to others, thoughtful, honest and fair," it reads. "We make every day count by working and continuing to learn." The children, Holliday says, recite this covenant during an assembly each morning after the Pledge of Allegiance.
Upstairs, Lila Honts teaches fourth-graders how to play xylophones. A veteran educator of 32 years, Honts came to Edison for its emphasis on arts and music. She used to shuttle between schools in Sherman to teach weekly arts classes to students, but Edison allows her to stay in one school and teach students up to three days a week.
"The time I've been teaching over the years, arts had been devalued," she says. "I'm a staunch supporter of Edison."
A few doors down, Ginger Box, a third-grade world languages instructor, teaches children Mexican folk songs. The children are also learning names of food items and articles of clothing in Spanish. "They learn it quickly," Box says. "They are energetic, and they like learning Spanish."
In the computer lab, computers Edison loans to parents of Washington's students fill a wall. They are older-model Apples with slow modems that are a little shabbier than those at other Sherman schools -- a disparity district officials have been quick to point out. John Traux, the school's computer guru, explains that Washington is on the company's "Cycle One" schedule. Had Edison's contract at Washington been renewed, it would have received new iMacs.
Last year, Chuck Holliday moved from Hickman, Kentucky, where he also served as a principal, to Sherman after being impressed by the company. "A lot of the parents of students here do want the school to stay with Edison," he insists. One of them is Cathy Wrenshaw, whose son attended Washington and whose daughter is in kindergarten there. She's upset Edison is leaving and thinks the company got a bad rap. "[District officials] used everything under the sun to say this isn't working, but it [is]," she says. "People just don't want to admit that somebody came in and changed things around."
But district officials enumerate a plethora of reasons why Edison must get out of Dodge by the end of the school year. They insist there has been little growth in test scores in Edison's schools, even though districtwide scores have soared. There have also been charges that Edison mismanaged the school by failing at such tasks as ensuring that math materials arrived by the first day of school. District officials also estimate that contracting with Edison cost the district $1 million in added expenses a year; it's one of myriad disputes over financing. On top of that, the company sparked a local furor when Edison officials arrived from DFW Airport in chauffeured Lincoln Town Cars.
"There's an enormous gap between what the company says it will do and what they really do," says Philip Garrett, Sherman Independent School District's assistant superintendent for administration and instruction.
Edison took the hint. As it heralded its new Dallas deal and contract renewals in four other cities, the company recently announced it wouldn't compete to renew its Sherman "partnership." Sherman officials agreed last week to let the contract expire in June.
The company didn't even wait a few months to defend its tenure at a school board meeting on whether to renew the contract, citing a lack of cooperation from Sherman officials. "A good marriage is like a good partnership," says Manny Rivera, Edison's co-head of development. "Partners can work things out no matter how far apart they seem. Without that, it doesn't make sense to go forward."
Good riddance, say district honchos. Dealing with Edison officials, Garrett says, was "probably the most unpleasant and difficult thing I've had to deal with as a school administrator."
As Edison retreats from Sherman, it prepares to take command of six elementary schools in Dallas, the new jewel in its nationwide empire of privatized public schools, following a hotly debated mid-November vote by school trustees to hire the firm. Local opinion-makers insist that Edison's failure in Sherman is irrelevant, beside the point. Dallas school trustee Roxan Staff argues that Dallas schools' size and higher spending per student make comparisons a moot point. "Sherman's problem is Sherman's problem," she told The Dallas Morning News.
Not for long.
Dallas is putting some of its children in the hands of a company that has its headquarters on New York City's Fifth Avenue and that is listed on the NASDAQ stock exchange. This fall, Edison Schools, which counts 38,000 students in 79 mostly urban schools nationwide in its growing network, will take responsibility -- and $50 million a year of the Dallas Independent School District's money -- for educating at least 6,500 Dallas elementary schoolchildren in six or more yet-to-be-named schools. Assuming "satisfactory performance," Edison will reap 3,500 more of Dallas' students in at least four schools by the 2001 school year, and 2,250 more students each year thereafter for three years.
The deal sends a strong message on social class in public education, says one observer.
"The willingness to contract with Edison is a public admission of the failure to invest equitably in [low-income] schools," says Linda McNeil, a Rice University education professor who helped quash an Edison bid in Houston. Others worry that in five years, Dallas will realize it was snookered into accepting another dubious educational fad.
"In their best cases, they [Edison] do about the same as public schools, and in their worst cases, much worse," says Roy Kemble, president of Classroom Teachers of Dallas, which is affiliated with the National Education Association.
But DISD's leader tells us not to fear.
"Whoa, it's privatization," says new superintendent and chief Edison patron Waldemar Rojas, mocking critics who worry about the implications of for-profit schooling. He believes DISD will benefit by learning from Edison's research-based design and touts Edison's commitment to put $30 million into Dallas schools right away.
"Edison is a way of extending service that we haven't been able to extend under the desegregation [decree affecting DISD]," he claims.
Meanwhile, free-market hawks tout Edison as a way to cut government bloat and deliver better education. But one Dallas official is heeding Sherman's warning of the expensive hidden costs of an added layer of management. Hollis Brashear, a Dallas school trustee who opposed the contract, wants to preempt a possible shakedown by reducing Edison's $5,715 per-pupil stipend in Dallas (which adds up to about $50 million a year). DISD, he points out, must still pay for transportation, food services, security, and other costs at future Edison schools.
"Edison claims they can do it for the same money, but they're not getting the same money," he says. "They're getting more."
Rojas isn't particularly worried. "I know it's going to cost more money," he admits during an interview with the Dallas Observer. "I see a district that can learn from that research and development focus."
Indeed, optimism reigns as Dallas prepares to privatize. The decision by the Dallas school district's board of trustees to hire Edison is Rojas' first major achievement at DISD's helm, but shenanigans in sealing the deal left him under a cloud. After trustees nixed his first attempt to deliver 11 schools to Edison by a vote of 5-3, he succeeded on November 18 in winning a smaller plan to Edisonize six schools. But victory came only after a bizarre interlude during which Rojas outdid the homegrown enfants terribles of Dallas politics.
After trustees shot down the first Edison plan, Rojas fought back by leveling apparently baseless allegations against Brashear and Lois Parrott, two trustees who voted against the plan ("Da thug," November 18). He alleged they had committed criminal and ethical violations in their votes, accusing Brashear of micromanaging his efforts to improve the district and Parrott of attempting to sell her vote in exchange for a friend's promotion. He vowed to press for investigations of both, but pressed only his allegation against Parrott with the U.S. Attorney's Office.
They were very serious and damaging charges, and they didn't hold up. Once the smoke cleared and no cause for investigation was found, it turned out Brashear merely sought to get the board to examine the company's lackluster record in nearby Sherman -- hardly a crime by any stretch. Rojas' second accusation was perhaps his bigger embarrassment. Parrott had earlier asked Rojas to promote a friend to a public relations post, but there's no evidence she ever tried to broker a quid pro quo for her vote.
Then there was the now infamous press conference at the beginning of November, when an incensed Rojas belittled Brashear and Parrott by holding out two tin cups with the trustees' names on them. He said since they scuttled his Edison plan in a 5-3 vote, they should panhandle to make up for Edison's promised $30 million in up-front investment. Rojas later apologized to Brashear and Parrott. His mea culpa allowed Edison supporters to regroup and find two more votes. Three weeks later, a divided board voted 5-4 to pass the slightly smaller outsourcing plan. Trustee Ron Price, who abstained from voting the first time, voted for Edison, while Kathleen Leos, citing the deal's smaller size and an agreement to conduct quarterly reports on Edison's progress, changed her vote.
In winning passage of his initiative, Rojas made history for privatizing six schools, a first for both Edison and an American school district. Kansas City, Missouri, held the previous record of five Edison schools.
Why is Rojas sold on Edison? For starters, he likes Edison's extended school day and year, which he says fit nine years of regular school time into seven years (research is inconclusive on whether logistical tinkering improves achievement). Children in Dallas schools, where budget cuts have hurt arts and music programs, he says, will get cultural enrichment every day with Edison. Moreover, he predicts children will benefit from Edison's strong technology focus and unique curricular design, including its research-based math and reading programs.
"The concepts they have are major areas of weakness that you find in urban areas," he insists.
Edison relies on the popular Success For All reading program, which emphasizes phonics and comprehension. It also uses the well-regarded (at least by the U.S. Department of Education) Chicago Math program, which eschews math drills for problem-solving skills. Still, DISD doesn't need Edison to bring in these programs.
"It's basically off-the-shelf stuff that any school could do," says Henry Levin, an economist who directs the National Center for the Study of Privatization in Education at Columbia University's Teachers College in New York City. "I don't see a revolution here."
Another motive for Rojas: The contract allows him to lock in reforms for five years, a rare feat for transient school chiefs. "In a normal public school, you may only have a reform effort for two years," says F. Howard Nelson, an American Federation of Teachers researcher.
Meanwhile, the AFT-aligned Alliance of Dallas Educators has "put its faith" in Rojas to manage the Edison contract, but vows to keep a close eye on the company, said longtime president Harley Hiscox. A recent letter from the group's second-in-command extolled Edison's unusual focus on music, art, Spanish, and physical education, as well as the reading and math programs. In a November 18 letter to The Dallas Morning News, ADE vice president Aimee Bolender said Edison should serve as a "pilot" to kick off community conversation on education reform. "This dialogue is much needed, but we must get past the talking stage and into the action stage if we hope to affect the lives of kids," she wrote.
DISD, Hiscox adds, should learn enlughfrom the company to eventually create its own "Edisons." But this well-meaning argument raises a crucial point: Is it necessary to privatize schools to "send a message" to the community?
Talk of fabulous programs aside, it's implementation that counts -- a point glossed over in Dallas' often mean-spirited debate over Edison's merits. Qualified principals and teachers are needed to staff Edison schools, and teachers need sufficient training, especially in skill-intensive programs such as Success For All. According to the AFT report, Edison has botched the job of staffing Success For All in many schools. In fact, AFT says, a well-staffed Success For All school performs better than the average Edison School. (Edison officials call AFT's finding "outrageous" and deem the data flawed.)
In addition, the company is renowned for hiring young teachers and teachers without professional degrees as a cost-cutting strategy. High turnover exacerbates Edison's disconnect between design and implementation: In 1998, about 23 percent of teachers at Edison schools departed, according to company figures, a rate twice as high as the national average.
"What is it about the Edison management that makes teachers unable to do their jobs?" wonders Jennifer Morales, a researcher with the Milwaukee-based Center for the Analysis of Commercialism in Education.
Edison is no stranger to bad press, although its for-profit status makes it an easy mark. In Miami, a media frenzy ensued last year when one teacher was accused of repeatedly beating students with a stick. In Boston, researchers charged that two Edison charter schools "counseled out" large numbers of special-education students, who are generally more expensive to educate. Edison's Minneapolis school reportedly lost 75 percent of its original teachers last fall, while some administrators in Duluth, Minnesota, claimed Edison's three local charter schools have drained funds from other schools (Duluth recently renewed its contracts with the company).
In San Francisco, Rojas' roost for seven years before arriving in Dallas, the outsourcing of one school was enough to galvanize voters in 1998 to throw out several incumbents in electing an anti-Edison school board. The people's mandate: rein in Rojas, seen as an autocrat in his decision-making. By June of last year, the new board, which also questioned Rojas' handling of the district's finances, forced him to resign his post. The shake-up embodied fears that privatizing one school was the first step in dismantling public education, a process activists fear will heighten inequality in society.
The Edison decision could cause a similar backlash in Dallas. Denigration of critics, obfuscation of issues, and the well-honed Edison tactic of quickly ramming the deal through the process were the tools used to subvert public debate. Will Dallas voters, less prone to leftist social critique than liberal San Francisco dwellers, rise up to expel pro-Edison trustees?
Sherman ISD's Philip Garrett does allow one word of praise for Edison. In his opinion, the company's arrival speeded the district's reform effort by sending "a signal to the whole community that things were going to be different." He recited a list of recent improvements to the town's schools, including new academic standards, high-speed Internet access, e-mail accounts for every student and employee down to bus drivers and custodians, and renovations at all buildings.
"I do not believe we would have that had Edison not come into our schools," he says. "We'd still be writing on chalkboards and showing old filmstrips."
A lifelong Texan and public-school educator, Garrett judges Edison through a personal lens. He says he didn't particularly like the company's executives, who he believed were more focused on business affairs than on learning. He considers them "corporate types," not educators -- "and that would be fine for UPS, but not for schools," he says. "If they were a supplier of tires for the school district, we would have long since found another supplier."
It's difficult to reconcile the opposite perceptions held by those in Sherman who love Edison and those who think the company has fouled things up. After all, how can those fighting on the same side see things so differently? Perhaps Lorie Shanklin, Sherman's director of elementary education, has that answer. She claims many teachers who chafed under Edison simply don't talk about their corporate boss.
"It's a very closed organization," she says. "If you work for Edison, teachers tell us, you just don't say anything."
But some teachers have spoken out. Kim Miller, a former first-grade teacher at Edison who left after the company's first year, complained to Sherman's Herald-Democrat that Edison didn't train her after she arrived two weeks into the 1995 school year. She signed her contract at 7 a.m. and began teaching at 7:30 a.m., later receiving informal help from other teachers (Edison's supporters say such problems were ironed out in later years). Miller said she liked Edison's special programs, but thought the company was "more interested in the business side of the school than in the education side." She declined an interview when contacted by the Observer.
A few blocks from Washington sits the Sherman school district's administration building, a converted high school. Manning the fort here are Garrett and David McConkey, Sherman's assistant superintendent for business, finance, and operations. (District superintendent Bob Denton recently retired and has not yet been replaced.)
Talk to Garrett, a tall and affable man, about the same school praised by teachers and parents, and he tells a completely different story, unloading five years of criticism against Edison built up during his close dealings with the firm.
"We have six elementary schools," Garrett says. "All five of the other schools have made more dramatic improvements in performance than [Washington]." He says Texas Assessment of Academic Skills (TAAS) scores for Washington students classified as economically disadvantaged at Washington have shown little improvement in five years. The school -- which once, under Edison, barely escaped state classification as "low performing" -- ranks near the bottom of a state-compiled index of 40 schools with comparable economic and ethnic profiles.
Their beefs aren't limited to test scores. Garrett says Edison seemed unable to manage day-to-day school operations, neglecting to properly staff and train its teachers, cutting corners in academic and business affairs, and giving local administrators grief or delay whenever they called them on it. The problems commenced from day one, he says. In the chaotic first few weeks of Edison's occupation, he says, the company botched class schedules and sought to sidestep the Texas law that caps class size to 22 students per teacher.
"They says, 'No, no, we can get around that,'" Garrett recalls. "They really couldn't believe it was a law. I had to show it to them."
He insists the company's blunders hindered learning at Washington Elementary. He cites the fact that at the beginning of this school year, the company neglected to deliver crucial math materials until October. In addition, he says, Edison wasn't aggressive in recruiting bilingual teachers, despite the school's large population of students with limited English skills, and its special-education services were poor. Edison also offered no gifted and talented classes.
David McConkey, a quiet man who takes pains to praise Washington Elementary's teachers, also expresses disenchantment with the company. He says Edison routinely balked when he billed it for its share of transportation, cleaning, and other costs (in some cases, the firm failed to find cheaper contractors than the district). "They tried to play hardball with every single one of them," he says.
McConkey recalls that when the company cut corners on maintenance, he directed staff to work at Edison despite the company's contractual responsibility. "This building belongs to SISD taxpayers," he says. "We can't afford for it to go downhill."
Edison, insisting its record in Sherman is one of success, declines to comment on the two leaders' specific charges. "I'm not going to get into a tit for tat with the administrators," says Edison's Rivera, who claims Garrett and McConkey are exaggerating some incidents -- without offering specifics to refute their accusations.
Garrett estimates that the town lost $4.2 million -- or about $1 million a year -- under the contract because of "hidden costs" associated with Edison, mostly because of management duplication and other indirect expenses. The increased costs traced to Edison, Garrett says, have forced him to cut other schools' instructional-supply budgets by 10 percent. He estimates the district spends $1,300 more on each student at Washington Elementary and $1,000 more per student at Dillingham Intermediate's Edison section.
"Is that fair?" Garrett asks. "It has been extremely divisive for our district."
The fleecing, he explains, occurred since the school district surrendered the Edison schools' share of administrative funding -- but didn't cut central office staff accordingly. That means SISD essentially paid to retain duplicate managers for each Edison school. Dallas taxpayers, he warns, will also take a serious bath on this count.
"I have looked at the Dallas contract," Garrett says, "and our financial arrangements are a lot more advantageous."
In contrast, Edison defends its record and points to modestly higher scores on the TAAS at Washington.
"We saw gains in reading and math," Rivera says. "The children are happy, they are doing well, and there is a tremendously high level of parent involvement."
Rivera says Edison reimbursed the district for administration costs. And he insists Edison was forced to eat other expenses: Computers and other equipment depreciated substantially, and the town spends so little on its students (it is, after all, a small town) that Edison had to pump a great amount of cash into the system just to keep it operational.
If you listen to Rivera, Edison was the true loser in Sherman -- to the tune of $6 million.
A possible silver lining for Edison's local critics and an outcome not discussed by Dallas' school leaders is that a debt-swollen Edison may go bust in the not-too-distant future, leaving DISD in the lurch. On Wall Street, rank-and-file investors don't share the enthusiasm of Rojas and white-shoe firms for Edison Schools Inc. The company, saddled with $110 million in debt and a falling share price, is seen as a turkey by many analysts and armchair stock pickers.
"Dead money" and "the biggest joke ever" are two recent assessments of Edison stock by traders on a Yahoo! Finance message board. Even Rojas admits the company will suffer financially until it achieves an economy of scale, which is estimated at anywhere from 200 to 300 schools.
"I'm sticking with Janus Technology Funds," he jokes when asked whether he would invest in Edison.
In a recent U.S. News and World Report article, one analyst says, "If Edison's pace in signing new contracts slows, the whole thing will be dead in the water." Edison claims it has made headway toward profits by reducing its debt-per-student ratio from $3,927 in 1996 to $603 last year, and says it could earn profits now if it stopped expanding.
Nevertheless, the failure of hype to match reality is a familiar theme for Edison and its founder. Media entrepreneur Chris Whittle, creator of the controversial Channel One in-school news service, founded the company in 1991. He initially sought to build 1,000 for-profit private schools to target the middle class, announcing plans to open 200 schools within five years at an estimated cost of $2.5 billion. But the numbers didn't add up, so he redirected Edison (then called the Edison Project) toward managing public schools, scaling back his ambitions to open a mere four schools in 1995.
A former part-owner of Esquire magazine, Whittle is best known for his high-profile, glitzy attempts to launch new businesses with novel concepts, such as publishing books with ads in them and beaming medical news into doctors' offices. He's renowned for securing large sums of money from venture capitalists for his schemes, but less so for returning profits on (or, for that matter, returning) their investments.
Whittle first appeared on schools' radar when his namesake company unveiled Channel One, a business that provides schools with free satellite TV equipment in exchange for a direct link to students' tender minds. That is, schools keep the free goodies so long as students are parked in front of the TVs each morning to watch a 12-minute news program featuring two minutes of commercials.
In 1994, shaky finances forced Whittle to sell his company and Channel One, which is now owned by Primedia Inc. Both Time Inc. and Philips Electronics -- which together put $360 million into the venture -- reportedly wrote off their entire investments (although Philips cashed in by selling TVs to Edison). Seen by more than 8 million demographically desirable students in nearly 12,000 schools, Channel One continues to generate ire from educators, media critics, and religious groups who don't like captive students watching ads for candy bars and risqué teenybopper TV shows.
To win credibility for his Edison venture, Whittle recruited former Yale University president Benno C. Schmidt to lead an all-star group of educators, scholars, and business executives in formulating Edison's curriculum and design.
As with Channel One, investors lined up to pour money into the venture despite Whittle's past flameouts. Indeed, Whittle's raw promotional talent is perhaps the most potent reason for Edison's appeal to financiers. According to a recent Education Week article, he believes public education is an industry that will soon be "branded" like Coke or Pepsi and envisions schools as an area where Edison and other providers will develop the name-recognition cachet of companies such as the Gap and Wal-Mart.
"Ten years from now, when you think about who does the best schools, we want there to be only one word that comes to mind -- Edison," he said.
Actually, the K-12 management market still is a big risk.
"There's no history of an enterprise that's made money on [for-profit management]," says Henry Levin, the Teachers College economist. Like Gremlins under a sprinkler hose, however, Edison and its imitators continue to multiply. Edison is simply the largest and most visible of about 15 Education Management Organizations (EMOs), a term coined by investors eager to carve up education the same way they chopped up health care in the 1990s. Other for-profits include Advantage Schools (which has four charter schools in Texas, including Dallas' Advantage Charter School) and Beacon Educational Management.
Wall Street's titans have accepted as gospel the notion that public education is a complete failure and cannot be told otherwise. Leading the charge to break up the public school "monopoly" is the global financial services firm Merrill Lynch. "Bringing market forces to schools such as competition, choice and capitalism are at the center of the inevitable change in how education is delivered in America," declares The Book of Knowledge, an influential report the firm released last year.
Merrill Lynch predicts EMOs will account for 10 percent of the $360 million K-12 school market in 10 years, a market share of $30 million. But where will Wall Street -- and Edison -- extract its needed profits? About 7 percent is needed to pacify investors, and while discounted computers, lower food costs, and online learning technology are all seen as profit centers, action to cut large, wasteful school bureaucracies is seen as the surest way to get returns.
"Approximately 50 percent of school budgets are spent on regular classroom instruction," says the report, which lists no source for the factoid. "No service business in the world could exist where 50 percent of every dollar is spent outside where the service is being rendered."
Edison officials are more generous to public schools than their benefactor Merrill Lynch. In a 1998 interview with Across the Board, a business journal, Edison executive John Chubb estimated that 66 percent of school funding was spent in actual schools. "We spend roughly 80 percent of every dollar at the school site instead of 66 cents," says Chubb, whose 1990 book Politics, Markets and America's Schools energized privatization advocates.
But what if school districts are not as bureaucratic as their critics insist? Some Edison critics say that's simply the truth.
"The public is misguided about the nature of public school administration," says CSCE's Morales. "School districts are not sitting back on layers and layers of fat." (DISD's bulging bureaucracy may be an exception: In August, Bill Rojas added six DISD administrators at record salaries of up to $175,000.)
Richard Rothstein, an education analyst with the Washington-based Economic Policy Institute, argues that Chubb's figures are wrong because they count employee-benefit costs as an off-site expense, when they are really a school-site expense. Move the benefit costs over a column, Rothstein says, and the share of spending at the school site jumps from 66 percent to 90 percent.
He doubts Edison will ever achieve profits because of education's labor-intensive nature, and thinks the company's young teaching staffs will contribute to part of its undoing. "When those teachers age," Rothstein asks, "are they going to be content with low salaries?"
Edison has also drawn heckles for taking donations from right-wing nonprofits. The company refused to manage schools in California because of the state's low per-pupil spending until the family foundation of Don Fisher, founder of the Gap clothing chain, pledged $25 million -- or $1.3 million for each school -- to make California worth Edison's time.
Meanwhile, Edison's stock tumbles. For its Initial Public Offering on November 8, Edison hoped to net as much as $172.5 million by valuing its stock at $21 to $23 a share. The market had other plans. Edison settled with a disappointing $122 million and an $18 share price, which has since fallen in value more than 20 percent to around $14 (most IPOs go up in this bull market, not down).
Before the IPO, the business press sounded an alert. "Take in $215 million and lose $326 million -- and there's not even a dot-com in the name to blame it all on," quipped financial journalist Christopher Byron in an article on TheStreet.com Web site last August. "The deal's a dog, and the only investors who stand to come out ahead in it will be wily Whittle and his boola-boola buddy, Benno Schmidt."
Likewise, a September article by BusinessWeek's Diane Brady cited as liabilities the lavish salaries of Whittle and Schmidt and millions in sweetheart loans and stock-option deals extended by the company to its two leaders. Both Whittle and Schmidt make $296,636 a year -- far more than any public-school educator -- while Schmidt's contract allows him to pocket two years of salary and a bonus $2.5 million if he gets canned. Schmidt also took a $1.8 million low-interest loan from Edison, while Whittle will receive a $5.6 million loan to buy Edison stock.
Thus, Brady says, it's likely both Schmidt and Whittle will walk off with millions, even if investors are left holding the bag. "The deal deserves to flunk," she concluded.
Despite the ominous signs, Wall Street continues to embrace Edison. A prestigious line of investment firms, including Merrill Lynch, J.P. Morgan Securities Inc., and CS First Boston Corp., underwrote the offering and issued "buy" recommendations, bringing conflicts of interest to new levels. The firms promise big gains when Edison unveils new contracts this spring.
"This is a company that the market sees in an early stage," says Gregory Cappelli, director of equity research for CS First Boston. "They're blazing new ground."
The unwashed stock-trading rabble doesn't buy it. On the Internet, traders vent anger and fume over what they charge are misleading claims by the company and big investment firms. "There were lots of accusations and arm twisting before EDSN got approved [in Dallas]," says one anonymous poster. "Unlike what the company's press release says...it was by no means a wide acceptance of Edison schools. Some poor old [DISD trustees] were busy fighting on the streets against this school."
Would-be investors may also be perturbed by the company's own prospectus, which listed potential liabilities of its stock in accordance with Securities and Exchange Commission disclosure mandates. Under the heading "WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES IN THE FUTURE," the prospectus read, "We have not yet demonstrated that public schools can be profitably managed by private companies and we are not certain when we will become profitable, if at all."
Whatever its financial shape, Edison will likely stay afloat longer than balance sheets might indicate through aid from foundations and support from top investment firms. But at some point, the big firms will cut their losses, and Dallas' students may find themselves back in the same old public schools. "I think institutions sucked up this stock," warns one Internet poster. "Once they dump, look out below."
It's an admonition Dallas should consider. Putting too much stock in Edison may prove a bad investment for DISD.