Edison Schools Inc.

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Edison Schools Inc.

521 Fifth Avenue
New York, New York 10175
U.S.A.
Telephone: (212) 419-1600
Fax: (212) 973-0571
Web site: http://www.edisonschools.com

Public Company
Incorporated: 1999
Employees: 3,868
Sales: $224.58 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: EDSN
NAIC: 541611 Administrative Management and General Management Consulting Services; 61111 Elementary and Secondary Schools

Edison Schools Inc. is the leading for-profit manager of public schools in the United States. In July 2000 it was running 108 schools in 21 states, operating them under local school districts or charter-school boards. In return for administering these schools, Edison receives per-pupil funding generally comparable to that spent on other public schools in the same area.

Launching the Edison Project: 1991–95

Christopher Whittle, a publishing entrepreneur who, in 1990, had introduced a commercial-sponsored television news program—entitled “Channel One”—for high school students, established the Edison Project in 1991. It was funded by Whittle Communications L.P., in which Time Warner Inc., Philips Electronics N.V., and Associated Newspapers Holdings P.L.C. held the major stakes. The ambitious Edison Project endeavor aimed to design a new education system that would provide a better education than public schools. These for-profit schools would charge as tuition the average cost per pupil in public schools, but one-fifth of all students would receive full scholarships. The plan originally called for 200 “campuses” combining day care and pre-elementary education by the fall of 1996, at a cost approaching $2.5 billion to $3 billion. One additional age group would be added each year. Whittle hoped to expand to 1,000 campuses, with an enrollment of two million students attending through high school, soon after the new millennium. His project also planned to contract services for public and private schools.

The Edison Project received instant credibility when it hired Benno C. Schmidt, Jr., president of Yale University, to become president and chief executive officer of the enterprise. “The reason this hasn’t been done before,” Schmidt told the press on reaching his decision in May 1992, “is that thing is a matter of D-Day dimensions. Only someone with a high tolerance for risk would even be willing to contemplate it.” A blue-ribbon panel of educators and entrepreneurs already had been established by Whittle to explore every aspect of education and how to rede-sign American schools.

The concept developed leaned strongly on electronic technology, with all students supplied with a personal computer linked, by video-satellite network, to their teachers, other Edison schools, libraries, lecturers, newscasts, and interactive town halls. Textbooks would be online, with students taking home a two-page printout of the day’s lessons instead of a backpack of books.

By 1993 Whittle Communications was in financial difficulty, and as a result the Edison Project dropped its private school approach, vowing instead to seek contracts from local school districts or state-sanctioned charter school boards to teach students in existing buildings. After more drastic economies, the company sold Channel One to K-III Communications Corp. in 1994 for about $240 million. This enabled Whittle Communications to avoid bankruptcy but effectively liquidated it by early 1995, following the sale of other divisions and properties.

The Edison Project was spun off as a separate venture, but Time Warner, which had lost $120 million of its $185 million investment in Whittle Communications, dropped out. Philips and Associated Newspapers, although declining to invest more money, stayed on as equal partners with Whittle, who had pledged to put up an additional $24 million. These funds were sorely needed, for, although the project had spent $40 million by the fall of 1994, it was in need of $25 million to $50 million more to buy computers, wire classrooms, hire teachers, and bring its first schools into operation by the fall of 1995. Only two contracts had been signed: to run a public school in Mount Clemens, Michigan, and a charter school in Boston. Schmidt reportedly tried to oust Whittle as chairman, without success.

The Edison Project was rescued from liquidation at the eleventh hour in December 1994, when Whittle sold his Manhattan East Side townhouse, his apartment in the Central Park West landmark Dakota building, a mansion in his native Tennessee, and most of his art collection. The $15 million infusion was initially applied to keeping the company afloat long enough to find a new partner to replace Philips and Associated Newspapers. In February 1995 the Sprout Group—the venture capital arm of Donaldson, Lufkin and Jenrette Securities Corp.—agreed to invest $12 million. Schmidt and two friends put up another $3 million. Whittle controlled or owned 75 percent of the stock but, at Sprout’s insistence, had to step aside temporarily as chairman of the venture. Whittle replaced Schmidt as president in 1997 and chief executive officer in 1998, with Schmidt replacing Whittle as chairman in 1997. By midsummer 1999 the Edison project had raised $232 million from private placements, including capital from J.P. Morgan Investment Corp.

Making Progress: 1996–98

When the academic year 1995–96 began, Edison was operating four schools: the ones in Boston and Mount Clemens, as well as schools in Wichita, Kansas and Sherman, Texas. The number expanded to 12 for the 1996–97 year and 25 for the 1997–98 year, when 13,000 children were enrolled in Edison-operated schools. By the beginning of the 1998–99 school year, the company doubled its scope, raising the number of schools operated to 51. Encouraging initial results were reported in the schools, which followed an educational plan that called for a school day at least one hour longer than usual and a school year of at least 200 days instead of the usual 180. The project also provided an Edison-owned computer in each student’s home— linked to the company’s local and national school networks— and reading and mathematics curricula developed by Johns Hopkins University and the University of Chicago, respectively. Most students were chosen through a lottery system.

By the end of the 1996–97 school year the Edison Project could point to some educational achievements. All but one of the eight local authorities that had extended contracts had expanded their relationships with the company. At the Dodge-Edison Elementary School in a poor part of Wichita, fifth graders raised their reading performance from the 46th to the 59th percentile nationwide, and from 35th to 64th in mathematics. Another survey reported that Edison kindergarten and first grade students greatly exceeded students in a control group at two sites. Music, art, and physical fitness were being taught every day, according to an Edison executive, and all students were studying Spanish, beginning in kindergarten. Critical ob-servers, however, claimed problems with providing special education services at some Edison sites, difficulty in adapting to the company’s complex design at others, and differing interpretations of the project’s early test results.

Most of the administrators and teachers Edison was hiring were not union members. Interviewed by A.J. Vogl for Across the Board, company vice-president John Chubb said in 1998 that teachers were being paid initially “whatever they would’ve been making on a district scale … plus 8 percent to 10 percent for the extra time.” Each year after that, he added, compensation was determined by merit increases and bonuses. Where hired by a charter board, Edison had complete freedom to establish compensation, but where answering to a public school district, compensation was constrained by whatever agreements had been worked with the district or with a union, if the teachers were organized. He conceded that teacher turnover was 24 percent, compared with about 15 percent for public schools.

Chubb called Edison’s provision of a home computer to students crucial because it enhanced parent participation. Before taking a computer home, parents had to spend six hours of training at the school. Pupils also had access to computers in the classroom. “You want [the children] interacting, working with one another, learning from one another, using computers on a team or project basis,” Chubb explained. “But then, if children go home and write their papers on a yellow pad or in a loose-leaf notebook, their computers are never going to be integral to their lives.” Chubb said that parents supported the longer school day—eight hours for third grade and up—because it relieved them of much of the burden of after-school care and baby-sitting. He added that in the elementary schools, 90 minutes were being devoted to reading and 60 minutes to mathematics each day. Chubb said that the longer, 205-day school year was “attractive to working parents who need to find quality activities for their kids” and added that “disadvantaged children … tend to fall back more in the summer than middle-class kids, who tend to have academic reinforcement in the summer.”

Company Perspectives:

We believe that every child should be given exciting educational opportunities and that every child has a tremendous capacity for learning. And, we believe that great schools are places that nurture the creative spirit, prize the beautiful as much as the useful, and inculcate a love of learning.

Mixed Report Card: 1999–2000

At the beginning of the 1999–2000 academic year, Edison was in charge of 79 schools in 16 states and the District of Columbia, mostly under contract with traditional school districts but about 30 percent with organizations authorized to run charter schools. The company was receiving an average of about $5,500 per pupil, the same amount allotted, on average, to publicly run schools. In a November 1999 article appearing in the Wall Street Journal, Thomas Toch wrote that several Edison schools had failed, some had indeed poorly served special education students, many of the company’s teachers had failed to apply its technology effectively, and most of the new schools that had opened in the fall of 1999 lacked books and supplies because of errors that resulted in Edison firing the entire pur-chasing staff. Cost-cutting had reduced the school year by ten days and led to scaling back the home computer program to begin in third grade instead of kindergarten. Because of low state spending, Edison had found it could not profitably operate schools in much of the South, California, and the Rocky Mountain states.

Nevertheless, Toch concluded that Edison students were performing better than others with similar backgrounds, that student attendance was generally high, and that dropout rates were low. Student achievement in basic subjects was being surveyed each month. Principals were being awarded performance-based bonuses by the company, and principals and teachers deemed to be doing poorly were being quickly fired. “Whatever Edison’s flaws,” he summed up, “the mostly disadvantaged kids on Edison’s campuses are by and large in more attractive, safer schools with higher standards, more re-sources and a greater sense of purpose than the traditional public schools most would otherwise attend.”

According to a Time article by John Greenwald published in March 2000, Edison was focusing on installing pride and discipline in its students, 60 percent of whom came from families with incomes below the poverty line. The company, he said, was only spending about 16 cents per dollar on administrative costs, compared with 20 to 30 cents for the typical school. (In a later Washington Post interview, however, Whittle gave the figure of 21 percent for Edison.) Greenwald reported Whittle’s claims that Edison students had raised their results on standardized tests by an average of five percent a year and quoted Whittle as saying, “We either make it or don’t make it on the basis of test scores.”

By the beginning of the 2000-2001 school year, Edison Schools had signed contracts to run 30 more schools, including three low-performing ones in Baltimore taken over by the state of Maryland—this contract being the first the company had signed with a state government. Independent studies were said to have shown greater parental involvement and satisfaction with Edison schools than comparable neighboring public ones. The company reported that test scores among its students at 40 schools had risen by an average of seven percent during the previous school year.

On the other hand, a survey of the 1,100-student Boston Renaissance Charter School, which Edison started in 1995, found that examination scores had generally declined between 1996 and 1999. An evaluation of an Edison-run elementary school in Miami reported poorer than average results compared with students from neighboring schools. Minnesota state educators said that students at three Edison schools in Minneapolis and Duluth were scoring at or below average in reading and mathematics. A charter school study commissioned by the state of Michigan, where Edison was running more than 20 schools, was reported to have shown Edison schools trailing the others. An analysis of Edison test scores by teachers’ unions, from data provided by state education officials, reported poor results in California and mixed ones in Colorado, Kansas, and Michigan, compared with similar schools. Edison officials also acknowl-edged a staff turnover rate of 18 percent.

While educators debated the Edison Project’s academic performance, prospective investors were looking at an un-promising bottom line. Revenue from educational services grew from zero in fiscal 1995 (the year ended June 30, 1995) to $11.77 million in fiscal 1996 and $38.56 million in fiscal 1997. Edison had a net loss, however, of $14.13 million in fiscal 1997, $10.1 million in 1996, and $11.42 million in 1997. In fiscal 1998, revenues almost doubled again, to $69.41 million, but the project’s net loss grew correspondingly, to $21.92 million. Revenues once again almost doubled in fiscal 1999, to $132.76 million, but the net loss for the year more than doubled to $49.43 million, a sum that included a $22 million charge to reissue stock options.

Despite this consistent red ink, the company, as Edison Schools Inc., announced in August 1999 its intention to issue an initial public offering of stock. The prospectus made for queasy reading, even stating, “We are not certain when we will become profitable, if at all.” Edison was seeking to sell $172.5 million worth of common stock to the public, after which, according to Diane Brady of Business Week, “both Whittle and Schmidt are expected to walk away with millions.” She concluded that the offering deserved a grade of D-. Edison Schools subsequently settled in November for net receipts of $109.7 million by selling 6.8 million shares at $18 a share. Earlier, during the summer, the company had sold a $30 million, 5.8 percent stake to Microsoft Corp. cofounder Paul Allen, through Allen’s Vulcan Ventures, Inc.

Edison Schools had revenue of $224.58 million in fiscal 2000 and incurred a net loss of $36.59 million for the fiscal year. Company debt rose to $36.28 million, compared with $2.83 million in fiscal 1996. Officers and directors owned 49 percent of Edison’s Class A common stock at the end of fiscal 2000, with Whittle holding 12 percent through his personally owned corporation, WSI Inc. He controlled about 30 percent of the voting shares.

Principal Competitors

Bright Horizons Family Solutions Inc.; Nobel Learning Communities Inc.; TesseracT Group.

Key Dates:

1991:: Christopher Whittle announces the plan that becomes the Edison Project.
1995:: Operations begin with contracts to run four schools.
1997:: The Edison Project is running 25 schools to start the 1997–98 academic year.
1999:: Edison Schools goes public with an initial offering of common stock.
2000:: Edison Schools has lost more than $140 million since 1995.