By Tali Woodward

EDUCATORS HAVE BEEN posing questions about Edison Schools since the firm began managing schools in 1995 – challenging the company's premise as well as the specific ways it educates kids, treats teachers, and reports test scores.

Edison, which now runs 133 schools through charter or contract, has racked up $250 million in losses in the past seven years. But Wall Street has looked kindly on the company anyway – until recently.

Revelations from a Securities and Exchange Commission (SEC) inquiry that Edison has misled investors about revenues sent Edison stock plummeting this month – and other troubling company news has kept it hovering at just over $1 a share, which is the minimum price needed to remain on Nasdaq. In February 2001, Edison stock was trading at $38 a share.

Even some of Edison's most vociferous critics are reeling – shocked that it's the sudden distrust of bankers and shareholders that could do Edison in.

"I always thought this was a dead-end detour in our efforts to reform education," said Margaret Brodkin, director of Coleman Advocates for Children and Youth and the unofficial spokesperson of San Francisco's anti-Edison contingent. "But it's happened so quickly – even those of us who were opposed didn't appreciate how corrupting the profit motive could be."

While some may be eager to declare the country's experiment with privatizing education a failure, no one's ready to label it inconsequential.

Executives and stockholders, after all, are not the only ones who stand to lose. At least 70,000 U.S. students attend schools run by Edison, which is by far the largest company of its kind. But without an immediate cash infusion, the Manhattan-based firm may be purchased or forced to declare bankruptcy.

What if Edison walks out of its schools in the middle of the academic year – or can't even open them next fall? For-profit school management is such a new enterprise that it's hard to get a precise answer; there's no history to examine or experts to turn to.

"Will creditors come haul away all the computers? Pick the rug up off the floor and take materials off the walls?" Brodkin asked. "It's hard for me to believe it might come to that, but this whole thing has been hard for me to believe."

Here in San Francisco, where Edison's control of an elementary school has been a running controversy, many people are watching and waiting. And they're speculating that the school's turbulent history will make matters particularly confusing.

Cooked books?

Questions about Edison's revenue reporting were first raised by Bloomberg News in February.

When the SEC investigated, it found that much of the money included in revenue numbers had never even passed through the company. Edison reported $375.8 million in revenue for fiscal year 2001 but never saw a full $158 million of that. The money was spent by school districts on salaries for teachers and other staff at schools run by Edison.

According to SEC documents dated May 14, the three-month inquiry also found that "Edison has not implemented an adequate system of controls, and had maintained books and records that contained certain inaccuracies."

"They way they were reporting revenues did not give investors a fair picture," SEC spokesperson John Nester said, explaining that revenue has become more central to how companies sell themselves in recent years and that many try to make it look as good as possible.

Edison agreed to revise its books and establish internal auditing procedures in order to settle the SEC charges. Company spokesperson Adam Tucker told us, "After going through an exhaustive process, we hope people have even more confidence in us."

But by press time at least eight investor class-action suits had been initiated against Edison.

The SEC inquiry drew unprecedented attention to the company. And just when everyone was watching, Edison had to contend with a string of unrelated but still negative announcements.

First the Chester Upland school district in Pennsylvania, where Edison manages nine schools, released a report May 14 highlighting high suspension rates.

Then Boston Renaissance Charter School, one of the first four schools Edison took control of back in 1995, announced May 16 that it is pulling out of its $9 million-a-year Edison contract three years before it is set to expire. The school, one of the largest Edison has run, has posted test scores below city averages.

The same day, administrators at the Clark County, Nev., district said they would freeze payment on $3 million now owed to Edison. Under the Nevada contract, Edison pledged to round up $4 million in philanthropic support during this school year. So far it's only delivered $1.8 million.

In Dallas, where Edison runs seven schools, two slipped from "acceptable" to "low performing" on state tests this year – prompting a district evaluation of the contract.

Edison has actually been suffering setbacks like this for years. Cities like New York and Austin have resisted Edison's overtures from the get-go. Another half dozen have ended contracts with the firm. In Sherman, Texas, where the company ran its first school, administrators said working with Edison meant hidden costs of up to $1 million a year – a complaint echoed elsewhere. Critics also assail Edison for its teacher turnover, which is about twice that at the nation's public schools, and for misreporting or distorting test results.

The media, which have generally treated Edison kindly (see "Full-Court Press," 2/7/02), have followed the recent developments closely. And perhaps because of that added scrutiny, investors and bankers have responded quickly and dramatically.

During the week of May 14, the firm's stock fell to a low of $1.22 a share, meaning it has lost 93 percent of its value this year.

Three major banks also downgraded Edison's stock rating. An analyst from Merrill Lynch and Co. (which underwrote Edison's initial public offering) explained in a bulletin, "We believe the business model is economic, we believe the stock is undervalued, but we also believe it will be difficult to get out of the way of the news flow."

The company's own quarterly report, filed May 17 with the SEC, provided further cause for concern. Edison acknowledged that three of the seven management agreements up for renewal this spring will likely be canceled.

Since its IPO in November 1999, Edison has covered its losses and high overhead by selling more stock. That wouldn't generate much money today. So Edison, which is also unlikely to attract loans, is so cash-strapped that it may have a problem running schools next fall.

Everything is complicated by Edison's obligations in Philadelphia, where it is set to take control of 20 schools as part of a massive, state-guided reform effort. Strangely, the announcement in April that Edison had been awarded only 20 schools was what started the stock dropping. Edison had consulted on the reform plan and initially bid to take over the whole district; in the end, it asked to run 45 schools.

According to reports in the Philadelphia Inquirer, Edison is still angling for a broader role there – even as executives admit they need $30 million to $50 million, and fast. (One rumored investor is Roger Milliken, the textile magnate who, according to the New Republic, banned copiers made by Xerox from his offices after Xerox sponsored a civil rights documentary. Milliken is also an ardent supporter of Pat Buchanan.)

"Every single year Edison has been in existence, we've needed to raise money," Edison spokesperson Tucker said.

Jill Wynns, the president of the San Francisco Board of Education and a critic of for-profit schooling, isn't reassured.

"In no other industry would you say, 'Let's enter a management agreement with a company that doesn't have the cash to operate,' " she scoffed. "It's not only investors but school districts and citizens – and legislators in Pennsylvania – who should be concerned."

The Whittle way

Edison, initially called the Edison Project, wasn't the first commercial enterprise to take a stab at school management, but it garnered more attention than its predecessors, in part because of its bow tie-wearing CEO, H. Christopher Whittle.

Whittle made his name resuscitating Esquire magazine in the 1980s, but he made his impression on the education world with Channel One, the enterprise that piped teen-targeted news – and advertisements – into classrooms the country over. That company was dissolved in the mid 1990s.

This time Whittle wanted to control the entire educational program. Building a for-profit chain of private schools would require too much capital up front, he reasoned. Public schools already had land and buildings – not to mention a stable source of funding. If he managed to convince people he could stretch each dollar further, he'd have a shot at the billions spent on public education each year.

The fact that so many people signed on to this experiment in the first place shows just how low the public's trust in traditional public education had fallen.

After all, the country is used to sinking money into public education – and, often, not seeing an adequate return on the investment. Whittle said he could reverse that – generating a profit and improving academic achievement at the same time.

But Edison has never had a particularly persuasive plan for how to do this. The company points out, accurately, that more and more public education dollars are going to administrative costs. But Edison has never said exactly how it would limit the bureaucracy – nor has it reconciled some pretty huge contradictions in the company philosophy.

Centralization is bad, Edison says; schools should be individualized and independent. So how can Edison run hundreds of these individualized programs in far-flung locales from one bare-bones office in Manhattan?

Money can be made through economies of scale, the company line runs. But wouldn't building a national, for-profit schools chain require an unprecedented investment in marketing and advertising?

Quality teaching is important, Edison says. But how can the company limit teacher salaries – the major cost in running schools – without hiring cheaper, less experienced teachers?

Edison says education funding is more than sufficient to runs schools. Then why has the company needed to secure millions of dollars from tax-exempt nonprofits for on-site improvements?

None of these questions have ever been answered.

Professor Bruce Fuller researches education and public policy – and specifically charter schools – at UC Berkeley. "It would be ironic to see this company go down because of problems in the financial world – rather than problems with their educational approach," Fuller told us. But he stressed that the two realms cannot be entirely separated. "Independent of this latest debacle, I think the softness of the stock price is related to the softness of their test scores and educational results," he said. "Another way of looking at it is, if they were doing better on the ground and getting more contracts, they wouldn't have to obfuscate their numbers."

Lesson plans

If Edison collapses, what will happen to the 133 schools it controls?

"That would need to be negotiated with each and every school – because every contract is different," Edison's Tucker said, adding that people "are getting a little ahead of themselves."

Most people agree that schools run under management agreements would just revert back to school district control. The S.F. school board's Wynns says things are likely to be more complicated at charter schools, which are in many ways distinct from the school districts where they operate. She also predicts that sorting out the San Francisco situation will be "doubly difficult."

The San Francisco Board of Education gave Edison a charter to run Noe Valley's Thomas Edison Elementary in 1998. But after years of public opposition and evidence that the renamed Edison Charter Academy was pushing out students and teachers, a newly elected board canceled the charter last year. The state Board of Education, which was generally more amenable to Edison, granted the company a quick replacement charter, and the school has continued to operate in a building rented from the San Francisco Unified School District. (Soon after, the state board also put the company on notice when test scores placed the school dead last among San Francisco's 75 elementary schools.)

Wynns told us the school district will likely take back the school if Edison withdraws from San Francisco. "It would be an organizational scramble, but I think we could do it," she said.

Wynns insisted the district has no legal tie to Edison. "All we are is the landlord," she said.

Deborah Connelly, who oversees the state-granted charters for the California Department of Education, agreed. "I imagine what would happen if Edison pulled out is the district would reclaim the school," she said. "I'm sure there would be lots of turmoil, but it would eventually settle down." But Connelly could not specify what would happen to campus property. "If there are creditors involved, I don't think there's anything in the documents that speaks to that."

"It's such new terrain, who knows?" Fuller said. But he surmised that it would depend on the applicable contract and if it included a "bailout clause."

"It's probably the case that a lot of districts didn't think of this," he added.

Right now, Connelly said, the state is "watching to see what happens" – and will probably not act unless there is evidence that the San Francisco school is being affected. She also faxed us a May 15 letter from Edison CEO Whittle. "I want to assure you that the company is alive and well," it states. "I assure you that we are both able to support existing schools and have a strong track record for raising capital to fund growth."

Some people, including youth advocate Brodkin, want the state to pull out now to protect against potential disruptions. "It's clear that the company is failing. If there is any legal avenue, they should end the contract at the end of this [school] year," she said.

Brodkin said people keep asking her if she's frustrated that Edison may be beaten by the stock market instead of by criticism from educators, parents, and the public. But it's actually quite fitting, she told us. "Certainly the straw that broke the camel's back was Philadelphia – it was such an overreach. And it provided an opportunity for many people to start really looking at the company, to start separating the truth from the lies. It was their greed that destroyed them."

San Francisco parent Caroline Grannan became so incensed by what Edison was doing here that she has devoted hundreds of hours to tracking its activities. Her extensive archive on the Web site Parents Advocating School Accountability (www.pasasf.org) has become the main clearinghouse for Edison information.

But she's not exactly relishing the company's downward spiral. "Yeah, the house of cards is falling," she told us. "But it's a real disruption to the kids and families – and to a lot of teachers."

It's true that school districts, including San Francisco's, which saw Edison as a panacea, may end up worse off for having played the privatization game. If Edison goes under, enormous logistical problems will land on them – re-enrolling kids, divvying up physical improvements, figuring out contracts with teachers who were working at Edison schools, maybe even negotiating with creditors. Plus, they'll have spent a bunch of money without having solved anything.