Edison Loses Millions – Again

The 8-year-old for-profit company claims it can financially (and academically) outperform public schools. Yet it posted a net loss of $49.5 million on revenues of $133 million in the fiscal year that ended June 30. In fiscal 1998, the company lost $22 million on revenues of $69 million.

The privately held Edison Project released the figures as part of filings with the Securities and Exchange Commission in anticipation of an initial public stock offering, known as an IPO.

Last year, Edison served 24,000 students in 51 schools and this year it expects to serve 37,000 students in 77 schools.

In its stock prospectus, the company says, “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.”

Edison said it hopes to issue $172.5 million worth of stock. In an analysis of the IPO in Business Week Sept. 6, commentator Diane Brady said that details released in the Edison IPO prospectus, “including details about executive compensation and the founder’s personal finances – suggests that this deal deserves to flunk.”

The analysis is headlined: “Chris Whittle’s New IPO Deserves a D-.”

The article says that founder Chris Whittle and president Benno Schmidt Jr. were paid $296,636 last year – but that their real compensation was elsewhere. Schmidt, for example, has been given low-interest loans of $1.8 million that he does not have to repay until next year; he also gets $2.5 million if he loses his job, plus up to two years’ salary. Whittle, meanwhile, has received more than $1 million from Edison for “professional services” since 1995. He is also promised a $5.6 million loan to buy 1.45 million shares at $1.50 each in the new company – shares that will likely sell for far more.

Both Schmidt and Whittle “are expected to walk away with millions” if all goes well with the stock offering, according to Business Week.

Brady also raises questions about Whittle’s personal finances. She notes that Whittle has pledged his interests in Edison to secure personal debts of an undisclosed amount to Morgan Guaranty Trust Co. If Whittle can’t deliver on his debts, his shares will fall into the bankers’ hands.

“That could give Whittle’s bankers a big say in Edison’s future,” Brady writes.

Analysts argue that “at best,” Edison will get a 3% profit margin from its school operations, according to the article. In the days of overnight Internet billionaires and double-digit returns, that’s probably not enough to make Wall Street jump with attention.

Brady concludes that Whittle may yet be able to prove “that Edison can pay off. But the brighter students of the markets will find better returns elsewhere.”

NOTE: Since its inception, Edison has raised some $232 million in private capital and last year it served 24,000 students. This comes to an investment of roughly $9,666 per student. If private investors were to infuse a similar amount into the Milwaukee Public Schools, which has an enrollment of about 100,000 students, MPS would receive an additional $966 million.