Posted on 28-6-2002

Edison's Failing Grade
By Tali Woodward, CorpWatch, www.corpwatch.org

Investors and school districts are ditching the country's leading public
education privatizer.

A year ago, Edison Schools Inc. was flying high. With 133 schools under its
control, Edison had quickly become the US's largest for-profit manager of
public schools. And the public education funding that the company was
tapping into seemed to provide a potentially limitless revenue stream.
Founder Chris Whittle had predicted that, by 2020, Edison would run one in
ten public schools in the United States. The company was a hit with Wall
Street: shares were trading at $38, up from $18 when Edison went public
just over two years earlier.

Now shares of Edison are changing hands for about a dollar, the minimum
price required to stay listed on NASDAQ. Edison has racked up $250 million
in losses since it began. The company announced June 3 that it had secured
the $40 million investment it needs to open school in the fall. But the
futures of 74,000 kids in Edison schools from Maryland to California remain
tied to a company that is financially unstable. Edison's economic troubles
raise renewed questions about the wisdom of turning public schools over to
for-profit corporations -- and could pose a major setback for the school
privatization movement.

Edison is still reeling from a three-month inquiry into the company's
finances by the Securities and Exchange Commission. Investigators
determined that the company consistently misreported revenues, providing an
unduly rosy picture to investors. For example, Edison reported $375.8
million in revenue in fiscal 2001. According to the SEC's May 14 order,
$154 million of that never passed through the company: it was spent by
school districts on salaries for teachers and other staff at schools run by
Edison. The SEC also found that Edison does not have an adequate system of
internal accounting controls in place.

At least ten class action lawsuits have since been filed against the
company, one of them by Milberg Weiss, the firm handling a major
stockholder suit against Enron. All charge that the company misled
investors. Yet amidst this turmoil, the former golden child of for-profit
education is planning its biggest project to date: next fall's takeover of
20 low-performing schools in Philadelphia.

Edison's improper bookkeeping practices may come back to haunt the company,
as was the case with Enron. But there's more to the Edison story than an
accounting scandal. Edison was built on the premise that a private company
could run public schools more effectively and efficiently than local
government could. Judging from the company's recent track record, that
premise may soon be proven false.

Bruce Fuller, a professor of education and public policy at UC Berkeley who
has researched charter schools and is familiar with Edison's history, says
that Edison's stock performance isn't unconnected to the company's
classroom record. "I think the softness of the stock price is related to
the softness of their test scores and educational results," he says.
"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.
Even markets have rules -- and [Edison's] evidence is so mixed that it's
starting to affect their standing with investors."