Woes growing, educator's fate in the balance

Edison: Amid funding and performance concerns, the for-profit firm faces a key test, managing 20 Philadelphia schools.

September 28, 2002|By Erika Niedowski | Erika Niedowski,SUN STAFF

There's a framed cartoon in the corner of Christopher H. Whittle's Midtown Manhattan office that pictures a man in a business suit sitting expectantly before a fortuneteller and her crystal ball.

"Why ask me what's going to happen?" the fortuneteller says. "Ask Chris Whittle."

The founder and chief executive officer of Edison Schools Inc. does see himself that way -- as a kind of entrepreneurial seer. But some say the gap between how Whittle envisions his company's place in American education and the reality of Edison's performance in the complex and frequently politically charged world of public schools is widening.

The country's largest for-profit school management company, with 150 schools, Edison says it can educate children -- particularly in underperforming schools -- more effectively and for the same amount of money as traditional public school systems.

But the company is increasingly under fire as an educational as well as a business enterprise. Several of its client schools have abandoned it over academic performance, cost or both. And investors have fled in droves, pushing its stock price down to pennies. Even the resilient Whittle, who has survived other education-related business failures, has referred to the past year as "traumatic" and said the company needed a "corporate gut check." Edison faces one of its most important -- and difficult -- tests: the transformation of 20 failing schools in Philadelphia.

Despite its mounting troubles, Edison opened the academic year running more schools than ever, including three in Baltimore under a contract with the Maryland State Department of Education. Those schools, in their third year under Edison's management, have shown significant improvement in some areas and less impressive gains in others.

Whittle, who burst onto the public scene more than 20 years ago when he bought Esquire magazine, remains optimistic that his model for education -- small, orderly learning environments and an emphasis on basics such as reading -- works. He calls speculation that Edison was headed toward bankruptcy last spring overblown. And he predicts that a number of cost-cutting measures -- including the letting go of dozens of employees at company headquarters in New York -- will help Edison reach its first profitable year in the next fiscal cycle.

Still, the list of problems the company faces is daunting:

Edison has lost several contracts this year alone, including most recently one with Dallas, where it runs one of its largest clusters of schools. Complaints from former Edison clients have ranged from lagging test scores to unexpectedly high costs.

The U.S. Department of Education has launched an investigation into how Edison was awarded its five-year $60 million contract to manage schools in Philadelphia. Democratic U.S. Rep. Chaka Fattah has asked federal officials to investigate whether the company "improperly conspired" with the state to "corrupt" the contracting process. A separate $2.7 million contract awarded to Edison last year without bids is also being investigated.

Edison's market value has gone from more than $1.5 billion 1 1/2 years ago to about $20 million today, and the company could be delisted from the Nasdaq stock exchange because its shares have been trading below $1 for more than 30 days. A recent warning gave the company 90 days to raise its stock price.

The Securities and Exchange Commission found in an informal investigation earlier this year that Edison had misled investors by improperly reporting as revenue money it never received, such as teacher salaries paid directly by school districts. Edison settled the case in May, agreeing to change its accounting methods, but faces several class-action shareholder lawsuits.

"They've still got a lot to prove that they're better than their counterparts in the traditional public school sector, and they've still got a lot to prove to Wall Street that they're a going concern," said Peter J. Stokes, executive vice president at Eduventures, a Boston-based education-research firm. "They're in a `prove it' situation right now, and they really can't afford any more massive publicity disasters."

In the end, the company's future may hinge in large part on its performance in Philadelphia, where it is overseeing the education of about 13,000 students, nearly twice the number in any other district.

The Philadelphia deal has been a mixed blessing. Edison had hoped for and led Wall Street to believe that it would have a much larger presence there -- managing 45 schools. Investor disappointment after the company was awarded only 20 sent its stock plummeting from $12 in April to a record-low 22 cents in mid-August. The stock closed at a high of $36.75 in February 2001.

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