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Edison Report Gets an F--Kept Loan Default Quiet

BLOOMBERG NEWS

Edison Schools Inc. left one thing out when the public-school manager reported a "dramatic" improvement last week: it had defaulted on $59.5 million in loans.

The Manhattan-based company was given until June 30 to comply with the terms of the loan agreements by creditors Merrill Lynch & Co. and School Services LLC, according to its filing with the Securities and Exchange Commission.

The disclosure came a day after chief executive Christopher Whittle said in a statement May 14 that Edison had "executed a dramatic financial turnaround." The stock soared 26 percent to $2.25 in after-hours trading that day.

Edison's admission of the default "doesn't pass the smell test," said Alan Bromberg, a law professor at Southern Methodist University in Dallas. "Generally, when you're putting out positive information, you need to balance it with negative information if there is any."

The company, which manages 149 elementary and secondary public and charter schools, said it knew of the loan default before releasing third quarter results.

"We thought it was immaterial given that the issue had been resolved and would be in the [SEC filing]," spokesman Adam Tucker said in an interview.

Whittle and chief financial officer Chris Scarlata declined requests for interviews.

Edison hasn't missed a loan payment. The default resulted from its failure to have a tangible net worth of about $201 million on March 31 in its loan agreements, Tucker said. Tangible net worth is the amount of physical assets, such as cash and buildings, in excess of liabilities.

Its loss in the quarter ended March 31 narrowed to $6.37 million.

Shares of Edison fell 12 cents to $1.50 as of 3:59 p.m. New York time in Nasdaq Stock Market trading. The stock gained 57 percent earlier this month after Edison said Whittle and other executives may buy the company and take it private. The company said the management group hadn't arranged financing for a buyout.

Edison last year agreed to change its revenue reporting after the SEC said the company's financial statements didn't reflect its performance.

Merrill and School Services have close ties to Edison. Merrill led the group of investment banks that took the company public in November 1999 and arranged subsequent stock sales over the next two years.

School Services was formed last summer by Leeds Weld & Co., a Manhattan investment firm run by former Edison directors Jeffrey Leeds and ex-Massachusetts Governor William Weld. Both resigned from the board in July.

Edison is in effect paying more than 30 percent annual interest to the two lenders on financing received over the last two years.

The company also needs to replace a $55 million line of credit that expires July 15.

— Bloomberg News
Report Gets an F
Newsday
May 23, 2003
http://www.newsday.com/business/local/newyork/ny-bzedis233297606may23,0,3181450.story

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