Trouble for School Inc.

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Wendy Walsh's seventh-graders at Gillespie Middle School in North Philadelphia have something in common with investors in the for-profit education company Edison Schools. Both fear that Edison, the nation's largest private operator of public schools, may be failing them. "The children ask me what's going on," Walsh says, "and I don't know what to tell them. We're all facing the great unknown."

In its most ambitious project to date, Edison is scheduled to take over Gillespie and 19 other schools in Philadelphia this fall. But just as the company's initial meetings with teachers began there last week, Edison was absorbing blows from a defection by a pillar client in Boston, a scolding by the Securities and Exchange Commission, lawsuits from angry investors and persistent doubts from teachers, parents and students in Philadelphia.

The Boston Renaissance Charter School became one of Edison's first clients when the school was founded in 1995. But a desire to move in a different curricular direction and disappointment with scores on Massachusetts state exams are prompting school officials to vacate their five-year contract with Edison this summer, three years before it was set to expire in 2005. "There was a sense that we're ready to do this on our own," says Dudley Blodget, Renaissance's president. "Test scores were one factor, but we really felt we didn't need the whole school-management piece any longer."

Eighth-graders at Renaissance perform below state and district averages--69% failed the statewide math test, compared with 54% in the Boston school district and 31% in the state; in English, 22% of Renaissance eighth-graders failed, compared with 20% citywide and 8% statewide. Edison spokesman Adam Tucker concedes that "none of us felt test scores were improving as quickly as they should" at Renaissance, but he says that a dual-management structure in which the school principal reported to both Edison and a local charter-school board was restricting. He says that Renaissance is an anomaly for Edison, which operates 136 schools serving 75,000 students in 22 states. According to Edison statistics, the average annual gain in test scores across its far-flung school system--4.2%--surpasses other districts of similar population size.

But the dissolution of the high-profile Boston contract was just one factor contributing to Edison's bad week. In an informal inquiry concluded last Tuesday, the SEC said that Edison had omitted crucial information from its filings, allowing it to report revenues from 1999 to 2002 that were 41% to 48% higher than it actually generated. The company had been counting teachers' salaries and other expenses paid by its client school districts and charter-school boards as revenue, even though none of the cash entered Edison's coffers. Because Edison also reported the funds as expenses, its bottom line was accurate, the sec said, and the reporting procedure did not violate generally accepted accounting rules. Still, the SEC said, Edison should have told investors how it was tabulating its impressive revenue growth.