Reading, Writing, and Revenue

The Edison Project's formula is simple: Take a Minneapolis public school, add some entrepreneurial savvy, and watch the profits roll in. Trouble is, it doesn't add up.

"If it took your superintendent three years and millions of dollars to come up with the decision to give every kid a free computer, she'd be fired on the spot," Molnar concludes. "I hope [Edison] spent that money on advertising, because that is something the company is very good at."

Indeed, promotion has always been Whittle's strong suit; according to the prospectus, "effective marketing and communication efforts targeted at administrators, teachers and parents" are an integral part of the Edison plan. "[Such efforts] will yield higher levels of perceived benefits among these constituencies," the document reads, "and ultimately generate increased penetration within our market of K-12 schools."

Whittle's PR mettle is felt even in his schools' music classes. Last year students in Minneapolis belted out lyrics such as "That's a bright idea, Mr. Edison, and one day the whole world will cheer, to make a longer year...and every boy and every girl alike will have a computer of their own." In the song "Edison Medicine," children were led in a chorus of "If you got those other-school blues, hold on, brother, 'cause we've got news. If you don't like school, 'cause you think it's not cool, ya need some Edison medicine."

The company's SEC filing shows that for Whittle and his top executives, the medicine has been sweet. Each of Edison's five highest-paid officials has been rewarded with an annual salary of more than a quarter of a million dollars; in addition Schmidt received a $2 million low-interest loan, Whittle was paid $1 million for services provided to the company since 1995, and all five execs received substantial allocations of stock options. In August TheStreet.com, a highly regarded business Web site, calculated the value of the stock and concluded that after the company goes public, "Whittle's stash will be worth nearly $22 million, and Schmidt's will be worth $18.5 million."

Noting the company's heavy losses, TheStreet.com compared Whittle to the snake-oil peddler in The Music Man, calling him a "baloney-spouting" Harold Hill. "What has he done in return for the money?" the article asked. "From an outside investor's perspective, the answer is clear: Nuttin'. Bottom line? 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."

Business Week likewise warned investors to stay away from the stock. "The fine print on Whittle's preliminary prospectus suggests that this deal deserves to flunk," concluded the magazine's September article on Edison's Wall Street debut.

Such assessments, Molnar says, should trouble communities where Edison operates schools. "Investors aren't going to keep pumping money into Edison just to be nice," he asserts. "And if Edison runs out of money, they'll just shut their doors--leaving the public school system with the pain and expense of cleaning it up."

 

What worries critics like Molnar more than Edison's ultimate fate, however, is how the company will go about seeking a return on shareholders' investment. For the past three years, according to the prospectus, Edison incurred school-site expenditures of 85 cents for every dollar in revenue; in order to achieve profitability, the document says (and finance vice president Feild confirms), that figure must be reduced.

One potential cost-cutting strategy is not available to Edison: Because the company manages public schools, it cannot legally "cherry-pick" its students, for example choosing only those whose parents can afford homework help and tutoring. Nationally, the firm reports, more than 60 percent of its students are eligible for free or reduced-price lunch programs, a standard measure of economic disadvantage. In Minneapolis 86 percent of its students qualify for lunch subsidies, compared with a district average of 70 percent.

Allegations have surfaced, however, that Edison has been failing to serve another group of students: those with special-education needs or disabilities. Nancy Zollers, a professor of education at Boston College, says that in the three years since Edison opened its Boston Renaissance school, 40 students with disabilities have left and 5 discrimination complaints have been filed against the company. By contrast, Zollers notes, the Boston public schools, which serve more than 13,000 special-education students, have received only 10 complaints--since 1974.

"These are not start-up problems," Zollers argues. "These are systemic problems Edison has to deal with if they're going to serve all the children of Massachusetts."

The charges might eventually land Edison in court. Mark Michelson, a partner at the Boston law firm Choate, Hall & Stewart, says he is considering a class-action lawsuit against Massachusetts for-profit schools, including two run by Edison. "It's too soon to make any predictions," the attorney cautions. "But we're seriously looking into whether students are being counseled or squeezed out of the [for-profit] charter schools."

David Dudycha, the Minneapolis school district's director of Policy and Planning Services, says that when the Edison contract was negotiated, district officials insisted on a clause designed to guarantee that the new school would have a place for special-needs kids. Edison would pay for and house a Special Programming for Elementary Needs (SPEN) room serving six to eight students diagnosed with severe emotional and behavioral disorders. "We wanted to make sure we could test the Edison model," Dudycha explains. "So we made sure the school was serving the needs of all our kids."

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