The Bronx, N.Y.
The abrupt bankruptcy filing by Brown Schools in late March left a wake of hardship – hundreds of youth workers and teachers without jobs and about 1,500 troubled youth in educational limbo.
The bankruptcy documents show how a seemingly thriving for-profit company can dig itself into a financial hole. And they raise questions about whether parents and public agencies should pay more attention to the balance sheets of the for-profit programs to which they entrust their children – and how they can. According to its bankruptcy filing, Brown Schools, a privately held company based in Austin, Texas, was conducting business under 24 names.
Founded in 1940 as a mom-and-pop operation, Brown was a pioneer in the privatization of treatment for adjudicated youth and the use of therapeutic wilderness programs. With its acquisition of CEDU Family Systems in 1998, it also became a major player in the burgeoning field of private-pay programs for troubled teens, often called “emotional growth schools.” By 2001, Brown was billing itself as “the largest national provider of education, therapeutic and family support services for children and adolescents with extraordinary needs.”
Until the bankruptcy filing, Brown operated five therapeutic boarding schools in Idaho, California and Vermont, and a wilderness program and a transitional housing program in Idaho. Together, these programs served 300 youth, most of them placed by their parents, who paid nearly $6,000 a month.
The company also operated schools in Houston for 600 youth in six detention or residential treatment centers, and for 600 youth who had been expelled from public schools. And in Ocala, Fla., it operated two public schools for children with behavioral and emotional problems.
In its bankruptcy petition, filed in Wilmington, Del., Brown reported assets of less than $10 million and debts of up to $50 million. The primary investor, McCown, De Leeuw & Co. (MDC), of Menlo Park, Calif., is owed $18 million, a spokesman said, while the other major investor, Teachers Insurance and Annuity Association of America (TIAA) is owed $20 million. The company also owes almost $1.4 million in legal fees and lawsuit settlement costs.
The unsecured creditors – who are unlikely to collect on their claims – include seven families awaiting settlement payments. Parents who prepaid the tuition for a year are also probably out of luck.
What Went Wrong?
The consensus in the industry is that the acquisition of CEDU set the stage for Brown’s demise. Even a spokesman for MDC told Youth Today that CEDU’s $78 million price tag was too high. Declining enrollment caused by increased competition contributed to the red ink, the spokesman said.
But a former Brown employee blames poor management for the closings. Beverly Kee, vice president of business operations until December, said that 27 different people had filled the company’s top five positions during her 5 1/2 year tenure.
“It’s been in a downward spiral ever since the investment group [MDC] came in,” she said. “I think they thought that this was going to be a great cash cow for them, that they could turn it around and spin it off in a few years as a public entity. What they failed to understand is that this is very much a relationship-based business.”
Lon Woodbury, an educational consultant in Bonners Ferry, Idaho, agreed. He operates Woodbury Reports, an online directory of emotional growth programs, and follows the industry closely.
“It’s such a unique business, working with high-risk teens in a private-pay, parent-choice market,” he said. “I think they didn’t have a clue that this was different from a factory. I think the main lesson for the industry is that the people calling the shots have to be familiar with the program.”
MDC is a private equity firm that manages $1.1 billion in investments and claims a mission to “build companies that make a difference.” MDC had no experience with programs for juveniles. Among the properties in which it holds significant equity are 24-Hour Fitness, a chain of fitness clubs; On-Stage Entertainment, a Las Vegas-based production company; and StoneMor Partners, a Philadelphia-based chain of cemeteries and funeral homes.
Child development specialists and industry observers are particularly upset with how the schools closed. The families of about 260 youth in the residential programs in Idaho and California were given a day or two over Easter weekend to remove their children. The King George School in Vermont and the public programs in Texas and Florida continue to operate under the supervision of the bankruptcy trustee.
“In closing it down, they treated it like a Rust Belt factory in a declining community,” Woodbury said. In a website posting on Woodbury’s website (www.strugglingteens.com), Bill Valentine, a psychologist in Bend, Ore., called the closings “insensitive and callous.”
As many as 700 youth workers, teachers and support workers are not only unemployed, but uncompensated for their final two weeks of work. They’re also worried that their 401(k) contributions for the first quarter of the year may be lost. Several have filed a class-action suit alleging that the company violated the federal Worker Adjustment and Retraining Notification (WARN) Act, which requires 60 days notice before a shutdown.
Brown Chairman Fenton “Pete” Talbott said he was sickened by the sudden closing, but that cash flow problems gave the board no choice.
Talbott, who has long ties to MDC, said he was brought on the board in January to prepare the company for a Chapter 11 bankruptcy filing, which would have allowed it to continue operating. Under Chapter 7, however a company’s assets are liquidated. “In a matter of months, we could have found buyers,” he said. “They’re very attractive properties. And in my opinion, they’re much more attractive as a going concern with children enrolled and clinicians and teachers and nurses in place.”
Talbott said TIAA and MDC refused to provide more financing. “I put the onus of responsibility on both financial institutions,” he said. “The board had no choice but to shut down. We literally were worried about the safety of the children, since we couldn’t make the payroll.”
In a prepared statement, MDC said it “did everything in its power to preserve the operations of the schools,” and that it had “repeatedly provided millions of dollars to help maintain the programs offered at the schools, without receiving payments in return.”
While the Brown Schools, particularly the former CEDU programs, generally enjoyed a good reputation, they have a history of financial distress, according to a 1997 article in the Austin Business Journal. In 1991, the company, then known as Healthcare International, filed for Chapter 11 bankruptcy. It emerged from bankruptcy in 1993 with about $250 million in debt and a new name: Healthcare America.
The company again filed for Chapter 11 protection in January 1996, shed some properties and emerged in May 1996 with new financing from a consortium of banks. It resumed using its original name – Brown Schools. In 1997, MDC and several other investors acquired the company in a $31 million leveraged buyout, which included the assumption of $55 million in debt. Two years later, Brown announced the placement of $15 million of subordinated debt with TIAA, which MDC said would be used to expand.
The heavy debt burden, combined with a slew of lawsuits alleging mistreatment or wrongful death, spurred Brown to sell its psychiatric facilities a few years ago for $63 million. The company refinanced again last July. That same month, it lost a lucrative contract to operate schools for detained juveniles in Dallas. And in February, it was forced to close one of its boarding schools, Rocky Mountain Academy in Naples, Idaho, after enrollment declined to 19 from 120.
Marguerite Sallee, Brown’s CEO from 2001 to 2003, says she left it in good programmatic shape. “CEDU and the Brown Schools were great industry pioneers,” said Sallee, who heads America’s Promise/The Alliance for Youth. “They really invented these incredibly important services for these kids. It’s sad to see this legacy lost.”
BROWN SCHOOLS PROGRAMS
Open (under administration of the bankruptcy trustee)