Akron businessman David Brennan told employees of White Hat Management last month that his family can no longer afford to subsidize the company he founded in 1998 and owns.
White Hat is one of the country’s largest for-profit charter school operators.
“Our family has committed over 50 million dollars to sustaining White Hat,” Brennan told employees in an internal memo dated Nov. 3. “But frankly we have run out of reserves. If we tighten spending as much as we can, our commitment will see us through June 2013.”
The letter, signed by Brennan and his wife, Ann, explains that the family can no longer subsidize cash flow for the Akron-based company.
“Clearly we have a problem in that we have not met a forecast for the bank in the last 5 years. PNC does not trust our numbers because of this failure. We must increase our enrollments and show profitability,” the Brennans’ letter says. “To meet the required payments on our loan, we must show an excess of 2 million every year for the next 5, while still covering our on-going necessary capital and operating needs.”
David Brennan could not be reached for comment.
White Hat Chief Executive and President Tom Barrett said the memo was intended to explain recent cost-cutting moves.
White Hat has laid off employees to adjust for unexpected declines in enrollment, relocated offices from the Key Building in downtown Akron to nearby Main Place, and eliminated bonuses the company had hoped to give to long-term employees.
“We just wanted to make sure they understood what was going on and why we were making changes,” Barrett said.
The company employs about 1,200 people in five states, Barrett said.
“We are at just a little over 13,000 students enrolled in 41 schools,” he said.
Barrett said he didn’t know exactly how many employees were let go.
“Sometimes you have to get a little smaller in order to grow,” Barrett said.
He said that the company can no longer afford to move slowly on layoffs when enrollment dips.
“In the past, I think they may have taken a little longer to make those decisions because they had a luxury, they had certainly the Brennans continuing to finance it even though it was costing money,” Barrett said.
He said the Brennans still support White Hat’s mission of providing parents an alternative to traditional district schools.
“A lot of people think that White Hat is here to make a ton of money and it’s not,” Barrett said. “It’s actually been heavily funded by the Brennans because they believe in the cause.”
‘Backs are full of arrows’
The Brennans portray themselves as pioneers under siege.
“As so often happens to pioneers, our backs are full of arrows and our opponents are vigorous and too often successful,” the letter says.
Charter schools are privately operated schools that receive state funding based on enrollment and other factors. Some operate their own schools, while others hire a management company such as White Hat.
“Our opponents have created a climate that is making it extremely difficult for us to succeed,” the letter says. “Most of our problems are political and legal.”
The boards of nine schools managed by White Hat have sued the company demanding more financial transparency and more control over how the schools are run. A Franklin County Common Pleas judge ruled in August that White Hat must provide a detailed accounting of how it spends taxpayer money.
Barrett attributes some of the drop in enrollment to increased competition for White Hat’s Life Skills Centers from traditional districts, which are offering their own dropout prevention programs, such as the Akron Alternative Academy.
The Hope Academies, which offer kindergarten through eighth grade, generally have been successful, but two new Hope Academies in Cleveland posted less-than-expected enrollment in their first year, Barrett said. He expects those numbers to improve next year when the schools become eligible for busing.
Another White Hat school in Youngstown, Southside Academy, took a hit when some suburban districts began accepting Youngstown students, Barrett said.
“The increased competition certainly didn’t help,” he said. “We had 600 kids in that school, so 200 of them decided to go to a suburban school. ”
Some good news
The one bright spot in the letter to employees pointed out the better-than-expected success of White Hat’s online division, DELA (Distance & Electronic Learning Academies), which teaches about 3,000 kids over the Internet, mostly in Ohio with some in Pennsylvania.
About 25,000 students in Ohio are enrolled in some kind of online schooling, Barrett said. DELA has captured about 10 percent of that market.
“We put a multimillion investment into software for DELA this year,” Barrett said.
He said White Hat has developed the new system with Houghton Mifflin Harcourt and GlobalScholar, an educational software company based in Bellevue, Wash.
The upgrades will allow for face-to-face live video instruction and online storage and management of student records similar to Blackboard.
“It’s Blackboard on steroids,” Barrett said. “We had Blackboard, but we unplugged it to move to this and the experience is fantastic.”
Barrett said the cost-cutting moves have all been made and it’s his job to make sure the company can wean itself from the Brennan family’s subsidies.
And the employees have been placed on notice that they can’t cook the books to make that happen.
The memo ends with this postscript:
“Much as we would rather not, we need to sound a cautionary note. When both financial and test result stresses are high, there may be a temptation to ‘fudge the numbers.’ This must not happen. It would be contrary to everything we are fighting for. It would give credence to all the lies that our opponents tell about us.”
John Higgins can be reached at 330-996-3792 or jhiggins@thebeaconjournal.com. Read the education blog at http://education.ohio.com/.