Talking Points Memo lacks

June 27, 2002 5:28 p.m.

Talking Points Memo lacks the resources to break big stories like the ridiculous collapse of WorldCom. But here’s an interesting morsel.

Edison Schools is a rather small company as publicly-traded companies go — actually getting smaller every day, if you go by market capitalization. But if the company is relatively small in size it’s extremely politically wired. Edison, you see, is in the rather innovative business of running — or trying to run — public schools on a for-profit basis. They also dabble in the charter school game. So as you can imagine the company’s work is highly politicized.

The Board also has some marquee names on it: Benno Schmidt, the former president of Yale, Floyd Flake, pastor, former congressman, all-around charter school maven, and even Bill Weld, who served as Governor of Massachusetts, before fate decreed that that post would be held only by sad-sacks. Schmidt is the Chairman of the Board and Flake is President of Edison Charter Schools.

But I digress.

Edison is the brainchild of Chris Whittle, the current President and CEO of the company. According to the company’s September 2001 proxy statement, the company lent Whittle $6.6 million on November 15, 1999 and $1.2 million on April 13, 2000 to exercise options to purchase stock in the company. In other words, the company was loaning him money to purchase stock in itself — not an uncommon practice. By September 30th, 2001 the combined principal and interest on those two loans totalled $9.2 million.

So far so good.

Now what’s interesting is the collateral Whittle put up for these two loans. It turns out it was the shares themselves, the shares he was buying with the loans. As the proxy statement says “The loans are collateralized only by the shares …”

Now the problem is, like the Chicago Bulls and ten year old beer, that stock ain’t what it used to be. In fact, as you can see from this handy diagram, Edison’s stock is now virtually worthless. A year ago shares in Edison went for about $23 a pop. Today the stock closed at 85 cents, its lowest close all year.

What all of this means of course is that there now isn’t any collateral for those loans. That stock is now worth only a fraction of what it was back in the day. In the real world, Whittle would now be facing the dreaded margin call. The company would at least demand some other collateral to secure the loan.

But are they? That’s not clear.

Remember, $10 million may not seem like a lot when WorldCom is tossing around billions. But as of today that’s equal to about 20% of Edison’s market capitalization. Given the company’s wobbly state, I’d imagine the Board would have a pretty clear fiduciary responsibility to its shareholders to try to recoup that debt.

Today I chatted with a stock analyst who covers Edison and he told me that the company has been less than clear about what it has done or plans to do about this problem. When I called Edison’s Chief Financial Officer Adam Field, one of his assistants told me that everyone at the company was busy today and that no one was available to answer the question. Tomorrow? She told me that everyone would probably be busy tomorrow as well.

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