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Questions About Finances Put Edison Project at Crossroads

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The Edison Project is entering a critical period in its short existence.

The private, for-profit education-reform effort already has 11 tentative agreements to run innovative public schools beginning in 1995, including a letter of intent approved by the Dade County, Fla., school board last week.

But the Edison Project now must find new investors who will provide the capital to refurbish those schools with new technology and hire professional educators to run them.

Meanwhile, the privately held company--a limited partnership formally called Whittle Schools--is doing what it can to distance itself from the financial troubles of Whittle Communications, which operates the Channel One classroom news show and other media ventures. Both concerns were founded by the media entrepreneur Christopher Whittle.

Just this year, Whittle Communications shut down an unprofitable advertiser-supported television service for doctors' waiting rooms and has faced uncertain prospects for a separate medical-news service for physicians.

Waves or Ripples?

Although Channel One, which is shown in more than 12,000 secondary and middle schools, has been successful, it is believed to be Whittle's only revenue-generating property. The company is said to be negotiating a deal to sell half of Channel One to GS Capital Partners Ltd., the merchant-banking arm of the investment bank Goldman, Sachs & Company.

Recent developments have fueled speculation that Whittle Communications is being dismantled. The trade magazine Advertising Age ran a front-page article last month with the headline, "Whittle's Bridges Falling Down.''

In an interview, however, Mr. Whittle was upbeat about the future of Whittle Communications, Channel One, and the Edison Project.

"Various media love to make large waves out of what are often just ripples,'' Mr. Whittle said. "We are essentially setting up three companies.''

The Edison Project already exists as a separate concern, he explained, while Channel One and Medical News Network, the news service for doctors, will be the other two.

"There is really no financial connection between the different entities,'' Mr. Whittle added. "Channel One is a very profitable and successful entity. We have had some bumps in our health entities.''

The Edison Project "is going much better than we thought,'' he said. "We're going to wind up with more schools than we expected in wave one.''

Up to 14 Schools Slated

As of late last month, the Edison Project's 11 tentative agreements call for it to run as many as 14 public schools beginning in the fall of 1995. These include previously announced arrangements in Massachusetts, where Edison is a key partner in three groups that have been awarded charters to run autonomous public schools, and Wichita, Kan., where the firm is slated to start running two schools in 1995 and one more in 1996.

Edison representatives have been traveling the country in recent weeks seeking to nail down additional agreements.

One major coup was last week's unanimous vote by the Dade County school board to sign a letter of intent with Edison to open two or three schools there in 1995.

Phyllis Cohen, the deputy superintendent for instruction in Dade, said many issues remain to be worked out, but the teachers' union there has also backed the letter of intent.

"On paper, what we see is something which has great possibilities,'' she said.

Other districts that have recently signed letters of intent to allow the project to operate one or two schools are Greeley, Colo.; Mount Clemens, Mich.; Bridgeport, Ohio; Austin, Tex.; Sherman, Tex.; and Wylie, Tex.

Other districts may soon jump on the bandwagon. The superintendent of the Trenton, N.J., schools, Bernice P. Venable, said last week she would ask her board to approve a letter of intent for Edison to operate a school beginning in 1996.

Chester E. Finn Jr., an original design-team member of the Edison Project, said the marketing phase is going better than expected.

"There is reason to believe the 10 to 20 schools we want to be operational in the first year will be a target easily met,'' said Mr. Finn, one of the chief architects of Edison's school blueprint, which stresses a longer school day and year, innovative technology, and a more rigorous curriculum.

Mr. Finn said he will leave the Edison Project within a few months--not because he harbors doubts about the venture, but because he wants to return to the world of educational policy.

"I don't think anyone ever visualized me running an elementary school,'' he said.

Mr. Finn and other original design-team members will remain "founding partners'' in the Edison Project, which means they could share in any future profits of the venture.

Capital Quest

Securing new investments is the next big test for Edison. The project will have spent some $40 million by the end of this year without taking in a single dollar in revenue, acknowledged Michael Finnerty, the firm's director of finance and operations.

After failing last year to attract major funding to undertake its original goal of opening a chain of private schools under the Edison banner, the project decided to concentrate on partnerships to run public schools. The $40 million for the current phase of the project came from three investors: Mr. Whittle, the Dutch consumer-products giant Philips Electronics N.V., and the British publisher Associated Newspaper Holdings PLC.

All three investors are also partners of Whittle Communications. Another Whittle stakeholder, Time Warner Inc., declined to invest more money in the Edison Project last year and reportedly is seeking to sell its one-third stake in Whittle.

The Edison Project has begun seeking new investments for its "operational phase,'' which will begin in January. The project will earn revenue on a per-pupil basis from the districts or states that grant it permission to run public schools, but revenues will not start flowing until the fall of 1995.

"We need to have working capital to go in and install infrastructure and bring on staff early to train,'' Mr. Finnerty said.

He would not confirm a report in The Wall Street Journal that the Edison Project was seeking $50 million for its next phase and has approached such potential investors as A.T.&T. Corporation and Ameritech Corporation.

"We don't have a target number,'' Mr. Finnerty said. "The sizing of how much capital we decide to bring in will be related to the number of schools'' opening in 1995.

One point that Edison's representatives may be stressing, both to potential investors and to school officials, is that while the firm was founded by Mr. Whittle, it is separate from Whittle Communications.

"When they look into this, people understand the separateness of the companies,'' Mr. Finnerty said. "Edison's viability is completely stand alone with respect to any other company.''

A Shadowy Future

Media analysts said Whittle Communications's recent moves indicate that the firm will soon be a shadow of its former self.

"To me, this says the end of the Whittle organization,'' said Erica Gruen, a senior vice president for television information and new media at Saatchi and Saatchi Advertising.

"Channel One has been the cash cow for a number of years,'' Ms. Gruen said. "There are few in the ad community who are going to weep for Chris Whittle. Many people in the community think he has overpromised and underdeveloped too many projects.''

However, Channel One is "still clearly viable,'' Ms. Gruen added.

"Most advertisers seeking to reach the junior high and high school audience have found it a good way to do so,'' despite Channel One's high advertising rates compared to other media, she said.

Whittle Communications last month issued a statement saying that it was working with an investment adviser "to explore future financial options'' for the firm. In addition to negotiating the sale of half of Channel One, sources said, the company is planning to offer public bonds.

The sale of half of Channel One would provide money to keep the company afloat and even allow the news show to expand, officials said.

Even if Whittle Communications can restore its financial footing, though, attacks from long-time opponents of Channel One are likely to continue.

Last month, the National Education Association called on state teacher-retirement systems to sell holdings in corporations that advertise on Channel One or own part of Whittle Communications.

Lyle Hamilton, the director of broadcast services for the union, said that, in addition to pushing that tactic, the N.E.A. will urge its affiliates to call for fire inspections of Channel One's wiring in participating schools.

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