Edison: An "F" in Finance

For-profit Edison Schools needs to make a profit soon

The messianic CEO of Edison Schools Inc. (EDSN ), H. Christopher Whittle, has long assumed that investors and educators would give him plenty of time to prove that his for-profit company could revolutionize American education. With good reason: Since founding Edison a decade ago, Whittle has raised $509 million--without ever coming close to turning a profit.

But time may finally be running out on his bold experiment. With Edison's stock now trading around 50 cents, down from $20 in early January, the equity market is closed. Edison's precarious financial position is forcing it to borrow funds at exorbitant rates of 12% and higher. And Edison's schools are under assault in some of its most important districts, from Dallas to Philadelphia.

True, most observers believe the company has the wherewithal to make it through the current school year. Despite heavy spending this summer to open new schools, Edison still has $30 million in cash. "But this is their last chance," says Trace Urdan, an analyst at ThinkEquity Partners, a boutique investment bank in San Francisco. By next June, Edison must pass its toughest exam yet--by proving that it can make money while effectively running schools in such tough places as Philadelphia. If it fails, Edison will likely either become a private company or face bankruptcy.

The stakes go far beyond the 80,000 students attending the 150 schools Edison now runs. "Edison is the bellwether for the entire for-profit school-reform movement," says Peter J. Stokes, executive vice-president at Eduventures Inc., a Boston market researcher.

Whittle's challenge: fixing the company before he loses all access to funding. While revenues soared to $465 million for the fiscal year ended June 30, up from just $66 million in 1998, Whittle's promise that size equals profits hasn't come true. Last year, Edison's spending on education and operating expenses still outpaced revenues by 10%. As a result, Edison's operating losses--including charges--jumped 88%, to $76.7 million.

In an effort to boost confidence, Whittle is pledging that "we will have the strongest financial year in our history." Specifically, he says, Edison will produce $20 million in EBITDA (earnings before interest, taxes, and depreciation) in the fiscal year ending next June. Although that would still mean a net loss, it would be a huge turnaround from fiscal 2002 when Edison lost $6.3 million on an EBITDA basis, even after excluding a charge of $46 million. To meet the target, Whittle says Edison is scaling back its growth objectives. He's also curtailing the pricey practice of giving each child a home computer, which accounts for nearly half of its school-related capital spending. And he hopes to raise $40 million to $50 million by refinancing some $80 million Edison loaned its charter schools.

Problem is, such austerity could weaken the appeal of Edison's education model and compound its already rocky relations with some of its biggest customers. Although Edison has been reporting improving test scores, contract disputes and other problems forced it to close 20 schools, with 7,400 students, last year. Dallas, where Edison runs seven schools, is terminating its contract at the end of this year. And now all eyes are on Philadelphia, where Edison assumed control of 20 schools in August--its biggest contract to date. "The opening of these schools was very chaotic," says Barbara Goodman, communications director for the Philadelphia Federation of Teachers. But Paul Vallas, CEO of the School District of Philadelphia, says it's "premature to pass judgment. Edison is holding their own in the vast majority of their schools." Still, Vallas has withheld $4 million due Edison until the problems are fixed.

Many observers believe Whittle will ultimately choose to take the company private. "That would allow them to right their fiscal ship outside the fishbowl you operate in as a public company," says Michael Connelly, CEO of Mosaica Education Inc., a for-profit operator of 44 charter schools in six states. But if Edison loses the Philadelphia contract, warns Stokes, bankruptcy could follow. If Edison does fail, the schools will survive in one form or another. The biggest blow will be to those who believe the private sector can play a key role in reforming public schools.

By William C. Symonds in Boston

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