<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 1999
REGISTRATION NO. 333-84177
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
EDISON SCHOOLS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8200 13-3915075
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
521 FIFTH AVENUE, 15TH FLOOR
NEW YORK, NY 10175
(212) 419-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
H. CHRISTOPHER WHITTLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EDISON SCHOOLS INC.
521 FIFTH AVENUE, 15TH FLOOR
NEW YORK, NY 10175
(212) 419-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID SYLVESTER, ESQ. MICHAEL W. BLAIR, ESQ.
BRENT B. SILER, ESQ. DEBEVOISE & PLIMPTON
HALE AND DORR LLP 875 THIRD AVENUE
1455 PENNSYLVANIA AVENUE, N.W. NEW YORK, NY 10022
WASHINGTON, D.C. 20004 TELEPHONE: (212) 909-6000
TELEPHONE: (202) 942-8400 TELECOPY: (212) 909-6836
TELECOPY: (202) 942-8484
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ------------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, $.01 par value per share.............. $180,000,000 $50,040.00(2)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
(2) $47,955.00 previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a U.S. and Canadian offering of the registrant's class A
common stock and one to be used in a concurrent international offering of the
class A common stock. The international prospectus will be identical to the U.S.
prospectus except that it will have a different front cover page, underwriting
section and back cover page. The U.S. prospectus is included herein and is
followed by the alternate front cover page, underwriting section and back cover
page to be used in the international prospectus, which each have been labeled
"Alternative Page for International Prospectus."
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 5, 1999
PROSPECTUS
6,800,000 SHARES [LOGO]
EDISON SCHOOLS INC.
CLASS A COMMON STOCK
----------------------
This is Edison Schools Inc.'s initial public offering of class A common
stock. The U.S. underwriters will offer 5,440,000 shares of class A common stock
in the United States and Canada and the international managers will offer
1,360,000 shares of class A common stock outside the United States and Canada.
We expect the public offering price to be between $21.00 and $23.00 per
share. After pricing of the offering, we expect that the class A common stock
will trade on the Nasdaq National Market under the symbol "EDSN."
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Edison Schools Inc. ......... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional 816,000 shares
of class A common stock at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
aggregate of an additional 204,000 shares of class A common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We expect that the shares of class A common stock will be ready for
delivery in New York, New York on or about , 1999.
----------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN & CO.
----------------------
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 4
Description of graphical material on inside front cover:
Photograph of children in classroom with the following caption:
"The most necessary task of civilization is to teach people to
think."
-- Thomas Edison
Description of graphical material on inside of gatefold:
Multiple photographs of children in classrooms with the following text:
The 10 fundamentals of Edison Schools
1. Schools organized for every student's success
2. A better use of time
3. A rich and challenging curriculum
4. Teaching methods that motivate
5. Assessment that provides accountability
6. Educators who are true professionals
7. Technology for an Information Age
8. A partnership with families
9. Schools tailored to the community
10. The advantages of system and scale
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 4
RISK FACTORS................................................ 11
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 22
OUR ADDRESS................................................. 22
USE OF PROCEEDS............................................. 23
DIVIDEND POLICY............................................. 23
CAPITALIZATION.............................................. 24
DILUTION.................................................... 26
SELECTED FINANCIAL AND OTHER DATA........................... 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 29
BUSINESS.................................................... 40
MANAGEMENT.................................................. 57
RELATED PARTY TRANSACTIONS.................................. 66
PRINCIPAL STOCKHOLDERS...................................... 74
DESCRIPTION OF CAPITAL STOCK................................ 79
SHARES ELIGIBLE FOR FUTURE SALE............................. 83
UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS................................................... 86
UNDERWRITING................................................ 88
LEGAL MATTERS............................................... 93
EXPERTS..................................................... 93
WHERE YOU CAN FIND MORE INFORMATION......................... 93
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
----------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
----------------------
Technology as a Second Language(R) and Edison's logo are trademarks or
service marks of Edison. Other trademarks or service marks appearing in this
prospectus are the property of their respective holders.
3
<PAGE> 6
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, especially
"Risk Factors" and our financial statements and the related notes included in
this prospectus, before deciding to invest in shares of our class A common
stock.
EDISON SCHOOLS INC.
Edison is the nation's largest private operator of public schools serving
students from kindergarten through 12th grade. We contract with local school
districts and public charter school boards to assume educational and operational
responsibility for individual schools in return for per-pupil funding that is
generally comparable to that spent on other public schools in the area. Over the
course of three years of intensive effort, drawing on research conducted by the
University of Chicago, Johns Hopkins University and other institutions as well
as research conducted by us, our team of leading educators and scholars
developed an innovative curriculum and school design. We opened our first four
schools in August 1995, and are currently serving approximately 37,000 students
in 79 schools located in 16 states across the country and the District of
Columbia, an increase of 13,000 students from the 1998-1999 school year.
Approximately 25,700 students are enrolled in our schools in grades K-5,
approximately 9,500 in grades 6-8 and approximately 1,600 in grades 9-12. We
attribute our growth in part to the success of our schools, as measured by
improvements in student academic performance and parental satisfaction. Twelve
of our first 13 clients have chosen to expand their relationship with us.
Our model offers public school authorities, who face concern about student
achievement, the benefits of a large private sector company with national
support systems. We believe those benefits include:
- the ability to create, implement and support an educational model through
focused research and development;
- the ability, through greater efficiencies, to drive a greater percentage
of educational expenditures to the classroom; and
- increased emphasis on accountability for achieving improved academic
performance.
These benefits contribute to an enhanced educational experience that has
proven attractive to public school authorities, parents and teachers alike.
Elements of that experience include:
- a curriculum based on clear standards and high expectations for all
students;
- a longer school day and year;
- an enriched technology program characterized by computers, supplied by us
without cost to the family, in the home of every student above the second
grade following the first year of the school's operation, full time
technology personnel supporting each site and laptop computers for every
teacher;
- an emphasis on the professional growth of teachers through a commitment
to training, an explicit career ladder and a school management structure
that allows teachers to participate in the leadership of the school;
- a support system focused on improving student achievement;
- exposure to foreign language beginning in kindergarten; and
- an emphasis on parental involvement and character development.
4
<PAGE> 7
OUR MARKET
According to the U.S. Department of Education's Digest of Education
Statistics (1998), the United States spent an estimated $324 billion on public
K-12 education in the 1997-1998 school year, nearly double the
inflation-adjusted level of spending for the 1987-1988 school year. This
represents 4% of the U.S. gross domestic product, making public education one of
the largest sectors of the U.S. economy. During the 1996-1997 school year, over
14,000 school districts comprising 88,000 K-12 schools enrolled an estimated
45.6 million students. We currently concentrate our business development efforts
on the approximately 1,800 medium and large school districts that each have more
than 5,000 students. We estimate that these districts had annual operating
budgets aggregating $190 billion for the 1998-1999 school year. Despite the
growth in spending on public education over the last decade, student achievement
has progressed very little and remains low. For example, on the National
Assessment of Educational Progress, a national measure of achievement trends,
students in grades 4 and 8 improved slightly in mathematics from 1988 to 1996,
the last date available, but only approximately 22% of students in grades 4 and
8 were proficient or above their grade level in the 1996 school year. In reading
and writing, trend levels are flat and performance levels nearly as low; only
approximately 32% of students in grades 4 and 8 were proficient or above their
grade level in reading in the 1996 school year and only approximately 25% were
proficient or above their grade level in writing in 1998.
We recognize that there are many excellent public schools in the United
States. We also believe, however, that the overall performance of public schools
has been compromised by several inherent constraints which inhibit many
districts from implementing a systemic program of improvement.
- Lack of consistency in leadership. As a result of the relatively brief
tenure of school and district-level leadership, many public school
systems have found it difficult to implement sustained, long-term
approaches to improving student performance and school quality generally.
- Inability to exploit the advantage of scale. School districts in the
United States tend to be small, independent and localized operations with
negligible research and development budgets. With the need to devote a
portion of their resources to stand-alone administrative structures and
to oversee curriculum for all subjects over 13 grade levels, many
districts simply have nothing left for a long-term program of
improvements in curriculum and school design.
- Inability to invest for the future. The time horizons of school
districts necessarily are linked to the one-year appropriations cycle
under which they usually operate and they are generally not able to
invest for the future by tolerating substantial short-term budget
deficits.
In all three respects -- consistency of leadership, the benefits of scale
and the ability to make substantial investment for the future -- a large,
private sector company such as Edison is in a strong position to add substantial
value to public education.
We believe the approximately 1,800 medium and large independent school
districts nationwide, which we estimate collectively spent $190 billion in the
1998-1999 school year, represent a significant growth opportunity. Illustrating
the magnitude of the overall market opportunity, we estimate that just one
percentage point market share nationwide within our market of large and medium
size school districts would represent approximately $1.9 billion in annual
revenues based upon expenditures for the 1998-1999 school year.
Edison is retained by public school authorities to implement its school
design and curriculum in one of two ways. In most instances, an elected school
board, accepting the recommendation of the superintendent, votes to enter into a
contract with Edison to manage one or more schools in the district. In other
cases, Edison manages the school pursuant to a contract granted by a public
charter school board. Thirty-six states and the District of Columbia have now
enacted charter school legislation. Under a typical charter school statute,
identified entities, such as a state board of education or state university, are
authorized to grant a "charter" to create and operate a public school. For both
contract and charter schools, the company's revenues are based on a per-pupil
fee that is generally comparable to that spent on other public schools in the
area. With respect to contract schools, the fee is the subject of negotiation
5
<PAGE> 8
between the school board and Edison. With respect to charter schools, the fee is
largely set by the applicable charter school statute. In some cases, we operate
charter schools under a charter granted by the local school board, which
provides the facility. In these cases, we categorize these schools as contract
schools because the economics of these arrangements closely resemble those of a
contract school.
RISK FACTORS
We have a limited operating history on which you can base your evaluation
of our business and prospects. We have incurred substantial net losses in every
fiscal period since we began operations. As of June 30, 1999, our accumulated
deficit since November 1996, when we converted from a partnership to a
corporation, was approximately $79.3 million.
The success of our business and our ability to implement our strategy are
subject to a number of risks, including risks relating to:
- public acceptance of private, for-profit management of public schools;
- our ability to improve the academic achievement of students;
- our ability to hire and retain highly skilled teachers and principals;
and
- our reliance upon public funding and our continued qualification to
receive funding from special government education programs.
For a more complete discussion of these risks and others that are material
to your investment, please see "Risk Factors."
OUR MANAGEMENT
We have an experienced management team led by our President and Chief
Executive Officer, H. Christopher Whittle, founder of several media enterprises,
including the first national electronic news system for middle and high schools
in the United States; our Chairman, Benno C. Schmidt, Jr., former President of
Yale University; our Chief Operating Officer, Christopher D. Cerf, former
Associate Counsel to President Clinton from 1994 to 1996; and our Chief
Education Officer, John E. Chubb, senior fellow at the Brookings Institution and
noted author and speaker on education reform. In addition, the management team
includes 9 former public school system superintendents.
THE OFFERING
Class A common stock offered:
U.S. offering............ 5,440,000 shares
International offering... 1,360,000 shares
Total.................. 6,800,000 shares
Common stock to be outstanding
after the U.S. and
International offerings:
Class A common stock...... 38,041,018 shares
Class B common stock..... 3,471,300 shares
Total.................. 41,512,318 shares
Use of proceeds............... We estimate that the net proceeds from this
offering (without exercise of the overallotment
option) will be approximately $136.9 million.
We intend to use these net proceeds for general
corporate purposes, including funding operating
losses, working capital and capital
expenditures. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol................. EDSN
6
<PAGE> 9
The number of shares to be outstanding after the offering is based on
shares outstanding at October 5, 1999 and excludes:
- 7,685,705 shares of class A common stock and 853,996 shares of class B
common stock that may be issued upon the exercise of outstanding options
with a weighted average exercise price of $19.86 per share;
- 3,610,800 shares of class A common stock and 401,249 shares of class B
common stock that may be issued upon exercise of outstanding warrants
with a weighted average exercise price of $13.06 per share; and
- 2,500,000 additional shares of class A common stock reserved for issuance
under our 1999 Stock Incentive Plan.
DESCRIPTION OF COMMON STOCK
In general, holders of class A common stock have the same rights as the
holders of class B common stock, except that:
- holders of class A common stock have one vote per share and holders of
class B common stock have ten votes per share; and
- beginning with the first annual meeting of stockholders occurring after
the completion of this offering, holders of class B common stock will be
entitled, as a separate class, to elect four of the 11 members of our
board of directors and the holders of class A common stock will be
entitled, as a separate class, to elect the remaining seven directors.
The holders of class A common stock and class B common stock will have
cumulative voting rights in the election of their respective directors. On other
matters presented to the stockholders for their vote or approval, the holders of
class A common stock and class B common stock will vote together as a single
class, except as to matters affecting the rights of the two classes of common
stock or as may be required by Delaware law. Class B common stock may be
converted into class A common stock at any time on a one-for-one basis. Each
share of class B common stock will automatically convert into one share of class
A common stock upon its transfer in most circumstances or upon the occurrence of
other specified events. For a description of cumulative voting and the events
that will cause conversion of the class B common stock into class A common
stock, see "Description of Capital Stock -- Common Stock."
PROSPECTUS ASSUMPTIONS
Except where otherwise indicated, all information in this prospectus:
- reflects the conversion of each outstanding share of our existing common
stock and preferred stock into 0.45 shares of class A common stock and
0.05 shares of class B common stock, which will occur automatically upon
the completion of this offering; and
- assumes the underwriters do not exercise their option to purchase
additional shares in this offering to cover over-allotments, if any.
7
<PAGE> 10
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary financial data for our business. You
should read this information together with our financial statements and the
related notes included in this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Please note that:
- The pro forma balance sheet data reflect the sale of shares of preferred
stock in private placements in July 1999 and the automatic conversion of
all outstanding shares of our existing common stock and preferred stock,
including the shares issued in the July 1999 private placements, into
shares of class A common stock and class B common stock upon the closing
of this offering.
- The pro forma as adjusted balance sheet data also reflect the sale of the
class A common stock offered by us in this offering, after deducting the
estimated underwriting discount and estimated offering expenses payable by
us.
- Note 2 to our financial statements includes information regarding net loss
attributable to common stockholders and shares used in computing basic and
diluted and pro forma basic and diluted net loss per share applicable to
common stockholders.
- Supplemental pro forma basic and diluted net loss per share and
supplemental pro forma weighted average number of shares outstanding
reflect the conversion of all outstanding common shares (series A through
series H) and preferred shares (series A through series G) into shares of
class A common stock and class B common stock. The supplemental pro forma
data has been presented for the fiscal years ended June 30, 1997, 1998 and
1999 and reflects the conversion as if it took place in each of the
historical years based upon actual historical shares outstanding at that
time. Each outstanding share of common and preferred stock will
automatically convert into 0.45 shares of class A common stock and 0.05
shares of class B common stock.
- We operated as a partnership prior to fiscal 1997.
- We recognize revenue for each school pro rata over the 11 months from
August through June.
The table also sets forth some of the operating data we believe you might
find useful in analyzing our business. The following information is intended to
help you understand our operating data:
- EBITDA, net of other charges, means the net loss we would have shown if we
did not take into consideration our net interest expense, gain or loss
from disposal of property and equipment, income tax expense, depreciation
and amortization, stock-based compensation and non-recurring design team
compensation. This is not a measurement in accordance with generally
accepted accounting principles and you should not consider it to be an
alternative to, or more meaningful than, operating income or loss, net
income or loss or cash flows as defined by generally accepted accounting
principles or as a measure of our profitability or liquidity. EBITDA, net
of other charges, may not be comparable to EBITDA or similarly titled
measures reported by other companies.
- Administration, curriculum and development expenses for fiscal 1999
included $22.4 million of stock-based compensation, which is a non-cash
expense recognized by us in connection with stock options and amendments
of stock options. For more information on these amendments, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Overview -- Stock-Based and Other Non-Cash Compensation
Expenses."
- We consider grades K-5, 6-8 and 9-12 each to be a school, and we count
grades K-5, 6-8 and 9-12 as separate schools even if they are located in
the same building. As we expand, we often introduce new grade levels
gradually rather than simultaneously opening all grade levels within a
school. We consider ourselves to have opened a new school if we introduce
at least one grade level at a different school level, for example, if we
add grade 6 at a location housing an existing K-5 school. In some cases,
we count grades K-6 as one school if it is the local practice to configure
elementary schools in this manner.
- We define gross site contribution as revenue from educational services
less direct site expenses. Gross site contribution is a measurement of
ongoing site-level operating performance of our schools and, for that
reason, does not include site-level pre-opening expenses or depreciation
and amortization or interest expenses related to site-level investments in
technology, curriculum materials and capital improvements. Gross site
contribution also does not include central administration, curriculum and
development expenses. Accordingly, gross site contribution does not
represent site-level profitability, but we believe that it serves as a
useful operating measurement when evaluating our schools' financial
performance.
- We define gross site margin as gross site contribution expressed as a
percentage of revenue from educational services.
- Throughout this prospectus, when we refer to total revenue, we mean the
amount of our revenue from educational services.
8
<PAGE> 11
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from educational services........ $ -- $ 11,773 $ 38,559 $ 69,407 $ 132,762
--------- --------- ---------- ---------- ----------
Education and operating expenses:
Direct site expenses................... -- 11,415 32,150 59,576 114,097
Administration, curriculum and
development.......................... 14,286 7,717 12,755 18,258 49,984
Depreciation and amortization.......... -- 1,166 3,552 7,232 12,526
Pre-opening expenses................... -- 1,476 1,487 2,486 5,457
Design team compensation............... -- -- -- 2,724 --
--------- --------- ---------- ---------- ----------
Total education and operating
expenses........................ 14,286 21,774 49,944 90,276 182,064
--------- --------- ---------- ---------- ----------
Loss from operations..................... (14,286) (10,001) (11,385) (20,869) (49,302)
Other income (expense), net.............. 161 (102) (137) (1,165) (249)
--------- --------- ---------- ---------- ----------
Net loss................................. (14,125) (10,103) (11,522) (22,034) (49,551)
Dividends on preferred stock............. -- -- -- (4,290) --
Preferred stock accretion................ -- -- -- (278) (1,027)
--------- --------- ---------- ---------- ----------
Net loss attributable to common
stockholders........................... $ (14,125) $ (10,103) $ (11,522) $ (26,602) $ (50,578)
========= ========= ========== ========== ==========
Basic and diluted net loss per share
attributable to common stockholders.... $ (1.85) $ (4.28) $ (8.14)
========== ========== ==========
Weighted average number of common shares
outstanding used in computing basic and
diluted net loss per share attributable
to common stockholders................. 6,214,709 6,214,711 6,214,711
========== ========== ==========
Pro forma basic and diluted net loss per
share.................................. $ (0.89)
==========
Pro forma weighted average number of
shares outstanding used in computing
pro forma basic and diluted net loss
per share.............................. 55,721,620
==========
Supplemental pro forma basic and diluted
net loss per share..................... $ (0.88) $ (1.04) $ (1.78)
========== ========== ==========
Supplemental pro forma weighted average
number of shares outstanding used in
computing supplemental pro forma basic
and diluted net loss per share......... 13,167,283 21,242,014 27,858,665
========== ========== ==========
STUDENT AND PER STUDENT DATA:
Student enrollment....................... -- 2,250 7,150 12,600 23,900
Total revenue per student................ $ 5,232 $ 5,393 $ 5,508 $ 5,555
Net loss per student..................... $ (4,490) $ (1,611) $ (1,749) $ (2,073)
EBITDA, net of other charges, per
student................................ $ (3,927) $ (1,089) $ (820) $ (603)
Cash used in operating activities per
student................................ $ (3,652) $ (1,530) $ 837 $ (673)
Cash used in investing activities per
student................................ $ (2,203) $ (1,822) $ (1,594) $ (1,269)
Cash provided by financing activities per
student................................ $ 6,385 $ 5,008 $ 1,776 $ 2,797
OTHER OPERATING DATA:
Capital expenditures..................... $ 233 $ 4,970 $ 15,553 $ 21,181 $ 34,023
Gross site contribution.................. $ 358 $ 6,409 $ 9,831 $ 18,665
Gross site margin........................ 3.0% 16.6% 14.2% 14.1%
Administration, curriculum and
development expenses, net of
stock-based compensation............... $ 14,286 $ 7,717 $ 12,710 $ 17,673 $ 27,613
Administration, curriculum and
development expenses, net of
stock-based compensation, as a
percentage of total revenue............ 65.6% 33.0% 25.5% 20.8%
EBITDA, net of other charges............. $ (14,286) $ (8,836) $ (7,787) $ (10,328) $ (14,404)
Cash used in operating activities........ $ (14,360) $ (8,216) $ (10,941) $ (10,550) $ (16,079)
Cash used in investing activities........ $ (3,163) $ (4,956) $ (13,030) $ (20,082) $ (30,328)
Cash provided by financing activities.... $ 17,973 $ 14,365 $ 35,809 $ 22,383 $ 66,838
Total number of schools.................. -- 4 12 25 51
</TABLE>
(continued on the following page)
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<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 27,923 69,665 206,567
Working capital............................................. 23,127 64,869 201,771
Total assets................................................ 104,392 146,134 283,036
Total debt, including current portion....................... 21,535 21,535 21,535
Accumulated deficit......................................... (79,266) (79,266) (79,266)
Total stockholders' equity.................................. 60,564 102,306 239,208
</TABLE>
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RISK FACTORS
Investing in our class A common stock will provide you with an equity
ownership interest in Edison. As a stockholder of Edison you may be exposed to
the risks inherent in our business. The performance of your shares will reflect
the performance of our business relative to the competition, industry conditions
and general economic and market conditions. The value of your investment may
increase or decline and could result in a loss. You should carefully consider
the following risk factors as well as other information contained in this
prospectus before deciding to invest in shares of our class A common stock.
RISKS RELATED TO OUR BUSINESS AND THE EDUCATION INDUSTRY
WE ARE A YOUNG COMPANY, AND OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT
TO EVALUATE OUR BUSINESS
We opened our first schools and recorded our first revenue in fiscal 1996.
As a result, we have only a limited operating history on which you can base your
evaluation of our business and prospects. Our business and prospects must be
considered in light of the risks and uncertainties frequently encountered by
companies in the early stages of development, particularly companies like us who
operate in new and rapidly evolving markets. Our failure to address these risks
and uncertainties could cause our operating results to suffer and result in the
loss of all or part of your investment.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES IN THE FUTURE
We have incurred substantial net losses in every fiscal period since we
began operations. For the fiscal year ended June 30, 1999, our net loss was
$49.6 million. As of June 30, 1999, our accumulated deficit since November 1996,
when we converted from a partnership to a corporation, was approximately $79.3
million. In addition, prior to November 1996, we incurred losses of
approximately $61.8 million, which are reflected in our additional paid-in
capital. We have not yet demonstrated that public schools can be profitably
managed by private companies and we are not certain when we will become
profitable, if at all. Our ability to become profitable will depend upon our
ability to generate and sustain higher levels of both gross site contribution
and total revenue to allow us to reduce central expenses as a percentage of
total revenue. Even if we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis. Failure to become and
remain profitable may adversely affect the market price of our class A common
stock and our ability to raise capital and continue operations.
THE PRIVATE, FOR-PROFIT MANAGEMENT OF PUBLIC SCHOOLS IS A RELATIVELY NEW AND
UNCERTAIN INDUSTRY, AND IT MAY NOT BECOME PUBLICLY ACCEPTED
Our future is highly dependent upon the development, acceptance and
expansion of the market for private, for-profit management of public schools.
This market has only recently developed and we are among the first companies to
provide these services on a for-profit basis. We believe the first meaningful
example of a school district contracting with a private company to provide core
instructional services was in 1992, and we opened our first schools in August
1995. The development of this market has been accompanied by significant press
coverage and public debate concerning for-profit management of public schools.
If this business model fails to gain acceptance among the general public,
educators, politicians and school boards, we may be unable to grow our business
and the market price of our class A common stock would be adversely affected.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO IMPROVE THE ACADEMIC
ACHIEVEMENT OF THE STUDENTS ENROLLED IN OUR SCHOOLS, AND WE MAY FACE
DIFFICULTIES IN DOING SO IN THE FUTURE
We believe that our growth will be dependent upon our ability to
demonstrate general improvements in academic performance at our schools. Our
management agreements contain performance requirements related to test scores.
As average student performance at our schools increases, whether due to
improvements in achievement over time by individual students in our schools or
changes in the average performance levels of new students entering our schools,
aggregate absolute improvements in student performance will be more difficult to
achieve. If academic performance at our schools declines, or simply
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fails to improve, we could lose business and our reputation could be seriously
damaged, which would impair our ability to gain new business or renew existing
school management agreements.
WE COULD INCUR LOSSES AT OUR SCHOOLS IF WE ARE UNABLE TO ENROLL ENOUGH
STUDENTS
Because the amount of revenue we receive for operating each school depends
on the number of students enrolled, and because many facility and on-site
administrative costs are fixed, achieving site-specific enrollment objectives is
necessary for satisfactory financial performance at a school. We may be unable
to recruit enough students to attend all grades in our new schools or maintain
enrollment at all grades in our existing schools. We sometimes do not have
enough students to fill some grades in some schools, particularly the higher
grades. It is sometimes more difficult to enroll students in the higher grades
because older students and their parents are reluctant to change schools. To the
extent we are unable to meet or maintain enrollment objectives at a school, the
school will be less financially successful and our financial performance will be
adversely affected.
WE ARE EXPERIENCING RAPID GROWTH, WHICH MAY STRAIN OUR RESOURCES AND MAY NOT
BE SUSTAINABLE
We have grown rapidly since we opened our first four schools in August
1995. For the 1999-2000 school year, we have grown to 79 schools. This rapid
growth has sometimes strained our managerial, operational and other resources,
and we expect that continued growth would strain these resources in the future.
If we are to manage our rapid growth successfully, we will need to continue to
hire and retain management personnel and other employees. We must also improve
our operational systems, procedures and controls on a timely basis. If we fail
to successfully manage our growth, we could experience client dissatisfaction,
cost inefficiencies and lost growth opportunities, which could harm our
operating results. We cannot guarantee that we will continue to grow at our
historical rate.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN HIGHLY SKILLED PRINCIPALS AND
TEACHERS IN THE NUMBERS REQUIRED TO GROW OUR BUSINESS
Our success depends to a very high degree on our ability to attract and
retain highly skilled school principals and teachers. We expect that we will
need to hire approximately 20 new principals and 750 new teachers to meet the
needs of our new schools for the 1999-2000 school year, in addition to
satisfying our needs resulting from normal turnover at existing schools.
Currently, there is a well-publicized nationwide shortage of teachers and other
educators in the United States. In addition, we may find it difficult to attract
and retain principals and teachers for a variety of reasons, including the
following:
- we generally require our teachers to work a longer day and a longer year
than most public schools;
- we tend to have a larger proportion of our schools in challenging
locations, such as low-income urban areas, which may make attracting
principals and teachers more difficult; and
- we believe we generally impose more accountability on principals and
teachers than do public schools as a whole.
These factors may increase the challenge we face in an already difficult
market for attracting principals and teachers. We have also experienced higher
levels of turnover among teachers than is generally found in public schools
nationally, which we attribute in part to these factors. If we fail to attract
and retain principals and teachers in sufficient numbers or of a sufficient
quality, we could experience client dissatisfaction and lost growth
opportunities, which would adversely affect our business.
WE ARE CURRENTLY IMPLEMENTING NEW INFORMATION SYSTEMS, WHICH COULD CAUSE
DISRUPTIONS TO OUR BUSINESS
We are currently in the process of implementing a new student information
system, as well as a new accounting, financial reporting and management
information system. We may face difficulties in integrating these systems with
our existing information and other systems. If we fail to successfully implement
and integrate these new systems, we may not have access on a timely basis to the
information we need to effectively manage our schools, our business and our
growth.
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WE MUST OPEN A LARGE NUMBER OF NEW SCHOOLS IN A SHORT PERIOD OF TIME AT THE
BEGINNING OF EACH SCHOOL YEAR AND, IF WE ENCOUNTER DIFFICULTIES IN THIS
PROCESS, OUR BUSINESS AND REPUTATION COULD SUFFER
It is the nature of our business that virtually all of the new schools we
open in any year must be opened within a few weeks of each other at the
beginning of the school year. Each new school must be substantially functional
when students arrive on the first day of school. This is a difficult logistical
and management challenge, and the period of concentrated activity preceding the
opening of the school year places a significant strain on our management and
operational functions. We expect this strain will increase if we are successful
in securing larger numbers of school management agreements in the future. If we
fail to successfully open schools by the required date, we could lose school
management agreements, incur financial losses and our reputation would be
damaged. This could seriously compromise our ability to pursue our growth
strategy.
OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF KEY EXECUTIVES
Our future success depends upon the continued services of a number of our
key executive personnel, particularly Benno C. Schmidt, Jr., our Chairman of the
Board of Directors, and H. Christopher Whittle, our President and Chief
Executive Officer. Mr. Schmidt and Mr. Whittle have been instrumental in
determining our strategic direction and focus and in publicly promoting the
concept of private management of public schools. If we lose the services of
either Mr. Schmidt or Mr. Whittle, or any of our other executive officers or key
employees, our ability to grow our business would be seriously compromised and
the market price of our class A common stock may be adversely affected. Also, we
do not maintain any key man insurance on any of our executives.
WE DEPEND UPON COOPERATIVE RELATIONSHIPS WITH TEACHERS' UNIONS, BOTH AT THE
LOCAL AND NATIONAL LEVELS
With respect to contract schools, but generally not charter schools, union
cooperation at the local level is often critical to us in obtaining new
management agreements and maintaining existing management agreements. In those
school districts where applicable, provisions of collective bargaining
agreements must typically be waived in areas such as length of school day,
length of school year, negotiated compensation policies and prescribed methods
of evaluation in order to implement the Edison design at a contract school. We
regularly encounter resistance from local teachers' unions during school board
debates over whether to enter into a management agreement with us. If we fail to
achieve and maintain cooperative relationships with local teachers' unions, we
could lose business and our ability to grow could suffer, which could adversely
affect the market price of our class A common stock. In addition, at the
national level, the American Federation of Teachers and the National Education
Association have substantial financial and other resources that could be used to
influence legislation and public opinion in a way that would hurt our business.
WE COULD BE LIABLE FOR EVENTS THAT OCCUR AT OUR SCHOOLS
We could become liable for the actions of principals, teachers and other
personnel in our schools. In the event of on-site accidents, injuries or other
harm to students, we could face claims alleging that we were negligent, provided
inadequate supervision or were otherwise liable for the injury. We could also
face allegations that teachers or other personnel committed child abuse, sexual
abuse or other criminal acts. In addition, if our students commit acts of
violence, we could face allegations that we failed to provide adequate security
or were otherwise responsible for their actions, particularly in light of recent
highly publicized incidents of school violence. Although we maintain liability
insurance, this insurance coverage may not be adequate to fully protect us from
these kinds of claims. In addition, we may not be able to obtain liability
insurance in the future at reasonable prices or at all. A successful liability
claim could injure our reputation and hurt our financial results. Even if
unsuccessful, such a claim could cause unfavorable publicity, entail substantial
expense and divert the time and attention of key management personnel.
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OUR MANAGEMENT AGREEMENTS WITH SCHOOL DISTRICTS AND CHARTER BOARDS ARE
TERMINABLE UNDER SPECIFIED CIRCUMSTANCES AND GENERALLY EXPIRE AFTER A TERM OF
FIVE YEARS
Our management agreements generally have a term of five years. When we
expand by adding an additional school under an existing management agreement,
the term with respect to that school generally expires at the end of the initial
five-year period. We have limited experience in renewing management agreements,
having renewed only one management agreement covering four schools to date. We
cannot be assured that any management agreements will be renewed at the end of
their term. Management agreements representing 16 schools, accounting for 28.3%
of our total revenue for fiscal 1999, will expire at the end of the 1999-2000
school year, and management agreements representing 10 schools, accounting for
21.1% of our total revenue for fiscal 1999, will expire at the end of the
2000-2001 school year. In addition, management agreements representing 13
schools, accounting for 25.8% of our total revenue for fiscal 1999, are
terminable by the school district or charter board at will, with or without good
reason, and all of our management agreements may be terminated for cause,
including a failure to meet specified educational standards, such as academic
performance based on standardized test scores. If we fail to renew a significant
number of management agreements at the end of their term, or if management
agreements are terminated prior to their expiration, our reputation and
financial results would be adversely affected.
OUR MANAGEMENT AGREEMENTS INVOLVE FINANCIAL RISK
Under all of our management agreements, we agree to operate a school in
return for per-pupil funding that generally does not vary with our actual costs.
To the extent our actual costs under a management agreement exceed our budgeted
costs, or our actual revenue is less than planned because we are unable to
enroll as many students as we anticipated or for any other reason, we could lose
money at that school. We are generally obligated by our management agreements to
continue operating a school for the duration of the contract even if it becomes
unprofitable to do so.
WE HAVE LIMITED EXPERIENCE OPERATING FOUR-YEAR HIGH SCHOOLS
An element of our strategy is to increase our business with existing
customers by opening new schools in school districts with whom we have an
existing relationship. An important aspect of this strategy is to open Edison
high schools in districts in which we operate elementary and middle schools. In
the 1998-1999 school year, we operated one high school through the 11th grade.
In the current school year, we added the senior year to that school and opened
our first four-year high school. Because we have just begun to operate all four
years of a high school, our complete high school curriculum, school design and
operating plan are not fully tested. In addition, school districts typically
spend more per pupil on high school education than on elementary education. By
contrast, some of our management agreements provide that we receive for each
student, regardless of grade level, the average per-pupil funding spent by the
school district for all grade levels. For this reason, in these schools we
receive less per high school student than is spent by the school district for
each of its high school students. In these situations, our success depends upon
our ability to deliver our high school design for the same per-pupil spending as
in our elementary schools. If we are unable to successfully and profitably
operate high schools, our ability to pursue our growth strategy will be
impaired, which could adversely affect the market price of our class A common
stock.
OUR LENGTHY SALES CYCLE COULD DELAY NEW BUSINESS
The time between initial contact with a potential contract or charter
client and the ultimate opening of a school, and related recognition of revenue,
typically ranges between 10 and 20 months. Our sales cycle for contract schools
is generally very long due to the approval process at the local school board
level, the political sensitivity of converting a public school to private
management and the need, in some circumstances, for cooperation from local
unions. We also have a lengthy sales cycle for charter schools for similar
reasons, as well as the need to arrange for facilities to house the school. As a
result of this lengthy sales cycle, we have only a limited ability to forecast
the timing of new management agreements. Any delay in completing, or failure to
complete, management agreements could hurt our financial performance.
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WE COULD LOSE MONEY IF WE UNDERESTIMATE THE REAL ESTATE COSTS ASSOCIATED WITH
ACQUIRING OR RENOVATING A CHARTER SCHOOL
If we incur unexpected real estate cost overruns in acquiring or renovating
a charter school, we could lose money in operating the school. Our decision to
enter into a management agreement for a charter school, and our estimate of the
financial performance of the charter school, is based, in part, on the estimated
facility financing cost associated with renovating an existing facility or
building a new facility to house the charter school. This cost varies widely
from minimal amounts for minor upgrades to between $4.0 million to more than
$8.0 million for new construction. Each charter school absorbs a portion of its
facility financing costs each year through its leasing and similar expenses. If
these expenses exceed our estimates for the charter school, the charter school
could lose money and our financial results would be adversely affected.
WE HAVE ADVANCED AND LOANED MONEY TO CHARTER SCHOOLS THAT MAY NOT BE REPAID
As of June 30, 1999, we had advanced or lent charter boards $13.4 million
to finance the purchase or renovation of school facilities we manage. We do not
charge interest on these loans and advances. Approximately $7.3 million of these
loans, representing six schools, are unsecured or subordinated to a senior
lender. Loans of $6.1 million, representing two schools, may be accelerated upon
termination of the corresponding management agreement with the charter school.
If these loans are not repaid when due, our financial results could be adversely
affected.
WE COULD BECOME LIABLE FOR FINANCIAL OBLIGATIONS OF CHARTER BOARDS
We could have facility financing obligations for charter schools we no
longer operate, because the terms of our facility financing obligations for some
of our charter schools exceeds the term of the management agreement for those
schools. While the charter board is generally responsible for locating and
financing its own school building, the holders of school charters, which are
often non-profit organizations, typically do not have the resources required to
obtain the financing necessary to secure and maintain the school building. For
this reason, if we want to obtain a management agreement with the charter board,
we must often help the charter board arrange for the necessary financing. For
three of our charter schools, we have entered into a long-term lease for the
school facility which exceeds the current term of the management agreement by as
much as 14 years. If our management agreements were to be terminated, or not
renewed in these charter schools, our obligations to make lease payments would
continue, which could adversely affect our financial results. As of June 30,
1999, our aggregate future lease obligations totalled $24.9 million, with
varying maturities over the next 18 years. In four of our charter schools, we
have provided some type of permanent credit support for the school building,
typically in the form of loan guarantees or cash advances. We do not charge
interest on these advances. Although the term of these arrangements is
coterminous with the term of the corresponding management agreement, our
guarantee does not expire until the loan is repaid in full. The lenders under
these facilities are not committed to release us from our obligations unless
replacement credit support is provided. The default by any charter school under
a credit facility that we have guaranteed could result in a claim against us for
the full amount of the borrowings. Furthermore, in the event any charter board
becomes insolvent or has its charter revoked, our loans and advances to the
charter board may not be recoverable, which could adversely affect our financial
results. As of June 30, 1999, the amount of loans we had guaranteed totaled $4.9
million.
OUR FINANCIAL RESULTS ARE SUBJECT TO PATTERNS THAT COULD AFFECT THE PERCEPTION
OF OUR FINANCIAL RESULTS
We expect our results of operations to experience seasonal patterns and
other fluctuations from quarter to quarter. The factors that could contribute to
fluctuations, which could have the effect of
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masking or exaggerating trends in our business and which could hurt the market
price of our class A common stock, include:
- Because new schools are opened in the first fiscal quarter of each year,
increases in student enrollment and related revenue and expenses will
first be reflected in that quarter. Because student enrollment tends to
remain relatively stable throughout a school year, trends in our
business, whether favorable or unfavorable, will tend not to be reflected
in our quarterly financial results, but will be evident primarily in
year-to-year comparisons.
- We recognize revenue for each school pro rata over the 11 months from
August through June, and we recognize no school revenue in July. Most of
our site costs are recognized over the 11 months from August through
June. For this reason, the first quarter of our fiscal year has
historically reflected less revenue and lower expenses than the other
three quarters, and we expect this pattern to continue.
- Our recognition of site-related expenses in the first fiscal quarter is
proportionally greater than the revenue recognition because some site
expenses are incurred in July and no revenue is recorded in July. This
results in lower gross site margin in the first fiscal quarter than in
the remaining fiscal quarters. We also recognize pre-opening costs
primarily in the first and fourth quarters.
Our financial results can vary among the quarters within any fiscal year
for other reasons, and our quarterly revenue and results of operations could
also fluctuate somewhat based on changes in school enrollment throughout the
fiscal year.
WE EXPECT OUR MARKET TO BECOME MORE COMPETITIVE
We expect the market for providing private, for-profit management of public
schools will become increasingly competitive. Currently, we compete with a
relatively small number of companies which provide these services, and they have
to date primarily focused on the operation of charter schools. These companies
could, however, begin to compete with us at any time for contract schools. In
addition, a variety of other types of companies and entities could enter the
market, including colleges and universities, other private companies that
operate higher education or professional education schools and others. Our
existing competitors and these new market entrants could have financial,
marketing and other resources significantly greater than ours. We also compete
for public school funding with existing public schools, who may elect not to
enter into management agreements with private managers or who may pursue
alternative reform initiatives, such as magnet schools and inter-district choice
programs. In addition, in jurisdictions where voucher programs have been
authorized, we will begin to compete with existing private schools for public
tuition funds. Voucher programs provide for the issuance by local or other
governmental bodies of tuition vouchers to parents worth a certain amount of
money that they can redeem at any approved school of their choice, including
private schools. If we are unable to compete successfully against any of these
existing or potential competitors, our revenues could be reduced, resulting in
increased losses.
FAILURE TO RAISE NECESSARY ADDITIONAL CAPITAL COULD RESTRICT OUR GROWTH AND
HINDER OUR ABILITY TO COMPETE
We have had negative cash flow in every fiscal period since we began
operations and are not certain when we will have positive cash flow, if at all.
We do not currently have a line of credit. We have regularly needed to raise
funds in order to operate our business and may need to raise additional funds in
the future. We cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all. If we issue additional equity
securities, stockholders may experience dilution or the new equity securities
may have rights, preferences or privileges senior to those of existing holders
of class A common stock. If we cannot raise funds on acceptable terms, if and
when needed, we may not be able to take advantage of future opportunities, grow
our business or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business.
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WE MUST RECOGNIZE A PORTION OF ANY LOSSES OF APEX ONLINE LEARNING INC.
In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc., a company which provides interactive advance placement courses
for high school students over the Internet. We have invested $5.0 million in
APEX and are obligated to invest up to an additional $5.0 million in the future,
if any third party invests in APEX. Because of our significant ownership
interest in APEX, we must recognize a pro rata portion of APEX's losses based
upon our ownership interest, up to a maximum amount equal to our investment in
APEX. We expect APEX to recognize an approximate $3.2 million loss in its fiscal
year ended June 30, 1999, representing approximately six months of operations,
and to continue to recognize losses into the future. If APEX does not become
profitable, we will be required to recognize losses attributable to APEX, and
our reported financial performance could suffer.
WE MAY BE HURT BY THE YEAR 2000 PROBLEM
We are currently in the process of testing the information and
non-information technology systems we use internally for year 2000 compliance.
We are also determining whether critical third parties with which we do business
are year 2000 compliant. We are particularly dependent on the year 2000
compliance of our school district and charter board clients because their
failure to be year 2000 compliant could cause our receipt of payment from them
to be delayed. Our failure, or the failure of third parties with which we do
business, to be year 2000 compliant could hurt our business in a number of other
ways, including:
- The Common, our Internet-based, internal messaging and information
system, which connects all of our schools and allows parents to
communicate by e-mail with teachers and administrators, could fail,
requiring that we use other means of communications;
- the computers we use in our schools and the computers we provide to our
families could fail, disrupting the computer-based portion of our
educational program;
- we might be unable to receive materials and supplies from our vendors
that are necessary for operating our existing schools or opening new
schools;
- heating and cooling, security and other operational systems and equipment
at our schools could fail;
- our voicemail system could fail; and
- our payroll and human resources software, our financial reporting system
software and other software we use could fail and cause disruption to our
business, such as delaying payment of salaries and wages to our
employees, preventing us from producing financial information needed to
manage our business, or causing other unforeseen problems.
RISKS RELATED TO GOVERNMENTAL FUNDING AND REGULATION OF THE EDUCATION INDUSTRY
WE RELY ON GOVERNMENT FUNDS FOR SPECIFIC EDUCATION PROGRAMS, AND OUR BUSINESS
COULD SUFFER IF WE FAIL TO COMPLY WITH RULES CONCERNING THE RECEIPT AND USE OF
THE FUNDS
We benefit from funds from federal and state programs to be used for
specific educational purposes. Funding from the federal government under Title I
of the Elementary and Secondary Education Act, which provides federal funds for
children from low-income families, accounts for approximately 6% of our total
revenue. We estimate that funding from other federal and state programs accounts
for an additional 12% of our total revenue. A number of factors relating to
these government programs could lead to adverse effects on our business:
- These programs have strict requirements as to eligible students and
allowable activities. If we or our school district and charter board
clients fail to comply with the regulations governing the programs, we or
our clients could be required to repay the funds or be determined
ineligible to receive these funds, which would harm our business.
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- If the income demographics of a district's population were to change over
the life of our management agreement for a school in the district,
resulting in a decrease in Title I funding for the school, we would
receive less revenue for operating the school and our financial results
could suffer.
- Funding from federal and state education programs is allocated through
formulas. If federal or state legislatures or, in some case, agencies
were to change the formulas, we could receive less funding and the growth
and financial performance of our business would suffer.
- Federal, state and local education programs are subject to annual
appropriations of funds. Federal or state legislatures or local officials
could drastically reduce the funding amount of appropriation for any
program, which would hurt our business and our ability to grow.
- The Elementary and Secondary Education Act, including Title I, is
scheduled for reauthorization by Congress in 1999. If Congress does not
reauthorize or provide interim appropriation for the Elementary and
Secondary Education Act, we would receive less funding and our growth and
financial results would suffer.
- Most federal education funds are administered through state and local
education agencies, which allot funds to school boards and charter
boards. These state and local education agencies are subject to extensive
government regulation concerning their eligibility for federal funds. If
these agencies were declared ineligible to receive federal education
funds, the receipt of federal education funds by our school board or
charter board clients could be delayed, which could in turn delay our
payment from our school board and charter board clients.
- We could become ineligible to receive these funds if any of our
high-ranking employees commit serious crimes.
WE COULD BE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION BECAUSE WE BENEFIT FROM
FEDERAL FUNDS, AND OUR FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD
RESULT IN THE REDUCTION OR LOSS OF FEDERAL EDUCATION FUNDS
Because we benefit from federal funds, we must also comply with a variety
of federal laws and regulations not directly related to any federal education
program, such as federal civil rights laws and laws relating to lobbying. Our
failure to comply with these federal laws and regulations could result in the
reduction or loss of federal education funds which would cause our business to
suffer. In addition, our management agreements are potentially covered by
federal procurement rules and regulations because our school district and
charter board clients pay us, in part, with funds received from federal
programs. Federal procurement rules and regulations generally require
competitive bidding, awarding contracts based on lowest cost and similar
requirements. If a court or federal agency determined that a management
agreement was covered by federal procurement rules and regulations and was
awarded without compliance with those rules and regulations, then the management
agreement could be voided and we could be required to repay any federal funds we
received under the management agreement, which would hurt our business.
WE RECEIVE ALL OF OUR REVENUE FROM PUBLIC SOURCES AND ANY REDUCTION IN GENERAL
FUNDING
LEVELS FOR EDUCATION COULD HURT OUR BUSINESS
All of our revenue is derived from public sources. If general levels of
funding for public education were to decline, the field of school districts in
which we could profitably operate schools would likewise diminish, and our
ability to grow by adding new schools would suffer. In addition, our management
agreements generally provide that we bear the risk of lower levels of per-pupil
funding, which would be directly reflected in lower revenue to us, even if our
costs do not decline accordingly.
RESTRICTIONS ON GOVERNMENT FUNDING OF FOR-PROFIT SCHOOL MANAGEMENT COMPANIES
COULD HURT OUR BUSINESS
Any restriction on the use of federal or state government educational funds
by for-profit companies could hurt our business and our ability to grow. From
time to time, a variety of proposals have been
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<PAGE> 21
introduced in state legislatures to restrict or prohibit the management of
public schools by private, for-profit entities like us. For example, a bill
filed in Minnesota that would have prohibited for-profit entities from managing
charter schools in that state was defeated in both 1997 and 1998. A similar bill
in Massachusetts was not voted out of committee. Additionally, Idaho's charter
school law may, subject to interpretation, restrict our ability to manage
schools in that state. If states were to adopt legislation prohibiting
for-profit entities from operating public schools, the market for our services
could suffer.
THE OPERATION OF OUR CHARTER SCHOOLS DEPENDS ON THE MAINTENANCE OF THE
UNDERLYING CHARTER GRANT
Our 16 charter schools operate under a charter that is typically granted by
a state authority to a third-party charter holder, such as a community group or
established non-profit organization. Our management agreement in turn is with
the charter holder or the charter board. If the state charter authority were to
revoke the charter, which could occur based on actions of the charter board
outside of our control, we would lose the right to operate that school. In
addition, many state charter school statutes require periodic reauthorization.
Charter schools accounted for 33.5% of our total revenue in fiscal 1999, or
$44.5 million. If state charter school legislation were not reauthorized or were
substantially altered in a meaningful number of states, our business and growth
strategy would suffer and we could incur losses.
RISKS RELATED TO THIS OFFERING
OUR OFFICERS AND DIRECTORS WILL EXERCISE SIGNIFICANT CONTROL OVER OUR AFFAIRS,
WHICH COULD RESULT IN THEIR TAKING ACTIONS OF WHICH OTHER STOCKHOLDERS DO NOT
APPROVE
Immediately following the closing of this offering, our officers and
directors and entities affiliated with them will together beneficially own
30,823,737 shares of class A common stock and 3,424,925 shares of class B common
stock. These shares will represent approximately 75.2% of the voting power of
the class A common stock, including the ability to elect five of the seven class
A directors; approximately 90.2% of the voting power of the class B common
stock, including the ability to elect all of the four class B directors; and
approximately 82.4% of the combined voting power of the class A and class B
common stock. Of the shares beneficially owned by our officers and directors and
others affiliated with them, 2,952,076 shares of class A common stock and
328,027 shares of class B common stock are subject to options exercisable within
60 days of September 30, 1999. These stockholders, if they act together, will be
able to exercise control over all matters requiring approval by our
stockholders, including the approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of our company and could prevent stockholders from receiving a
premium over the market price if a change of control is proposed.
In addition, immediately following the closing of this offering, H.
Christopher Whittle, our President and Chief Executive Officer and a director,
will beneficially own 10,069,085 shares of class A common stock and 1,328,295
shares of class B common stock. These shares will represent approximately 25.4%
of the voting power of the class A common stock, including the ability to elect
three of the seven class A directors; approximately 36.4% of the voting power of
the class B common stock, including the ability to elect two of the four class B
directors; and approximately 30.7% of the combined voting power of the class A
and class B common stock. Of the shares beneficially owned by Mr. Whittle and
his affiliates, 1,579,252 shares of class A common stock and 175,479 shares of
class B common stock are subject to options exercisable within 60 days of
September 30, 1999. Mr. Whittle and his affiliates also own options not
exercisable within 60 days of September 30, 1999 covering 3,502,684 shares of
class A common stock and 389,189 shares of class B common stock. To the extent
Mr. Whittle exercises these options, his voting power will be increased. In
addition, if the other holders of class B common stock sell a significant
portion of their class B common stock, the voting power of Mr. Whittle's class B
common stock will further concentrate. Also, if the other holders of class B
common stock reduce their common stock holdings below a specified threshold,
then their class B common stock will automatically convert into class A common
stock, further increasing Mr. Whittle's voting power. The class B common stock
generally converts into class A common stock upon its transfer. However, shares
of class B common stock transferred to
19
<PAGE> 22
Mr. Whittle do not automatically convert into class B common stock.
Consequently, Mr. Whittle can also increase his voting power by acquiring shares
of class B common stock from other stockholders.
PLEDGES OF SHARES OF OUR COMMON STOCK BY MR. WHITTLE COULD RESULT IN VOTING
POWER SHIFTING TO THE HANDS OF HIS LENDERS
Immediately following the closing of this offering, Mr. Whittle and WSI
Inc., a corporation controlled by Mr. Whittle, will directly or indirectly own
2,971,845 shares of class A common stock and 539,707 shares of class B common
stock, including 852,397 shares of class A common stock and 94,722 shares of
class B common stock which represents WSI's partnership interest in limited
partnerships that hold Edison stock. These figures include shares issuable upon
the exercise of options within 60 days of September 30, 1999. Mr. Whittle and
WSI have pledged to Morgan Guaranty Trust Company of New York all of their
direct and indirect interests in Edison to secure personal obligations. These
obligations become due in August 2002 and interest on these obligations is
payable quarterly. Of these shares, Morgan allowed WSI to pledge 500,002 shares
to another lender. Upon satisfaction of WSI's obligation to the other lender,
these shares would revert back to being pledged to Morgan. Morgan also allowed
WSI to grant options to purchase an aggregate of 65,991 of these shares to other
investors. If these options were not exercised, these shares would revert back
to being pledged to Morgan. If Mr. Whittle and WSI were to default on their
obligations to Morgan and Morgan were to foreclose on its pledge, the class B
common stock transferred directly or indirectly to Morgan would be converted
into class A common stock. Thereafter, based on current holdings, and assuming
the shares pledged to the other lender and the shares subject to options to
other investors revert to the Morgan pledge, Morgan, together with its
affiliates who are currently stockholders of Edison, would beneficially own
6,153,524 shares of class A common stock and 293,561 shares of class B common
stock, including shares subject to options exercisable within 60 days of
September 30, 1999, representing 13.5% of the voting power of the class A common
stock, 9.7% of the voting power of the class B common stock and 12.7% of the
combined voting power. This would enable Morgan to exercise greater influence
over corporate matters.
YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE
Prior to this offering you could not buy or sell our class A common stock
publicly. The initial public offering price will be determined through
negotiations between the representatives of the underwriters and us. Following
the offering you may not be able to resell your shares at or above the initial
public offering price if the public market does not accept this valuation or if
an active public market for our class A common stock does not develop or is not
sustained.
OUR STOCK PRICE MAY BE VOLATILE
The market price of the class A common stock may fluctuate significantly in
response to the risks discussed above, as well as other factors, some of which
are beyond our control. These other factors include:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial performance;
- changes in market valuations of similar companies;
- future sales of our class A common stock or other securities; and
- general stock market volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
20
<PAGE> 23
OUR STOCK PRICE COULD BE AFFECTED BY SHARES BECOMING AVAILABLE FOR SALE
Sales of a substantial number of shares of class A common stock in the
public market after this offering could depress the market price of the class A
common stock and could impair our ability to raise capital through the sale of
additional equity securities. After this offering, assuming no exercise of
outstanding options, there will be outstanding 38,041,018 shares of class A
common stock and 3,471,300 shares of class B common stock. Each share of class B
common stock is convertible at any time, at the option of the holder, into one
share of class A common stock. Of these shares, the shares sold in this offering
will be freely tradable except for any shares purchased by our "affiliates" as
defined in Rule 144 under the Securities Act. The remaining 31,241,018 shares of
class A common stock and all of the outstanding shares of class B common stock
held by existing stockholders will be "restricted securities" and will become
eligible for sale only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 of the Securities Act. Pursuant to
Rule 701, 90 days after the date of this prospectus, 350,000 shares of common
stock issuable upon exercise of outstanding options are not subject to lock-up
agreements with the underwriters and will be eligible for resale. Upon
expiration of lock-up agreements with the underwriters 180 days after the date
of this prospectus, 30,134,212 shares of common stock will be eligible for
resale in accordance with the provisions of Rule 144 under the Securities Act,
including shares issuable upon exercise of outstanding options.
PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE, SUBSTANTIAL DILUTION
We expect that the initial public offering price of our class A common
stock will be substantially higher than the book value per share of the common
stock outstanding immediately prior to this offering. As a result, investors
purchasing class A common stock in this offering will incur dilution of $16.26
per share from their investment. Dilution is a reduction in net tangible book
value per share from the price you pay per share for our class A common stock.
In the past, we issued options to acquire common stock at prices significantly
below the initial public offering price. To the extent these outstanding options
are ultimately exercised, there will be further dilution to investors in this
offering.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CHARTER AND BYLAWS COULD
PREVENT OR DELAY A CHANGE IN CONTROL
Provisions of Delaware law, our charter and our bylaws could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of class A common
stock, and could have the effect of delaying, deferring or preventing a change
in control of Edison. These provisions include:
- the high-vote nature of the class B common stock;
- restrictions on removal of directors, which may only be effected for
cause and only by a vote of the holders of 80% of the class of common
stock that elected the director;
- Section 203 of the General Corporation Law of Delaware which could have
the effect of delaying transactions with interested stockholders;
- a prohibition of stockholder action by written consent; and
- procedural and notice requirements for calling and bringing action before
stockholder meetings.
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING
We plan to use the proceeds from this offering to fund operating losses and
capital expenditures, and for general corporate purposes. Therefore, we will
have broad discretion as to how we will spend the proceeds, and stockholders may
not agree with the ways in which we use the proceeds. We may not be successful
in investing the proceeds from this offering, in our operations or external
investments, to yield a favorable return. We may also lose the proceeds of this
offering.
21
<PAGE> 24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Result of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about our ability to, among other things:
- implement our business strategy;
- expand our customer base and increase the number of students enrolled in
schools managed by us;
- control costs;
- improve the academic achievement of students in our schools; and
- manage our rapid growth.
In some cases, you can identify forward-looking statements by words such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of these and
other similar words.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, achievements and prospects to be materially different
from those expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include those identified under "Risk Factors."
OUR ADDRESS
We are a Delaware corporation, and our principal executive offices are
located at 521 Fifth Avenue, 15th Floor, New York, New York 10175 and our
telephone number is (212) 419-1600. Our World Wide Web site address is
www.edisonproject.com. We do not intend the information on our Web site to be
incorporated into this prospectus.
22
<PAGE> 25
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 6,800,000 shares of
class A common stock will be approximately $136.9 million, assuming an initial
public offering price of $22.00 per share and after deducting the estimated
underwriting discount and estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option, we estimate that we will
receive additional net proceeds of approximately $20.9 million.
The principal purposes of this offering are to establish a public market
for our class A common stock, to increase our visibility in the marketplace, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders and to obtain additional working capital.
We expect to use the net proceeds to fund operating losses and capital
expenditures, and for anticipated working capital needs and general corporate
purposes. Although we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our business, we
have no specific acquisitions planned. Pending such uses, we plan to invest the
net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business.
23
<PAGE> 26
CAPITALIZATION
The following table describes our cash and cash equivalents, current
portion of long-term debt and capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis reflecting our July 1999 private placements of
preferred stock and the automatic conversion of all of our outstanding
shares of common stock and preferred stock, including the shares issued
in the July 1999 private placements, into shares of class A common stock
and class B common stock upon the closing of this offering; and
- on a pro forma as adjusted basis reflecting also the sale of the shares
of class A common stock offered by us in this offering and our receipt of
the estimated net proceeds, after deducting the estimated underwriting
discount and the estimated offering expenses that we expect to pay in
connection with this offering.
You should read this table along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our financial statements and
the related notes and the other financial information included in this
prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 27,923 $ 69,665 $206,567
======== ======== ========
Current portion of long-term debt......................... $ 6,661 $ 6,661 $ 6,661
======== ======== ========
Long-term debt, less current portion...................... $ 8,264 $ 8,264 $ 8,264
Stockholders' notes payable............................... 6,611 6,611 6,611
Stockholders' equity:
Series A through I common stock, $.01 par value per
share; 97,466,152 shares authorized, 6,214,711 shares
issued and outstanding (actual); no shares
authorized, issued or outstanding (pro forma and pro
forma as adjusted)................................... 62 -- --
Non-voting common stock, $.01 par value per share;
9,827,026 shares authorized, no shares issued or
outstanding (actual); no shares authorized, issued or
outstanding (pro forma and pro forma as adjusted).... -- -- --
Class A common stock, $.01 par value per share; no
shares authorized, issued or outstanding (actual);
150,000,000 shares authorized (pro forma and pro
forma as adjusted); 31,241,018 shares issued and
outstanding (pro forma); 38,041,018 shares issued and
outstanding (pro forma as adjusted).................. -- 313 381
Class B common stock, $.01 par value per share; no
shares authorized, issued or outstanding (actual);
5,000,000 shares authorized, 3,471,300 shares issued
and outstanding (pro forma and pro forma adjusted)... -- 35 35
Convertible preferred stock, series A through G, $.01
par value per share; 77,931,054 shares authorized,
56,422,341 shares issued and outstanding (actual); no
shares authorized, issued or outstanding (pro forma
and pro forma as adjusted)........................... 1,868 -- --
Preferred stock, undesignated, $.01 par value per share;
no shares authorized, issued or outstanding (actual);
5,000,000 shares authorized, no shares issued or
outstanding (pro forma and pro forma as adjusted).... -- -- --
Additional paid-in capital.............................. 145,877 189,201 326,035
Unearned stock-based compensation....................... (5,836) (5,836) (5,836)
Accumulated deficit..................................... (79,266) (79,266) (79,266)
Stockholder note receivable............................. (2,141) (2,141) (2,141)
-------- -------- --------
Total stockholders' equity......................... 60,564 102,306 239,208
-------- -------- --------
Total capitalization...................................... $ 75,439 $117,181 $254,083
======== ======== ========
</TABLE>
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<PAGE> 27
The number of shares of class A and class B common stock outstanding as of
June 30, 1999 does not reflect:
- 7,141,990 shares of class A common stock and 793,577 shares of class B
common stock that may be issued upon the exercise of outstanding options
as of June 30, 1999 at a weighted average exercise price of $20.44 per
share, of which options to purchase 2,349,922 shares of class A common
stock and 261,149 shares of class B common stock were vested as of such
date;
- 3,610,800 shares of class A common stock and 401,249 shares of class B
common stock that may be issued upon the exercise of warrants outstanding
as of June 30, 1999 at a weighted average exercise price of $13.06 per
share;
- 543,715 shares of class A common stock and 60,419 shares of class B
common stock issuable under options issued after June 30, 1999 at an
exercise price of $12.30 per share; and
- 1,050,392 additional shares of common stock reserved for issuance under
our stock option plans.
At June 30, 1999, there were 97,466,145 shares of series A common stock
authorized and 6,214,704 shares of series A common stock issued and outstanding.
At that time, there was one share authorized and one share issued and
outstanding of each of series B through H common stock.
At June 30, 1999, there were 31,000,000, 1,010,101, 6,258,608, 25,077,843,
6,759,420, 4,757,476 and 3,067,606 shares of series A, B, C, D, E, F and G
preferred stock, respectively, authorized. There were 30,294,435, 1,010,101,
6,258,608, 14,101,721, 3,957,476 and 800,000 shares of series A, B, C, D, F and
G preferred stock, respectively, issued and outstanding at June 30, 1999 and no
shares of series E preferred stock issued or outstanding at June 30, 1999.
After June 30, 1999, we authorized an additional 7,000,000 shares of series
A common stock, one share of series I common stock and an additional 7,000,000
shares of series F preferred stock. In our July 1999 private placements, we
issued one share of series I common stock and 6,787,238, shares of series F
preferred stock.
There were no shares of series A, B, C, D, E, F and G preferred stock
authorized, issued or outstanding on a pro forma or a pro forma as adjusted
basis.
More detailed information about our series A through I common stock and
series A through G convertible preferred stock is included in note 9 to our
financial statements included in this prospectus.
The capitalization table gives effect to a change in the number of
authorized shares of common stock and preferred stock after June 30, 1999 that
will result from the filing of our amended and restated certificate of
incorporation.
25
<PAGE> 28
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$101.2 million or approximately $2.92 per share of common stock. The formula for
calculating pro forma net tangible book value per share is pro forma total
assets less deferred charter costs from total liabilities, divided by the total
pro forma number of shares of class A and class B common stock outstanding,
after giving effect to the July 1999 private placements and the conversion of
our common stock and preferred stock, including the preferred stock that was
issued in the July 1999 private placements, into class A common stock and class
B common stock. After giving effect to the issuance and sale of the 6,800,000
shares of class A common stock offered by us in this offering, at an assumed
initial public offering price of $22.00 per share, and the receipt of the net
proceeds from the sale of these shares, our pro forma net tangible book value
(representing pro forma net book value less deferred charter costs) at June 30,
1999 would have been $238.1 million, or $5.74 per share. This represents an
immediate increase in pro forma net tangible book value to existing stockholders
of $2.82 per share and an immediate dilution to new investors of $16.26 per
share. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share............. $22.00
Pro forma net tangible book value per share before this
offering............................................... $2.92
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.82
-----
Pro forma net tangible book value per share after this
offering.................................................. $ 5.74
------
Dilution per share to new investors......................... 16.26
======
</TABLE>
The following table summarizes, on the pro forma basis discussed above, as
of June 30, 1999, the total number of shares of class A and class B common stock
purchased, the total consideration paid and the average price paid by existing
stockholders and to be paid by new investors in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 34,712,318 83.6% $230,122,667 60.6% $ 6.62
New investors.................... 6,800,000 16.4 149,600,000 39.4 $22.00
----------- ----- ------------ ------
Total....................... 41,512,318 100.0% $379,722,667 100.0%
=========== ===== ============ ======
</TABLE>
If the underwriters exercise their over-allotment option in full, the
percentage of shares held by existing stockholders will decrease to 81.6% of the
total shares outstanding, and the number of shares held by new investors will
increase to 7,820,000, or 18.4% of the total shares outstanding.
The above computations exclude 7,141,990 shares of class A common stock and
793,577 shares of class B common stock issuable upon the exercise of options
with a weighted average exercise price of $20.44 per share and 3,610,800 class A
common stock and 401,249 class B common stock issuable upon the exercise of
warrants outstanding as of June 30, 1999 with a weighted average exercise price
of $13.06 per share. It also excludes 543,715 shares of class A common stock and
60,419 shares of class B common stock issuable upon the exercise of options
granted after June 30, 1999 with a weighted average exercise price of $12.30 per
share. If any of those options and warrants are exercised, investors will incur
further dilution. See "Management -- Benefit Plans" and note 10 of the notes to
our financial statements included in this prospectus.
26
<PAGE> 29
SELECTED FINANCIAL AND OTHER DATA
The following selected financial data should be read in conjunction with
our financial statements and the related notes and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in this
prospectus. The statement of operations data for the years ended June 30, 1997,
1998 and 1999, and the balance sheet data as of June 30, 1998 and 1999, are
derived from, and are qualified by reference to, audited financial statements
included in this prospectus. The statement of operations data for the years
ended June 30, 1995 and 1996 and the balance sheet data as of June 30, 1995,
1996 and 1997 are derived from our audited financial statements that are not
included in this prospectus. Administration, curriculum and development expenses
for fiscal 1999 included $22.4 million of stock-based compensation expense. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Stock-Based and Other Non-Cash Compensation Expenses."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from educational services................. $ -- $ 11,773 $ 38,559 $ 69,407 $132,762
Education and operating expenses:
Direct site expenses.......................... -- 11,415 32,150 59,576 114,097
Administration, curriculum and development.... 14,286 7,717 12,755 18,258 49,984
Depreciation and amortization................. -- 1,166 3,552 7,232 12,526
Pre-opening expenses.......................... -- 1,476 1,487 2,486 5,457
Design team compensation...................... -- -- -- 2,724 --
--------- --------- ---------- ---------- ----------
Total education and operating
expenses................................. 14,286 21,774 49,944 90,276 182,064
--------- --------- ---------- ---------- ----------
Loss from operations.............................. (14,286) (10,001) (11,385) (20,869) (49,302)
Other income (expense), net....................... 161 (102) (137) (1,165) (249)
--------- --------- ---------- ---------- ----------
Net loss.......................................... (14,125) (10,103) (11,522) (22,034) (49,551)
Dividends on preferred stock...................... -- -- -- (4,290) --
Preferred stock accretion......................... -- -- -- (278) (1,027)
--------- --------- ---------- ---------- ----------
Net loss attributable to common
stockholders.................................... $(14,125) $(10,103) $(11,522) $(26,602) $(50,578)
========= ========= ========== ========== ==========
Basic and diluted net loss per share attributable
to common
stockholders.................................... $ (1.85) $ (4.28) $ (8.14)
========== ========== ==========
Weighted average number of common shares
outstanding used in computing basic and diluted
net loss per share attributable to common
stockholders.................................... 6,214,709 6,214,711 6,214,711
========== ========== ==========
Pro forma basic and diluted net loss per share.... $ (0.89)
==========
Pro forma weighted average number of shares
outstanding used in computing pro forma basic
and diluted net loss per share.................. 55,721,620
==========
Supplemental pro forma basic and diluted net loss
per share....................................... $ (0.88) $ (1.04) $ (1.78)
========== ========== ==========
Supplemental pro forma weighted average number of
shares outstanding used in computing
supplemental pro forma basic and diluted net
loss per share.................................. 13,167,283 21,242,014 27,858,665
========== ========== ==========
</TABLE>
(continued on the following page)
27
<PAGE> 30
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C>
STUDENT AND PER STUDENT DATA:
Student enrollment................................ -- 2,250 7,150 12,600 23,900
Total revenue per student......................... $ 5,232 $ 5,393 $ 5,508 $ 5,555
Net loss per student.............................. $ (4,490) $ (1,611) $ (1,749) $ (2,073)
EBITDA, net of other charges, per student......... $ (3,927) $ (1,089) $ (820) $ (603)
Cash used in operating activities per student..... -- $ (3,652) $ (1,530) $ (837) $ (673)
Cash used in investing activities per student..... $ (2,203) $ (1,822) $ (1,594) $ (1,269)
Cash provided by financing activities per
student......................................... $ 6,385 $ 5,008 $ 1,776 $ 2,797
OTHER OPERATING DATA:
Capital expenditures.............................. $ 233 $ 4,970 $ 15,553 $ 21,181 $ 34,023
Gross site contribution........................... $ 358 $ 6,409 $ 9,831 $ 18,665
Gross site margin................................. 3.0% 16.6% 14.2% 14.1%
Administration, curriculum and development
expenses, net of stock-based compensation....... $ 14,286 $ 7,717 $ 12,710 $ 17,673 $ 27,613
Administration, curriculum and development
expenses, net of stock-based compensation, as a
percentage of total revenue..................... 65.6% 33.0% 25.5% 20.8%
EBITDA, net of other charges...................... $(14,286) $ (8,835) $ (7,788) $(10,328) $ (14,404)
Cash used in operating activities................. $(14,360) $ (8,216) $(10,941) $(10,550) $ (16,079)
Cash used in investing activities................. $ (3,163) $ (4,956) $(13,030) $(20,082) $ 30,328
Cash provided by financing activities............. $ 17,973 $ 14,365 $ 35,809 $ 22,383 $ 66,838
Total number of schools........................... -- 4 12 25 51
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 2,710 $ 3,904 $ 15,741 $ 7,492 $ 27,923
Working capital................................... 4,672 8,693 19,843 2,684 22,634
Total assets...................................... 6,359 18,423 46,231 55,935 104,392
Total debt, including current portion............. -- 2,825 9,395 17,151 21,535
Accumulated deficit............................... (47,845) (57,215) (7,681) (29,715) (79,266)
Total stockholders' equity........................ 5,474 12,539 31,573 26,831 60,564
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Edison should be read in conjunction with "Selected
Financial and Operating Data" and our financial statements and the related notes
included in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors that include, but are not limited to,
those set forth under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are the nation's largest private operator of public schools serving
students from kindergarten through 12th grade. We contract with local school
districts and public charter school boards to assume educational and operational
responsibility for individual schools in return for per-pupil funding that is
generally comparable to that spent on other public schools in the area. We
opened our first four schools in August 1995 and have grown rapidly in every
subsequent year, currently serving 37,000 students in 79 schools located in 16
states across the country and the District of Columbia. Our total revenue has
increased from $11.8 million in fiscal 1996 to $132.8 million in fiscal 1999.
From our formation in 1992 until opening our first schools in fiscal 1996,
we were a development stage company focused on research, development and
marketing of the Edison school design and curriculum and raising capital to
support our business plan. From 1992 until 1995, Edison's team of leading
educators and scholars developed an innovative, research-backed curriculum and
school design. We operated as a partnership prior to November 1996, when we
converted to a corporation. As of June 30, 1999, our accumulated deficit since
November 1996 was approximately $79.3 million. In addition, prior to November
1996, we incurred losses of approximately $61.8 million, which are reflected in
our additional paid-in capital. Because of our rapid growth, and in view of the
evolving nature of our business and our limited operating history, we believe
that period-to-period comparisons of our operating results may not be
meaningful.
Edison's curriculum expenses include the ongoing costs to maintain and
support Edison's educational design. These expenses include the salaries and
wages of trained educators in our central office curriculum department, the
costs of providing professional training to our staff and teachers, including
materials, and the ongoing costs of maintaining and updating the teaching
methods and educational content of our program.
We make a significant investment in each school we open. The investment
generally includes:
- initial staff training and professional development;
- technology, including laptop computers for teachers and, after the first
year of operation, a computer for the home of every child above the
second grade;
- books and other materials to support the Edison curriculum and school
design, including enrollment fees for the Success for All reading
program; and
- upgrades in facilities.
REVENUE FROM EDUCATIONAL SERVICES
Our revenue is principally derived from contractual relationships to manage
and operate contract and charter schools. We also receive small amounts of
revenue, which represented less than 0.5% of total revenue in fiscal 1999, from
the collection of after-school program fees and food service costs. We receive
per-pupil revenue from local, state and federal sources, including Title I and
special education funding, in return for providing comprehensive education to
our students. The per-pupil revenue is generally comparable to the funding spent
on other public schools in the area. We recognize revenue for each school pro
rata over the 11 months from August through June. Because the amount of revenue
we receive for
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<PAGE> 32
operating each school depends on the number of students enrolled, achieving
site-specific enrollment objectives is necessary for satisfactory financial
performance at the school. Both the amount of per-pupil revenue and the initial
enrollment at each school become known at the beginning of the school year and
generally tend not to vary significantly throughout the year. For these reasons,
our revenue for each school year is largely predictable at the beginning of the
school year.
DIRECT SITE EXPENSES
Direct site expenses include most of the expenses incurred on-site at our
schools. The largest component of this expense is salaries and wages, primarily
for principals and teachers. The remaining direct site expenses include on-site
administration, facility maintenance and, in some cases, transportation and food
services. Once staffing levels for the school year are determined, most of these
expenses are fixed and, accordingly, variations in enrollment will generally not
change the overall cost structure of a school for that year. Direct site
expenses do not include teacher training and other pre-opening expenses
associated with new schools, financing costs or depreciation and amortization
related to technology, including computers for teachers and students, curriculum
materials and capital improvements to school buildings.
GROSS SITE CONTRIBUTION AND GROSS SITE MARGIN
We define gross site contribution as revenue from educational services less
direct site expenses. Gross site margin is gross site contribution expressed as
a percentage of revenue from educational services. Gross site contribution is a
measurement of ongoing site-level operating performance of our schools. We
believe it serves as a useful operating measurement when evaluating our schools'
financial performance. Gross site contribution does not reflect all site-related
costs, including depreciation and amortization or interest expense and principal
repayment related to site-level investments, or on-site pre-opening expenses,
and accordingly gross site contribution does not represent site-level
profitability.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES
Support from our central office is important for the successful delivery of
our curriculum and school design. Administration, curriculum and development
expenses include those amounts related to the creation and enhancement of our
curriculum, and our general, administrative and sales and marketing functions.
These costs include costs for curriculum, assessment and training professionals,
sales and marketing personnel, financial reporting and legal and technological
support and travel expenses and other development activities.
PRE-OPENING EXPENSES
Pre-opening expenses consist principally of various administrative and
personnel costs incurred prior to the opening of a new school or the expansion
of an existing school, particularly the costs for the initial training and
orientation of professional staff, recruitment and travel expenses and expenses
for temporary offices and staff. In connection with the establishment of a new
school, we seek to hire the school's principal several months in advance of the
school's opening. This allows the principal to hire staff, most of whom receive
substantial professional training in the Edison education design prior to the
first day of school. Pre-opening expenses generally are first incurred in the
fourth quarter of the fiscal year prior to the school's opening or expansion and
continue into the first quarter of the fiscal year in which the school opens.
These costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization relates primarily to the investments we make
in each school for books and other educational materials, including enrollment
fees for the Success for All program, computers and other technology, and
facility improvements. These investments support the Edison curriculum and
school design and relate directly to our provision of educational services.
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<PAGE> 33
ENROLLMENT
Our annual budgeting process establishes site-specific revenue and expense
objectives, which include assumptions about enrollment and anticipated
per-student funding. While our budgets include desired enrollment levels, we do
not attempt to maximize enrollment based upon the physical capacity of our
facilities. Our budgets are designed to achieve both financial and academic
goals, both of which we believe are critical to the ongoing success of our
business. Therefore, our budgets are designed to achieve the proper balance
between financial performance and academic standards. While managed closely at
each school, our school enrollment levels are evaluated by management in the
aggregate.
We implement various strategies to achieve optimal enrollment, including
local recruiting, media advertising, and coordinating with our school district
partners and community groups. Since some site costs are partially fixed,
incremental enrollment can positively affect profitability. Further, due to the
closely correlated relationship of site revenue and expenses, school personnel
closely manage expenses based upon actual enrollment. While 51 of our 79 schools
maintain waiting lists or are oversubscribed, based upon our assumptions about
enrollment used in the budgeting process, in the aggregate our schools are
currently operating at 97.5% of the enrollment levels assumed in our budget.
During the 1998 and 1999 fiscal years, we operated at approximately 96% of
assumed enrollment levels.
FINANCIAL PERFORMANCE
We have incurred substantial net losses in every fiscal period since we
began operations and expect losses to continue into the future. For the fiscal
year ended June 30, 1999, our net loss was $49.6 million. As of June 30, 1999,
our accumulated deficit since November 1996, when we converted from a
partnership to a corporation, was approximately $79.3 million. In addition,
prior to November 1996, we incurred losses of approximately $61.8 million, which
are reflected in our additional paid-in capital.
The following table sets forth various financial data expressed as a
percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenue from educational services........................... 100.0% 100.0% 100.0%
----- ----- -----
Education and operating expenses:
Direct site expenses...................................... 83.4 85.8 86.0
Administration, curriculum and development expenses....... 33.1 26.3 37.6
Depreciation and amortization............................. 9.2 10.4 9.4
Pre-opening expenses...................................... 3.9 3.6 4.1
Design team compensation.................................. -- 3.9 --
----- ----- -----
Total education and operating expenses................. 129.6 130.0 137.1
----- ----- -----
Loss from operations........................................ (29.6) (30.0) (37.1)
----- ----- -----
Other income (expense), net................................. (0.4) (1.7) (0.2)
----- ----- -----
Net loss.................................................... (30.0)% (31.7)% (37.3)%
===== ===== =====
</TABLE>
In order to achieve profitability, we believe it will be necessary both to
improve gross site margin while maintaining educational quality and to continue
to reduce central expenses as a percentage of total revenue from educational
services. The latter improvement is largely dependent on our ability to increase
our total revenue through expanded student enrollment while controlling central
costs.
CONTRACT SCHOOLS COMPARED TO CHARTER SCHOOLS
We operate two types of schools: contract and charter. Contract schools are
public schools we operate under a management agreement with local school boards.
Charter schools are schools we operate under a
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<PAGE> 34
management agreement with a charter holder, which is typically a community group
or non-profit entity that has been granted a state-authorized charter to create
a public school. The cost of operating a contract school and a charter school is
similar, except that, in the case of a charter school, we are typically required
to arrange for a facility. In some cases, we operate charter schools under a
charter granted by the local school board, which provides the facility. In these
cases, we categorize these schools as contract schools because the economics of
these arrangements closely resemble those of a contract school. Charter school
facilities that are not provided by a local school board are financed in a
variety of ways, including bank debt, sale/leaseback arrangements, third-party
ownership by real estate investment trusts and philanthropy. At times, we
advance funds or guarantee loans to our charter board clients to assist them in
arranging for facilities. At June 30, 1999 we had lent or advanced $13.9 million
and guaranteed loans of $4.9 million to our charter board clients. Our facility
investment for a charter school will generally exceed our investment in
facilities for a contract school. Because of these higher costs, we generally
seek to establish charter schools in areas with higher per-pupil revenue.
STOCK-BASED AND OTHER NON-CASH COMPENSATION EXPENSES
Beginning in 1995, we granted a number of stock options with four and
five-year terms. In the fourth quarter of fiscal 1999, we decided to extend the
term of these options to ten years and to make other changes in their terms that
we believe are customary for options granted by public companies. As a result,
we were required to record compensation expense at that time representing the
difference between the exercise price of the options and the deemed fair market
value of the shares underlying the stock options. In this regard, we recognized
an expense of $17.4 million in the fourth quarter of fiscal 1999. This is in
addition to $5.0 million of stock-based compensation expenses recorded in fiscal
1999 in connection with stock options that were subject to variable accounting
treatment. We expect to recognize additional expenses related to the option
amendments aggregating approximately $5.8 million over the vesting periods of
the individual stock options. These additional expenses are expected to
approximate $3.6 million for fiscal 2000, $1.1 million for fiscal 2001, $703,000
for fiscal 2002 and $413,000 for fiscal 2003. We do not expect any future
charges for currently existing options resulting from variable accounting.
INCOME TAXES
We have not recorded any provision for federal, state and local income
taxes because we have incurred operating losses from our inception through June
30, 1999. As of that date, we had approximately $80 million of net operating
loss carryforwards for federal income tax purposes, approximately $45 million of
which are expected to expire in fiscal 2013 and approximately $35 million of
which are expected to expire in fiscal 2019, available to offset future taxable
income. Given our limited operating history, losses incurred to date and the
difficulty in accurately forecasting our future results, we do not believe the
realization of the related deferred income tax assets meets the criteria
required by generally accepted accounting principles and, accordingly, we have
recorded a full valuation allowance.
SEASONALITY
Because new schools are opened in the first fiscal quarter of each year,
trends in our business, whether favorable or unfavorable, will tend not to be
reflected in our quarterly financial results, but will be evident primarily in
year-to-year comparisons. The first quarter of our fiscal year has historically
reflected less revenue and lower expenses than the other three quarters, and we
expect this pattern to continue. We generally have lower gross site margin in
the first fiscal quarter than in the remaining fiscal quarters. We also
recognize pre-opening costs primarily in the first and fourth quarters.
Our financial results can vary among the quarters within any fiscal year
for other reasons, and our quarterly revenue and results of operations could
also fluctuate somewhat based on changes in school enrollment throughout the
fiscal year. For more information on the seasonality of our financial results,
see "Risk Factors -- Our financial results are subject to patterns that could
affect the perception of our financial results."
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<PAGE> 35
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $132.8 million for fiscal 1999 from $69.4 million for fiscal 1998,
an increase of 91.4%. The increase was primarily due to the 89.7% increase in
student enrollment from 12,600 in the 1997-1998 school year to 23,900 in the
1998-1999 school year, reflecting both the opening of new schools and the
expansion of existing schools.
DIRECT SITE EXPENSES. Our direct site expenses increased to $114.1 million
for fiscal 1999 from $59.6 million for fiscal 1998, an increase of 91.4%. Like
revenue growth, the increase in direct site expenses was primarily due to the
86.7% increase in student enrollment. The largest element of direct site
expenses is personnel costs. Personnel costs included in direct site expenses
increased to $90.7 million for fiscal 1999 from $46.0 million for fiscal 1998.
GROSS SITE MARGIN AND CONTRIBUTION. Our gross site margin remained
relatively stable at 14.1% for fiscal 1999 compared to 14.2% for fiscal 1998.
Higher revenues resulted in an increase in gross site contribution to $18.7
million for fiscal 1999 from $9.8 million for fiscal 1998.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses increased to $50.0 million for fiscal 1999
from $18.3 million for fiscal 1998, an increase of 173%. This substantial
increase was primarily due to stock-based, non-cash compensation expense, which
increased to $22.4 million for fiscal 1999 from $585,000 for fiscal 1998,
resulting from amendments to options and, to a lesser extent, application of
variable accounting to outstanding options. A 97.2% increase in personnel costs
resulting from a 104% increase in the number of headquarters employees
represented the next largest portion of the overall increase. This increase in
personnel costs was primarily attributable to a substantial increase in staff in
our school operations and curriculum and education divisions, an increase in our
professional marketing employees to support an expanded marketing program, an
increase in our central office administrative staff to enhance legal and
contracting functions and to expand financial reporting and support functions.
The remainder was primarily attributable to increased travel expenses and, to a
lesser extent, greater rent expenses. Administration, curriculum and development
expenses as a percentage of total revenue increased to 37.6% for fiscal 1999
from 26.3% for fiscal 1998. Excluding stock-based non-cash compensation
expenses, administration, curriculum and development expenses as a percentage of
total revenue decreased to 20.8% for fiscal 1999 from 25.5% for fiscal 1998.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $12.5 million for fiscal 1999 from $7.2 million for fiscal 1998, an increase
of 73.6%. The increased depreciation and amortization resulted from additional
capital expenditures for our curriculum materials, computers and related
technology and, to a lesser extent, facility improvements. For fiscal 1999,
additions to property and equipment totaled $34.0 million, including $13.7
million for additional computers and equipment, $12.6 million for curriculum
materials and $7.7 million for new facilities and improvements. These increases
resulted primarily from the large investments in the 26 new schools we opened in
the 1998-1999 school year and operated during the year.
PRE-OPENING EXPENSES. Our pre-opening expenses increased to $5.5 million
for fiscal 1999 from $2.5 million for fiscal 1998, an increase of 120%. This
increase was associated primarily with enrolling students at the 26 new schools
opened in August 1998 compared to the 13 schools opened one year earlier.
DESIGN TEAM COMPENSATION. Some members of our original design team were
entitled to distributions when we achieved predetermined performance objectives.
These objectives were achieved and the contractual provisions triggered in
connection with our issuance of preferred stock in December 1997. Accordingly,
during fiscal 1998, we incurred approximately $2.7 million of expense. We did
not recognize any similar expenses in fiscal 1999 and we do not expect to
recognize any similar expenses in the future.
EDUCATION AND OPERATING EXPENSES. Our total education and operating
expenses as a percentage of total revenue increased to 137.1% for fiscal 1999
from 130.0% for fiscal 1998. Total education and operating expenses for fiscal
1999 included stock-based, non-cash expenses, which accounted for 16.9% of
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<PAGE> 36
total revenue. In addition, total education and operating expenses for fiscal
1998 included a non-recurring design team compensation expense which accounted
for 3.9% of total revenue. Excluding such amounts, total education and operating
expenses as a percentage of total revenue would have decreased to 120.2% for
fiscal 1999 from 126.1% for fiscal 1998. This decrease primarily resulted from
the decrease in administration, curriculum and development expenses as a
percentage of total revenue.
EBITDA, NET OF OTHER CHARGES. EBITDA, net of other charges, means the net
loss we would have shown if we did not take into consideration our interest
expense, income tax expense, depreciation and amortization, stock based
compensation and non-recurring design team compensation. These costs are
discussed above. EBITDA, net of other charges, was a negative $14.4 million for
fiscal 1999 compared to a negative $10.3 million for fiscal 1998. The decline
was primarily a result of increased administration, curriculum and development
expense. However, on a per-student basis, negative EBITDA improved from $807 to
$603 for the same periods.
LOSS FROM OPERATIONS. Our loss from operations increased to $49.3 million
for fiscal 1999 from $20.9 million for fiscal 1998, an increase of 136%. The
$28.6 million of additional loss primarily reflects the growth in
administration, curriculum and development expenses.
OTHER INCOME AND EXPENSE. We recognized $250,000 of other expenses, net,
for fiscal 1999, compared to $1.2 million for fiscal 1998. The change was
primarily attributable to a significant increase in interest income, which
primarily relates to interest earned on the fully committed proceeds from our
series D preferred stock financing in December 1997, which we drew on as needed
in August and December 1998. We recognized $1.5 million of interest income as a
result of our series D preferred stock financing. This improvement was partially
offset by an increase in interest expense primarily due to additional financing
for technology and other equipment investments at our schools.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
increased to $49.6 million for fiscal 1999 from $22.0 million for fiscal 1998,
an increase of 125.5%. During fiscal 1998, we declared a $4.3 million dividend
on preferred stock, in the form of notes payable, in connection with an equity
financing. During fiscal 1999 and fiscal 1998, we recognized $1.0 million and
$278,000 of preferred stock accretion, respectively. This resulted in net loss
attributable to common stockholders of $50.6 million and $26.6 million for these
periods, respectively.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $69.4 million for fiscal 1998 from $38.6 million for fiscal 1997,
an increase of 79.8%. The greatest portion of the increase was due to student
enrollment increasing 76.2% to 12,600 in the 1997-1998 school year from 7,150 in
the 1996-1997 school year, attributable both to opening new schools and
expanding existing schools.
DIRECT SITE EXPENSES. Our direct site expenses increased to $59.6 million
for fiscal 1998 from $32.1 million for fiscal 1997, an increase of 85.7%. The
increase in direct site expenses was primarily due to increased staffing to
support the 76.2% increase in student enrollment. Personnel costs included in
direct site expenses increased to $46.0 million for fiscal 1998 from $24.0
million for fiscal 1997.
GROSS SITE MARGIN AND CONTRIBUTION. Our gross site margin decreased to
14.2% for fiscal 1998 from 16.6% for fiscal 1997. This decrease was due to
improvements in the gross site margin at two schools in fiscal 1997 which was
not sustained in fiscal 1998, as well as a decline in margins for several other
schools. The corresponding gross site contribution increased to $9.8 million for
fiscal 1998 from $6.4 million in fiscal 1997, an increase of 53.1%.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses increased to $18.3 million for fiscal 1998
from $12.8 million for fiscal 1997, an increase of 43.0%. The increase reflects
a 28% increase in administrative, curriculum and marketing staff, related travel
expenses, office rents and expanding business and financial services to support
our growing operations. The increase also included approximately $600,000 of
office relocation costs incurred to consolidate our finance and other support
functions in New York City with our other management
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<PAGE> 37
functions. As a percentage of total revenue, administration, curriculum and
development expenses decreased to 26.3% for fiscal 1998 from 33.1% for fiscal
1997.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $7.2 million for fiscal 1998 from $3.6 million for fiscal 1997, an increase
of 100%. The increased depreciation and amortization resulted from additional
capital expenditures for our curriculum, computers and related technology and
facility improvements. For fiscal 1998, additions to property and equipment
totaled $21.2 million, including $10.3 million for additional computers and
equipment, $1.8 million for curriculum materials and $9.1 million for new
facilities and improvements. These expenditures were due to the large
investments in the 13 new schools opened in the 1997-1998 school year. We made
capital expenditures in fiscal 1997 of $9.1 million, including $4.8 million for
computers and equipment, $1.4 million for curriculum materials and $2.9 million
for new facilities and improvements.
PRE-OPENING EXPENSES. Our pre-opening expenses increased to $2.5 million
for fiscal 1998 from $1.5 million for fiscal 1997, an increase of 66.7%. The
increase was a direct result of opening new schools and expanding existing
schools for the 1997-1998 school year. During fiscal 1998, we opened 13 new
schools.
DESIGN TEAM COMPENSATION. During fiscal 1998, we incurred approximately
$2.7 million of design team expenses. We had no similar expenses in fiscal 1997.
EDUCATION AND OPERATING EXPENSES. Our total education and operating
expenses as a percentage of total revenue increased to 130.0% for fiscal 1998
from 129.6% for fiscal 1997. Total education and operating expenses for fiscal
1998 included a non-recurring design team compensation expense which accounted
for 3.9% of total revenue. Excluding this amount, total education and operating
expenses as a percentage of total revenue would have decreased to 126.1% for
fiscal 1998 from 129.6% for fiscal 1997. The decrease primarily resulted from
the decrease in administration, curriculum and development expenses as a
percentage of total revenue, partially offset by an increase in direct site
expense of 2.4% as a percentage of total revenue.
EBITDA, NET OF OTHER CHARGES. EBITDA, net of other charges, was a negative
$10.3 million for fiscal 1998 compared to a negative $7.8 million for fiscal
1997. The decline was primarily a result of increased administration, curriculum
and development expense. However, on a per-student basis, negative EBITDA
declined from $1,089 to $820 for the same periods.
OTHER INCOME AND EXPENSE. Other expense, net, increased to $1.2 million in
fiscal 1998 from $137,000 in fiscal 1997. The increase was primarily due to
increased interest expense on additional debt incurred to finance technology and
other equipment investments at our schools. This increase was offset in part by
increased interest income on cash balances.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
increased to $22.0 million for fiscal 1998 from $11.5 million for fiscal 1997,
an increase of 91.3%. However, because of our $4.3 million preferred stock
dividend and $278,000 of preferred stock accretion in fiscal 1998, we had net
loss attributable to common stockholders of $26.6 million for the period. In
fiscal 1997, net loss and net loss attributable to common stockholders were
equal.
LIQUIDITY AND CAPITAL RESOURCES
We have historically operated in a negative cash flow position. To date we
have financed our cash needs through a combination of equity and debt financing.
Since our inception and through June 30, 1999, we had raised $190.9 million of
equity capital. In July 1999, we closed on an additional $41.7 million of new
equity capital. We have also utilized debt and equipment leasing arrangements to
finance computers and other technology investments in our schools. We do not
have a line of credit.
At June 30, 1999, after giving effect to the $41.7 million of equity
capital we received in July 1999, our cash available for operations was
approximately $69.6 million.
We expect that our existing cash and available leasing arrangements will be
sufficient to meet our anticipated working capital needs for operating our
existing schools for at least the next 12 months. We
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<PAGE> 38
expect to use the proceeds of this offering in connection with preparing for and
opening additional schools in the future. However, until we are able to achieve
positive cash flow from operations, we will continue to be dependent upon
additional funds from additional equity or debt financings. Depending on the
terms available, such funding may be dilutive to existing stockholders and we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. In the long term, we will need capital to fund our
curriculum materials, technology and other school investments. We expect to fund
such investments and other longer term liquidity needs with cash generated from
operations, the proceeds from this offering and expanded financing arrangements.
CASH USED IN OPERATING ACTIVITIES
For fiscal 1999, we used approximately $16.1 million for operating
activities. This use primarily resulted from $49.6 million of net loss and a
$3.0 million increase in accounts receivable. These amounts were offset by $22.4
million in stock-based compensation expense, depreciation and amortization
totaling $11.5 million and an increase of $2.6 million of accounts payable and
accrued expenses. The large increases in accounts receivable and accounts
payable and accrued expenses are directly attributable to the 86.7% increase in
student enrollment that was experienced during the fiscal year. In fiscal 1998,
we used approximately $10.6 million for operating activities. EBITDA, net of
other charges, was a negative $14.4 million for fiscal 1999 compared to a
negative $10.3 million for fiscal 1998. The decline was primarily a result of
increased administration, curriculum and development expense. However, on a per-
student basis, negative EBITDA, net of other charges, declined from $820 to $603
for those same periods.
CASH USED IN INVESTING ACTIVITIES
For fiscal 1999, we used approximately $30.3 million in investing
activities. During the year, we invested approximately $34.0 million in our
schools and operations. This amount includes the investments we make in
technology and curriculum in each of the schools we open. We have also advanced
funds to three of our charter board clients or their affiliates to help obtain,
renovate and complete school facilities. We do not charge interest on these
advances. The amounts advanced during fiscal 1999 approximated $15.8 million.
During fiscal 1999, we also received approximately $1.9 million in repayments on
advances previously made. Significant real estate investments are often
necessary when we establish a charter school and existing facilities are not
available. We work closely with the charter board to locate, develop and finance
the charter school's facilities. The building or renovation process generally
lasts several months and can vary widely in expense from minimal upgrades to new
construction, which can cost from $4.0 million to more than $8.0 million. We
also sold buildings to charter boards during the year. The proceeds of the sales
approximated $10.5 million and was equal to our cost to acquire and improve the
building. For fiscal 1998, we used approximately $20.1 million in investing
activities. These investments were primarily for technology and equipment for
our schools.
CASH FROM FINANCING ACTIVITIES
In fiscal 1999, we received approximately $66.8 million in our financing
activities. The amounts received were from issuances of series D, series F and
series G preferred stock during the period. In December 1997, we received a
commitment to purchase approximately $51.0 million, net of expenses, of series D
preferred stock. The first payment of $19.2 million on this equity commitment
was made in December 1997 with the remaining $31.8 million contributed during
fiscal 1999. Additionally, stockholder notes payable totaling $1.6 million were
issued in connection with this equity financing, of which approximately $938,000
were issued during fiscal 1999. The amounts received pursuant to the equity
commitments were partially offset by payments on debt of approximately $6.2
million. Cash generated from financing activities in fiscal 1998 of $22.4
million was primarily from the issuance of stock and debt totalling $33.2
million, net of issuance expenses, partially offset by debt repayments of $7.3
million.
We generally finance our technology investments in schools through debt
arrangements. We have also issued warrants in connection with these
transactions. Details of the financing arrangements are included in
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note 6 of the notes to our financial statements. In fiscal 1999, an additional
$9.6 million was financed through notes payable for computers and other
technology.
PHILANTHROPY
Philanthropic entities have supported or will be supporting 11 of our 79
schools, focused particularly in those areas where the per-pupil expenditures
would otherwise make it difficult to achieve satisfactory financial performance.
These philanthropic entities provide funds directly to our school board or
charter board clients, and not to Edison. Our initial investments to open our
six California schools were supported by philanthropic entities, which made
available to the school districts the amounts to cover the cost of the items
necessary to open the schools, including technology and curriculum materials. In
two of these schools, the philanthropic support also includes funds for ongoing
annual operations. In one other location, the support helped fund the capital
improvements to the buildings. Additionally, philanthropic support has been used
in Colorado to help fund a school building and related renovations and
construction. The D2F2 Foundation has supported some of our schools in
California and has indicated that it intends to provide support up to $22.5
million for schools operated or to be operated by us, primarily in California;
$4.6 million of this amount has been used to date in schools operated by us and
$3.3 million of this amount is expected to be used for the 1999-2000 school year
in schools operated by us. We have issued a warrant to the D2F2 Foundation which
represents the right to purchase up to 1,698,750 shares of class A common stock
and 188,750 shares of class B common stock at an exercise price of $7.96 per
share. Although some of our school district and charter board clients have used
philanthropic funds in the past and we expect some of them to use philanthropic
funds in the future, we do not rely on philanthropic support significantly for
our growth strategy. Our schools received approximately $10.1 million of
philanthropic support in the 1998-1999 school year. There is no guarantee that
philanthropic support will be available to open new schools or operate existing
schools in the future.
CHARTER SCHOOL FACILITY FINANCINGS
Innovative financing methods are often needed to compensate for the limited
amount of state and local funding available to develop charter school
facilities. We have employed a variety of approaches, including owning or
leasing the building, advancing funds for the building to the charter board
without charging interest and under various repayment terms, or having the
charter board directly own or lease the facility from a third party, sometimes
assisted by a subordinated loan from us. We also consider providing guarantees
to lending institutions to allow the charter board flexibility in obtaining
financing. We generally choose the most economically viable option available for
each school and purchase real estate only if we determine it is the best
available financing option. We own no facilities that are not used by schools we
manage. We are currently exploring a variety of financing structures to assist
in our charter efforts, including tax-exempt structures, expanding our current
real estate investment trust relationships and forming our own real estate
investment trust. Currently, our only relationship with a real estate investment
trust consists of a sale and lease-back arrangement with respect to one property
housing two schools. We expect to continue to advance funds to our charter board
clients as well as spend significantly on charter school facilities directly. We
have been successful in securing various financing arrangements in the past, but
our ability to obtain any such financing arrangements in the future cannot be
assured. As of June 30, 1999, we had no direct obligations for charter school
facility financings but had guarantees totaling $4.9 million for
facility-related debt of two of our charter school clients, representing four
schools in fiscal 1999. The underlying debt comes due in fiscal 2001 and fiscal
2002.
INVESTMENT IN APEX ONLINE LEARNING INC.
In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc., a company that provides interactive advanced placement courses
for high school students over the Internet. Concurrently, Vulcan Ventures
Incorporated, the majority stockholder of APEX, invested $30.0 million in
Edison. We have invested $5.0 million in APEX and are obligated to invest up to
an additional $5.0 million in the future, if any third party invests in APEX.
Because of our significant ownership interest in APEX, we must recognize a pro
rata portion of APEX's losses based upon our ownership interest, up to a maximum
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amount equal to our investment in APEX. We expect APEX to recognize an
approximate $3.2 million loss in its fiscal year ended June 30, 1999,
representing approximately six months of operations, and to continue to
recognize losses into the future.
ANTICIPATED CAPITAL EXPENDITURES
Capital expenditures for fiscal 2000 are expected to be approximately $40.0
million, which includes approximately $20.0 million for computers and other
technology and $6.0 million for curriculum materials. Additionally, we expect to
advance or lend $8.2 million to new charter board clients to help secure and
renovate school properties for the schools opening in the 1999-2000 school year.
We are also implementing enterprise-wide computer and software packages. Such
systems include financial reporting, payroll, purchasing, accounts payable,
human resources and other administrative modules as well as a student data and
school management package. We expect expenditures for the software packages will
be approximately $5.0 million. We expect the hardware, implementation costs and
other maintenance expenditures to account for an additional $5.0 million over
the next 24 to 36 months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have market risk sensitive instruments related to interest
rates. As disclosed in note 6 of the notes to our financial statements, we had
outstanding long-term notes payable of $13.9 million at June 30, 1999. Interest
rates on the notes are fixed and range from 15.0% to 20.4% per annum and have
terms of 36 to 48 months.
We do not believe that we have significant exposure to changing interest
rates on long-term debt because interest rates for our debt is fixed. We have
not undertaken any additional actions to cover interest rate market risk and are
not a party to any other interest rate market risk management activities.
Additionally, we do not have significant exposure to changing interest
rates on invested cash, which was approximately $29.9 million and $7.5 million
at June 30, 1999 and 1998, respectively. We invest cash mainly in money market
accounts. We do not purchase or hold derivative financial instruments for
trading purposes.
YEAR 2000
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may not properly recognize a year that begins
with "20" instead of "19." This, in turn, could result in major system failures
or miscalculations that could disrupt our business. We have formulated a plan to
address our year 2000 issues and have created a year 2000 task force headed by
our Chief Information Officer to implement the plan. Our year 2000 plan has six
phases:
- ORGANIZATIONAL AWARENESS: educating our employees, senior management and
the board of directors about the year 2000 issue;
- INVENTORY: conducting a complete inventory of internal business systems
and their relative priority to continuing business operations. In
addition, this phase includes a complete inventory of critical vendors,
suppliers and service providers and their year 2000 compliance status;
- ASSESSMENT: assessing our internal business systems and the year 2000
compliance status of our important vendors, suppliers and service
providers;
- PLANNING: preparing the individual project plans and project teams and
other required internal and external resources to implement the solutions
for year 2000 compliance;
- EXECUTION: implementing the solutions and fixes; and
- VALIDATION: testing the solutions for year 2000 compliance.
Our year 2000 plan will apply to our internal business systems and compliance by
external customers and providers.
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INTERNAL BUSINESS SYSTEMS
Our internal business systems and workstation business applications will be
a primary area of focus. Currently, we have no existing enterprise-wide business
software. We do, however, have several key site-wide and departmental
applications. The majority of these solutions are represented by their vendors
as being fully year 2000 compliant.
We have categorized all of our internal business systems as either critical
or non-critical and have completed the organizational awareness, inventory and
assessment phases for all critical internal business systems. The planning phase
was completed in August 1999 and we expect the execution and validation phases
will be completed by the end of October 1999. We expect to be year 2000
compliant on all critical systems before December 31, 1999.
We may not address the year 2000 compliance of some non-critical systems
until after January 1, 2000. However, we believe that any failure of these
systems would not cause significant disruptions in our operations.
COMPLIANCE BY EXTERNAL PROVIDERS, CONTRACTORS AND OUR SCHOOL DISTRICT AND
CHARTER BOARD CLIENTS
In the first quarter of calendar 1999, we completed the organizational
awareness phase of our year 2000 plan with respect to suppliers, service
providers, contractors and our school district and charter board clients to
determine the extent to which our systems are susceptible to those third
parties' failure to remedy their own year 2000 issues. We are currently in the
inventory and assessment phases and we expect these will be complete by the
third quarter of calendar 1999. To the extent that responses to year 2000
readiness are unsatisfactory, we intend to change suppliers, service providers
or contractors to those that have demonstrated year 2000 readiness. There can be
no assurance that we will be successful in finding such alternative suppliers,
service providers and contractors.
COSTS TO ADDRESS YEAR 2000 ISSUES
Because we are in the position of implementing new enterprise-wide business
applications, there are few, if any, year 2000 changes required to existing
business applications. We have been informed by the vendors that all of the new
business applications implemented, or in the process of being implemented in
1999, are year 2000 compliant.
Through June 30, 1999, we had spent approximately $100,000 on our year 2000
plan. Excluding the cost of implementing our new enterprise wide system, we
currently believe that the additional costs of implementing our year 2000 plan
will not exceed $350,000 and will not have a material effect on our financial
position.
CONTINGENCY PLAN
We have not formulated a contingency plan at this time but expect to have
specific contingency plans in place by October 1999.
SUMMARY
We anticipate that the year 2000 issue will not have a material adverse
effect on our financial position or results of operations. We can give no
assurance, however, that the systems of our clients, other companies or
government entities, on which we rely for supplies, cash payments and future
business, will be timely converted or that a failure to convert by our clients
or government entities would not have a material adverse effect on our business.
For more information on the risks associated with the year 2000 problem, see
"Risk Factors -- We may be hurt by the year 2000 problem."
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BUSINESS
Edison is the nation's largest private operator of public schools serving
students from kindergarten through 12th grade. As reflected in the agendas of
both the Republican and Democratic parties, education, a $324 billion sector of
the U.S. economy in the 1997-1998 school year according to the U.S. Department
of Education's Digest of Education Statistics (1998), is among the most
important domestic issues in the United States today. Directly addressing this
issue, we contract with local school districts and public charter school boards
to assume educational and operational responsibility for individual schools in
return for per-pupil funding that is generally comparable to that spent on other
public schools in the area. Over the course of three years of intensive
research, Edison's team of leading educators and scholars developed an
innovative, research-backed curriculum and school design. We opened our first
four schools in August 1995, and have grown rapidly in every subsequent year,
currently serving approximately 37,000 students in 79 schools located in 16
states across the country and the District of Columbia. This represents an
increase of 13,000 students and four new states from the 1998-1999 school year.
Approximately 25,700 students are enrolled in our schools in grades K-5,
approximately 9,500 in grades 6-8 and approximately 1,600 in grades 9-12. Our
total revenue has grown from $11.8 million in fiscal 1996 to $132.8 million in
fiscal 1999. We attribute our growth in part to the demonstrated success of our
schools, as measured by significant improvements in student academic performance
and high levels of parental satisfaction. Twelve of our first 13 clients have
chosen to expand their relationship with us.
Our model offers public school authorities, who face widespread concern
about disappointing student achievement, the benefits of a large private sector
company with national support systems. We believe those benefits include:
- the ability to create, implement and support a superior educational model
through focused research and development;
- the ability, through greater efficiencies, to drive a greater percentage
of educational expenditures to the classroom; and
- increased emphasis on accountability for achieving improved academic
performance.
These benefits contribute to an enhanced educational experience that has
proven attractive to public school authorities, parents and teachers alike.
Elements of that experience include:
- a rich and challenging curriculum based on clear standards and high
expectations for all students;
- a significantly longer school day and year;
- an enriched technology program characterized by computers, supplied by us
without cost to the family, in the home of every student above the second
grade following the first year of the school's operation, full time
technology personnel supporting each site and laptop computers for every
teacher;
- an emphasis on the professional growth of teachers through a commitment
to training, an explicit career ladder and a school management structure
that allows teachers to participate in the leadership of the school;
- a support system focused on improving student achievement;
- exposure to foreign language beginning in kindergarten; and
- an emphasis on parental involvement and character development.
We have an experienced and talented management team led by H. Christopher
Whittle, founder of several media enterprises, including the first national
electronic news system for middle and high schools in the United States, Benno
C. Schmidt, Jr., former President of Yale University, Christopher D. Cerf,
former Associate Counsel to President Clinton from 1994 to 1996, and John E.
Chubb, senior fellow at the Brookings Institution and noted author and speaker
on education reform. In addition, the management team includes 9 former public
school system superintendents.
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INDUSTRY BACKGROUND
OVERVIEW
According to the Digest of Education Statistics (1998), the United States
spent an estimated $324 billion on public K-12 education in the 1997-1998 school
year, nearly double the inflation-adjusted level of spending for the 1987-1988
school year. This represents 4% of the U.S. gross domestic product, making
public education one of the largest sectors of the U.S. economy. During the
1996-1997 school year, over 14,000 school districts comprising 88,000 K-12
schools enrolled an estimated 45.6 million students. We currently concentrate
our business development efforts on the approximately 1,800 medium and large
school districts that each have more than 5,000 students. We estimate that these
districts had annual operating budgets aggregating $190 billion for the
1998-1999 school year. Despite the growth in spending on public education over
the last decade, student achievement has progressed very little and remains low.
For example, on the National Assessment of Educational Progress, a national
measure of achievement trends, students in grades 4 and 8 improved slightly in
mathematics from 1988 to 1996, the last date available, but only approximately
22% of students in grades 4 and 8 were proficient or above their grade level in
the 1996 school year. In reading and writing, trend levels are flat and
performance levels nearly as low; only approximately 32% of students in grades 4
and 8 were proficient or above their grade level in reading in the 1996 school
year and only approximately 25% were proficient or above their grade level in
writing in 1998.
We recognize that there are many excellent public schools in the United
States. We also believe, however, that the overall performance of public schools
has been compromised by several inherent constraints under which they operate.
We believe that, taken together, these constraints inhibit many districts from
implementing a systemic program of improvement.
- LACK OF CONSISTENCY IN LEADERSHIP. We believe that an effective program
for change requires both planning and a sustained commitment to effective
implementation over a lengthy period of time. School districts are
typically governed by school boards subject to regular elections and
related turnover. The average term of urban school superintendents is
less than three years. As a result of the relatively brief tenure of
leadership, many public school systems have found it difficult to
implement long-term approaches to improving student performance and
school quality generally.
- INABILITY TO EXPLOIT THE ADVANTAGE OF SCALE. The over 14,000 school
districts in the United States tend to be small, independent and
localized operations. Only 2% of all school districts had annual
operating budgets greater than $100 million for the 1995-1996 school
year. This modest size can result in severe limitations on the ability
both to develop and to implement substantial improvements in curriculum
and school design. For example, in contrast to most large-scale private
enterprises, the research and development budget in many districts is
negligible. With the need to devote a significant portion of their
resources to stand-alone administrative structures and the support staff
to oversee curriculum for all subjects over 13 grade levels, many
districts simply have nothing left for a long-term program of
improvement.
- INABILITY TO INVEST FOR THE FUTURE. The time horizons of school
districts necessarily are linked to the one-year appropriations cycle
under which they usually operate. The ability to invest for the future by
tolerating substantial short-term budget deficits is generally not
feasible for school districts. For this reason as well, we believe,
change tends to be only incremental.
In all three respects -- consistency of leadership, the benefits of scale
and the ability to make substantial investment for the future -- a large,
private sector company such as Edison is in a strong position to add substantial
value to public education.
CURRENT REFORM INITIATIVES
Public education is currently at the top of national, state and local
political agendas. Both major national political parties have placed education
at the center of their national platforms and many state and local authorities
have enacted or encouraged measures to implement significant educational
reforms.
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Some of these reforms are programmatic innovations occurring within public
schools. Examples include expanded levels of teacher training, higher standards,
more rigorous testing and more effective technology. Other initiatives have
sought to reform the public education system itself by embracing the market-
oriented concepts of competition, accountability and a broader range of parental
choice. These measures include legislation authorizing charter schools, private
management of public schools, voucher programs and increased choice within
existing systems.
- CHARTER SCHOOLS. Since Minnesota first enacted legislation in 1991, 36
states and the District of Columbia have passed charter school
legislation. Under the typical charter school statute, identified
entities, such as the state board of education or a state university, are
authorized to grant a specified number of charters to community groups or
non-profit entities to create a public school. A growing number of
charter boards in turn contract with private sector organizations to
operate the schools. In return for a large measure of autonomy from
regulation, the charter school is accountable for student academic
performance. Many charter school statutes limit the number of charter
schools or the number of students that may enroll in charter schools.
Currently, there are over 1,600 charter schools in operation, with an
estimated enrollment of over 350,000 students in 31 states and the
District of Columbia. This enrollment represents approximately 1.0% of
the total student population in those 31 states and the District of
Columbia.
- CONTRACT SCHOOLS. Contract schools are public schools operated by
private organizations based upon management agreements with local school
boards. Unlike charter schools, contract schools do not require specific
statutory authority, but are created through a contract between a school
management company and a school board in accordance with existing
authority.
- VOUCHER PROGRAMS. Voucher programs provide for the issuance to parents
of tuition vouchers worth a certain amount of money that they can redeem
at any approved school of their choice. These programs allow students to
choose among public schools, which would have to compete for students, or
possibly even attend private schools. Milwaukee and Cleveland have
implemented voucher programs and Florida has adopted legislation
authorizing such a program. Voucher legislation has also been introduced
in several states. Private philanthropists have also made funds available
for voucher programs.
- CHOICES OFFERED BY SCHOOL DISTRICTS. School districts are offering
increased choice to their students by, for example, establishing magnet
schools serving students within the district and allowing students to
attend schools across district lines. Magnet schools are specialized
public schools offering unique programs, such as curricula emphasizing
math, science or the arts.
Incorporating elements of both a market-oriented approach and programmatic
innovation, we are a leader in offering reform alternatives to local school
boards searching for new approaches to education. We are currently operating 55
contract schools with a total enrollment of 25,600 students and 24 charter
schools with a total enrollment of 11,400 students. Of these contract schools,
15 are operated under charters granted by school districts and we categorize
these schools as contract schools because the economics of these arrangements
closely resemble those of a contract school. The remaining 40 contract schools
are operated under management agreements with local school boards. We do not
participate in voucher programs.
THE EDISON SOLUTION
As a private enterprise with national scale, Edison offers school districts
and charter boards a vehicle for overcoming many of the inherent constraints
that have impeded systemic reform of public schools. The Edison solution
consists of two equally critical and mutually reinforcing components:
- a research-backed curriculum and school design that we believe yields
significant improvement in student academic achievement as reflected in
average annual gains of six percentage points against state
criterion-referenced tests and four percentage points per year against
national norm-referenced tests; and
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- support systems designed to ensure consistent, replicable and effective
implementation of our educational model as we expand into a wide range of
communities across the nation.
Examples of the latter include a national teacher and principal recruiting
system; an infrastructure to support teacher training both before and after a
school opens; a national distribution network for curriculum materials,
technology equipment and supplies; and information systems to track and enhance
student progress against identified goals.
We believe that many public school authorities are attracted to the Edison
solution because, unlike some other school reform initiatives, it enables them
to stimulate positive, market-oriented, comprehensive school reform within the
framework of the existing, locally controlled public school system. By entering
into a partnership with us, such authorities enjoy the resources, systems,
continuity of focus and commitment to ongoing research and development
associated with a national private sector company while at the same time
retaining local control of public education. For example, our management
agreements typically provide for the district or charter board to maintain
ultimate oversight and supervision over the school. In addition to regular
reporting requirements and the ability to terminate the management agreement on
performance grounds, such oversight may take several forms, including the right
to reject Edison's candidate for school principal and the right to make
adjustments to the curriculum.
RESEARCH BEHIND THE EDISON SOLUTION
The Edison school design and curriculum grew out of a comprehensive
three-year research project conducted by a team of approximately 30 full-time
professional employees and numerous outside experts under the leadership of
Benno C. Schmidt, Jr., the former President of Yale University. Our design team
included respected education researchers, curriculum developers, teachers,
principals, school administrators, writers, technology specialists and experts
in school finance and management. Together, they brought a wide range of
perspectives on improving education through the reform of curriculum,
instruction, assessment, professional development, school organization and most
other elements of education.
The research leading to the development of our solution was extensive and
systematic; our staff members interviewed educators, reviewed a wide range of
school programs and attempted to assemble the best scientific evidence of the
effects of potential reforms in K-12 education. For example, our review of a
successful project in Indiana which placed computers in the homes of high-risk
students was instrumental in our decision to put computers in our students'
homes. Similarly, our investment in tutors resulted from our examination of
programs run by a Johns Hopkins University sociologist with a well-documented
record of developing basic skills with students who are at high risk for
academic failure.
THE EDISON CURRICULUM AND SCHOOL DESIGN
Our schools combine innovative curriculum and instruction methods with
structures to assess and guide students, hold school administrators accountable
for student performance and encourage and facilitate parental involvement in
their children's education.
CURRICULUM
DEMANDING PROGRAM OF STUDY. Our curriculum is guided by detailed and
demanding student academic standards that specify what students should know and
be able to do at the end of each school year in twenty fields of study, from
reading, writing and mathematics to economics, geography, visual arts and
foreign languages. Our curriculum is also rich in content. For example, students
at the junior and high school levels study three years of world history and
literature and two years of U.S. history and literature. In addition, the high
school curriculum calls for all students to have the opportunity to complete
biology, chemistry and physics, usually by the end of 10th grade, and offers a
wide range of advanced placement courses to students in the 11th and 12th
grades.
PROFESSIONAL DEVELOPMENT FOR TEACHERS. Our professional development
program provides opportunities for teachers to learn how to implement our
program and develop their skills as educators. We typically
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provide teachers with four to six weeks of training before a school first opens
and additional support and training during the school's initial year. In
addition, teachers generally have two periods every day free for their own
professional development, and our school calendars provide at least five days
for ongoing training each year. We also offer more than a dozen national
curriculum conferences annually for different specialists within our schools.
PROVEN INSTRUCTION METHODS. We use instruction methods derived from
systematic research. For example, our elementary schools implement Success for
All, a K-5 reading program developed at Johns Hopkins University and refined
through experimental studies directed by Johns Hopkins University over the last
ten years. Our schools generally use mathematics programs developed through
years of research by the University of Chicago School Mathematics Project.
EMPHASIS ON CORE VALUES. We believe schools cannot be successful unless
the students display certain values, such as the willingness to take
responsibility for themselves and their education, respect for teachers and
other students, and the desire to become educated. Our educational program is
built around a defined set of core values: wisdom, justice, courage, compassion,
hope, respect, responsibility and integrity. We believe these core values help
us promote strong character in our students and a positive learning environment.
Our students receive instruction in these core values at every grade level. For
example, students in our elementary schools read out loud and have group
discussions of morality stories written for children. Also, our teacher training
in student discipline, classroom management and instruction is based on a
character education program that incorporates these values.
REGULAR ASSESSMENTS OF STUDENT PERFORMANCE. We routinely monitor our
students' progress against academic standards. We connect our standards and
instructional programs with state standards and assessments, and we believe our
students are well prepared for state and local tests, for which we are held
accountable. Each quarter teachers complete a unique report card, known as a
Quarterly Learning Contract, which is a special narrative report card that
tracks student progress against academic standards and sets specific goals for
students. We believe this is a contrast to the typical American report card that
grades progress relative to each teacher's subjective classroom standards.
Students also receive traditional letter grades in the Quarterly Learning
Contract. Our students take all standardized tests required by state and local
authorities, and we also administer our own annual tests, known as Common
Performance Assessments, calibrated to our academic standards, to ensure
teachers are judging work appropriately.
EXTENSIVE REMEDIAL INSTRUCTION. The Edison curriculum is designed to meet
the needs of all students, regardless of ability. We employ one-on-one tutoring
to help students master the academic requirements of their grade level.
Intensive remedial instruction in reading is available at all grade levels. In
addition, our longer school day and year provide more time for instruction.
SUPPORT FOR STUDENTS WITH SPECIAL NEEDS. We instruct special education
students in mainstream classrooms, to the extent we believe it is responsible to
do so. However, special education staff are available at each site to provide a
full continuum of services, including additional support in regular classrooms,
resource rooms and self-contained environments for students with greater needs.
We offer students who have limited English proficiency
English-as-a-second-language programs or bilingual programs, depending on
community preference and needs.
SCHOOL DESIGN
STUDENTS AND TEACHERS ARE ORGANIZED INTO SMALL
SCHOOLS-WITHIN-A-SCHOOL. Each of our schools consists of small, flexible
schools-within-a-school, called academies, where teachers typically follow the
same students from grade to grade for several years. We believe this
organization ensures that students are better known by their teachers, helps
foster student-teacher relationships and encourages teachers to feel more
ongoing responsibility for individual students. Within each academy, students
are generally organized into multigrade groups, called houses, of 100 to 180
students each. Students typically remain within the same house until they
graduate from the particular academy. Each house is led by four to six teachers,
who usually work with students of every level of the house for the duration of
their academy experience and are responsible for the core academic program of
instruction in math, science, history, geography, civics, economics, reading and
language arts.
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LONGER SCHOOL DAY AND YEAR. Our students are in school an average of 1,500
hours each year after the first year of their school's operation, compared to
the national average of approximately 1,170 hours per year. Our school year is
approximately 200 days, compared to an average of 180 days for public schools.
Based on these averages, we believe our students spend approximately 28% more
time in school each year than students in most other public schools. This
provides our students with substantially more time for learning than many public
school students and enables us to implement a richer curriculum. Our school
schedule also provides our students with less time during the shorter summer
vacation to forget what they learned during the school year.
INCREASED INTEGRATION OF TECHNOLOGY IN THE LEARNING ENVIRONMENT. Our
schools are technologically rich environments aimed at preparing students for
the workplaces of the future. We provide each of our teachers with a laptop
computer and our classrooms generally have three computers as well as printers
for student use. We provide every family with a student above the second grade a
computer and a modem for use at home, following the first year of their school's
operation. To encourage and increase communication and enable the sharing of
best practices, teachers, students and parents are electronically connected via
The Common, our Internet-based, internal message, conferencing and information
system that connects all our schools. We have a distinctive program called
Technology as a Second Language to teach school staff, students and families to
use technology effectively.
IMMEDIATE AND COMPREHENSIVE CHANGE. We make an average initial investment
of approximately $2,500 per student in each school we operate, or approximately
$1.5 million per school, which is used to purchase computers and other
technology, implement our curriculum and train new teachers. We believe this
provides an opportunity for schools to launch a comprehensive package of change
all at once. In contrast to the small steps that school reform usually must
take, our schools are able to integrate new curriculum, technology and
professional development and pursue excellence in all areas immediately and
aggressively.
SCHOOL-LEVEL ACCOUNTABILITY. We hold each school accountable for a high
level of demonstrated student progress as measured by conventional standardized
tests, official performance assessments and our own assessments. Staff
compensation and promotions within our schools are generally linked to
performance. Parents of students in our schools are encouraged to share
accountability for their children's progress by co-signing the Quarterly
Learning Contract, under which they make a moral commitment to help their
children achieve specified academic goals. The Quarterly Learning Contract
serves as the report card for our students and indicates to parents how well
their children are performing relative to our annual academic standards. In
addition to educational accountability, our schools are also held accountable
for financial management and student, parent and community satisfaction.
PRINCIPALS ACCOUNTABLE FOR SCHOOL PERFORMANCE. Principals at our schools
are appraised and compensated based on meeting student academic performance,
financial management and community satisfaction goals. They are also responsible
for public reporting of their school's accounts and budgets. Principals receive
school report cards that track progress on all accountability criteria, and
principals are in turn appraised and compensated based on progress against the
accountability criteria. Principals for our contract and charter schools are
chosen in consultation with the school district or charter board and normally
hired four to six months before the school opens. This allows our regional vice
presidents to work closely with the new principals for several months to
thoroughly introduce them to our education system. In addition, new principals
receive two weeks of formal training on our education system.
DEDICATED TEACHERS. We believe our schools attract motivated and dedicated
teachers due to the following factors:
- our innovative curriculum and approach to education;
- our commitment to professional development of teachers;
- increased access to resources and technology; and
- generally competitive salary levels.
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Our schools are staffed by four levels of teachers: lead teacher, senior
teacher, teacher and resident teacher. We believe this four-tier seniority
system provides an attractive career path and allows new teachers to be mentored
by more experienced teachers. Teachers are hired based on classroom and
educational experience, expertise in a particular subject area, evidence of
leadership abilities in the context of teams, and interaction with staff,
students and families. Lead teachers have responsibility for the organizational
management of the teaching team, and classroom instruction is the primary focus
of senior teachers, teachers and resident teachers. In addition, lead teachers
serve on the management team of the school, which is led by the principal and
also includes the business services manager. In this respect, teachers are
offered the opportunity to participate in the management of the school.
PARTNERSHIPS WITH FAMILIES. We are committed to keeping families engaged
in their children's education, both at school and in the home. We actively
encourage parental involvement in the education of their children through
interaction with teachers, involvement in school affairs and numerous volunteer
opportunities. We believe our program of providing, following the first year of
the school's operation, computers to the families of our students above the
second grade has increased parents' level of involvement in the school. In
addition, by co-signing the Quarterly Learning Contract, parents commit to
monitor the progress of their children in meeting stated educational goals.
THE EDISON OPERATING SYSTEM
The systems we have built to ensure consistent and effective
implementation, replicability and scalability are as essential to our model as
the Edison curriculum and school design itself. Although there are many
outstanding public schools in the United States, we believe that the basis for
such success has been highly individualized, often, for example, dependent on an
especially dynamic principal. Edison has designed its support systems with the
objective of not only creating excellence, but being able to replicate it in a
consistent manner in a widely diverse array of schools across the country.
REGIONAL VICE PRESIDENT STRUCTURE. Edison's 12 regional vice presidents,
most of whom are former school superintendents or principals, provide the most
critical link between our central operations and each school site. They are
accountable for building and ensuring the operation of successful schools,
defined as schools that measurably enhance student achievement over time and
meet financial objectives. In meeting this responsibility, regional vice
presidents make frequent site visits, analyze school academic and financial
data, coordinate central support operations that meet the needs of each school
and hold regional training sessions for principals and teachers.
EDUCATION AND CURRICULUM DIVISION. Our Education and Curriculum Division,
our largest central division, oversees the implementation, modification, support
and effectiveness of our educational design. The Education and Curriculum
Division's nearly 50 employees, together with over 200 of our teachers who we
annually certify as trainers, provide a continuous stream of support to our
schools through the coordination of schoolwide and national training programs,
development of curricular standards and assessment of design effectiveness at
each school. The Education and Curriculum Division also collects, analyzes and
publishes educational data for use by our schools, our school district and
charter board clients and the public.
ASSESSMENT. The Assessment Department within our Education and Curriculum
Division monitors student achievement, school design and customer satisfaction
criteria of our schools, and analyzes these data to understand and measure our
schools' performance. This department also prepares monthly and annual reports
on school performance for our principals and regional vice presidents.
RECRUITING. Strong educational leadership and teaching ability are vital
to the successful implementation of the Edison design. Our Recruitment
Department works year-round to attract outstanding principal candidates through
a variety of recruitment strategies, including direct headhunting, national
advertising and cultivation of outstanding internal candidates. The department
also recruits outstanding teacher candidates through a network of school-based
recruitment coordinators and through targeted recruitment efforts at prominent
schools of education, historically black colleges and highly regarded teacher
organizations.
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REAL ESTATE. Prior to finalizing a management agreement, our Real Estate
Department typically reviews the physical condition, technology infrastructure,
suitability and student capacity of each school site, and estimates the costs of
preparing the facilities for an Edison school. Once the management agreement is
finalized, the Real Estate Department either contracts with local architects and
construction managers to make the necessary modifications or works closely with
client school districts, depending on the terms of the management agreement. In
some independent charter school management agreements, we may be responsible for
new construction, major renovation or conversion of a commercial or industrial
property. We have developed expertise in working with national, regional and
local project managers, architects, engineers and construction firms to develop
these properties for school use. For more information on our real estate
arrangements, see "-- Facilities."
START-UP. As a management agreement is finalized, the assigned regional
vice president sets up a local start-up office, hires a start-up staff, and
begins to complete each step outlined in our Start-up Manual, a multi-volume
guide that directs each phase of the start-up process. The start-up office
serves as the center for all school operations, including student enrollment,
staff recruitment and coordination with the central office.
PURCHASING. Our Purchasing Department is responsible for coordinating both
the purchase and the delivery of each school's curriculum and technology. We
believe our size and growth have allowed us to achieve economies of scale by
realizing more competitive prices from vendors than could most school districts.
Once all curriculum and technology orders are made, attention shifts to
coordinating delivery to each Edison school. To help achieve this goal,
beginning with the 1999-2000 school year, we are requiring each of our vendors
to ship most orders to a central warehouse for distribution to the schools.
ENROLLMENT. We provide technical expertise and on-site support to assist
each school in reaching its targeted enrollment. The Student Enrollment
Department supports a variety of student recruitment strategies, including
door-to-door distribution of recruitment literature, neighborhood information
sessions, posting of fliers in public areas, use of available print and
electronic media and interaction with community-based organizations. In the
event that the number of students seeking admission to an Edison school exceeds
the school's capacity, an open admissions lottery is held to determine which
students are admitted and which are placed on the school's waiting list.
BUSINESS SERVICES. We hire a business services manager to manage the
day-to-day administrative operations at each Edison school under the supervision
of the school's principal. Business services managers are responsible for
managing the school's budget, processing all site expenditures and coordinating
student transportation, food and personnel services at each Edison school. We
also employ four financial analysts in our central office to assess prospective
management contracts and monitor the budgets of our existing schools. Our
central office also monitors real estate financing and performs traditional
financial administrative functions.
TECHNOLOGY. Our Technology Department oversees the creation, modification,
and implementation of the technology components of the Edison curriculum and
school design. The department creates specifications for each school and
start-up office, oversees technology-related building modifications and
equipment installation, recruits and selects, together with the school
principal, the school's technology director, trains the school's technology
director and provides additional field support as needed.
FAMILY AND COMMUNITY PARTNERSHIPS. Formal parent orientation begins once
the student body has been selected, but all parent meetings and community
information sessions that lead up to final student selection are part of
families' introduction to Edison and the contract or charter school. The parent
orientation process is organized at each site by the school's student support
manager, an individual hired for the school's first year to facilitate community
interaction and coordinate social services within the school. The student
support manager works closely with the school's principal throughout the
start-up process to recruit parent volunteers, hold welcome meetings, orient
parents to the Edison curriculum and school design and coordinate the school's
grand opening celebration.
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PRE-OPENING TRAINING. We provide a comprehensive, pre-opening professional
development program for principals and teachers at each of our new sites. Our
national leadership training gives new principals an intense overview of the
Edison design, including the start-up process, curriculum, student academic
standards, school organization, school culture, technology, financial management
and measures of accountability. Training for all instructional school staff
takes place during the summer before the opening of the school and includes
training on instructional methodology, classroom management and the core
curriculum in each teacher's area of expertise.
ONGOING TRAINING. We maintain the successful operation of each of our
schools through frequent site visits by our support personnel and through
ongoing professional development for school staff. All schools receive an
average of 19 days of on site visits from our Curriculum and Education Division
personnel. These visits are frequently supplemented with additional training
sessions based upon the observations made during site visits and the expressed
needs of each school's principal and teachers. In addition to training at the
site level, principals and teachers regularly convene for national conferences,
where training typically focuses on student achievement, leadership strategies,
design modifications, community relations, new support services or
subject-specific training sessions. For example, we convened 30 conferences
during the 1998-1999 school year. Principals and teachers can also utilize The
Common, our on-line network, to access additional resources and interact with
individuals from other Edison schools.
SITE MONITORING AND ACCOUNTABILITY. To ensure that each Edison school
makes continuous progress in each of these areas, beginning with the 1999-2000
school year, we plan to generate a monthly School Operations Report for each
school site. This report will include a compilation of educational data
generated at each school site, anecdotal observations from our personnel who
visited the school and information related to attendance, enrollment, student
and teacher mobility and technology usage. In addition to the School Operations
Report, we compile a year-end School Report Card for each school site. The
report includes information about student performance on standardized tests;
student performance on Edison's common performance assessments; levels of
parent, staff, and student satisfaction; and the degree to which the school met
its budgetary requirements. The School Report Card serves as the basis upon
which the school principal is evaluated and, where state law permits,
compensated.
THE EDISON SOLUTION IMPLEMENTED
For the current school year, we are operating 79 schools in 16 states and
35 cities with a combined student enrollment of 37,000. This represents an
increase of 13,000 students and four new states from the 1998-1999 school year.
We operate two types of schools: contract and charter. In the case of most
charter schools, we are required to arrange for a facility. In some cases,
however, we operate charter schools under a charter granted by the local school
board, which provides the facility. In these cases, we categorize and count
these schools as contract schools because the economics of the arrangement more
nearly resemble those of a contract school. We believe that Edison, with 55
contract schools, is the only current provider of contract schools for
traditional K-12 instruction in the United States.
We consider grades K-5, 6-8 and 9-12 to each be a school, and we count
grades K-5, 6-8 and 9-12 as separate schools, even if they are located in the
same building. As we expand, we often introduce new grade levels gradually
rather than simultaneously opening all grade levels within a school. We consider
ourselves to have opened a new school if we introduce at least one grade level
at a different school level, for example, if we add grade 6 at a location
housing an existing K-5 school. In some cases, we count grades K-6 as one school
if it is the local practice to configure elementary schools in this manner. We
currently have 38 principals, and each principal is generally responsible for
all the Edison schools on his or her campus. Our students have generally been
from economically disadvantaged backgrounds, and approximately 60% of our
students participated in the federal free and reduced lunch program during the
1998-1999 school year. These students came from families with incomes at or
below 185% of the poverty level established by federal authorities.
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The following table provides information about the schools we are operating
for the current school year.
<TABLE>
<CAPTION>
NUMBER
OF YEAR TYPE OF SHORTEST EARLIEST
CLIENT LOCATION SCHOOLS COMMENCED GRADES SCHOOL TERM EXPIRATION DATE
------ -------- ------- --------- ------ ------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Chula Vista Elementary
School District Chula Vista, California 1 1997 K-5 Contract* 5 yrs June 2002
Ravenswood City School
District East Palo Alto, California 2 1998 K-8 Contract* 5 yrs January 2003
Fresno Unified School
District Fresno, California 1 1999 K-6 Contract* 5 yrs June 2004
Napa Unified School
District Napa, California 1 1998 K-6 Contract* 5 yrs June 2003
San Francisco School
District San Francisco, California 1 1998 K-5 Contract* 5 yrs June 2003
West Covina School
District West Covina, California 2 1998 K-6 Contract* 5 yrs June 2003
Academy School District Colorado Springs, Colorado 2 1998 K-8 Contract 5 yrs June 2003
Colorado Springs School
District Colorado Springs, Colorado 2 1996 K-8 Contract* 5 yrs June 2001
Denver-Edison Charter
School Denver, Colorado 2 1998 K-7 Charter 5 yrs June 2003
Board of Area
Cooperative Ed
Services Hamden, Connecticut 2 1998 K-8 Contract 5 yrs June 2003
Friendship Public
Charter School Washington, D.C. 3 1998 K-8 Charter 5 yrs June 2003
Dade County Public
Schools Miami, Florida 1 1996 K-5 Contract 5 yrs June 2001
Bibb County School
District Macon, Georgia 2 1999 K-6 Contract 5 yrs June 2004
Chicago Charter School
Foundation Chicago, Illinois 3 1999 K-11 Charter 8 yrs June 2007
Peoria Public Schools Peoria, Illinois 2 1999 K-4 Contract 5 yrs June 2004
Davenport Community
School District Davenport, Iowa 1 1999 K-5 Contract 5 yrs June 2004
Wichita School District
No. 259 Wichita, Kansas 4 1995 K-8 Contract 5 yrs June 2000
Boston Renaissance
Charter School Boston, Massachusetts 2 1995 K-8 Charter 5 yrs June 2000
Seven Hills Charter
School Worcester, Massachusetts 2 1996 K-8 Charter 5 yrs June 2001
Battle Creek School
District Battle Creek, Michigan 3 1998 K-7 Contract 5 yrs June 2003
Detroit Academy of Arts
and Sciences Detroit, Michigan 2 1997 K-6 Charter 5 yrs June 2002
Detroit Public School
Academy Detroit, Michigan 2 1998 K-8 Charter 3 yrs June 2001
YMCA Service Learning
Academy Detroit, Michigan 1 1999 K-5 Charter 5 yrs June 2004
Edison Oakland Public
School Academy Ferndale, Michigan 2 1999 K-8 Charter 5 yrs June 2004
Flint School District Flint, Michigan 4 1997 K-10 Contract 5 yrs June 2002
Mid-Michigan Public
School Academy Lansing, Michigan 2 1996 K-8 Charter 5 yrs June 2001
Mt. Clemens School
District Mt. Clemens, Michigan 4 1995 K-12 Contract 5 yrs June 2000
Board of Education of
Pontiac Pontiac, Michigan 2 1998 K-7 Contract 5 yrs June 2003
Duluth Public Schools Duluth, Minnesota 3 1997 K-8 Contract* 3 yrs June 2000
Minneapolis School
District No. 1 Minneapolis, Minnesota 2 1998 K-7 Contract 5 yrs June 2003
Westport Community
Secondary Schools Kansas City, Missouri 2 1999 6-12 Contract* 5 yrs June 2004
Kansas City Municipal
School District Kansas City, Missouri 1 1999 K-5 Contract 5 yrs June 2004
Norman Village Charter
School Kansas City, Missouri 2 1999 K-8 Charter 5 yrs June 2004
Granville Public Charter
School Trenton, New Jersey 2 1998 K-8 Charter 2 yrs June 2000
</TABLE>
(continued on the following page)
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<TABLE>
<CAPTION>
NUMBER
OF YEAR TYPE OF SHORTEST EARLIEST
CLIENT LOCATION SCHOOLS COMMENCED GRADES SCHOOL TERM EXPIRATION DATE
------ -------- ------- --------- ------ ------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Wayne County Public
Schools Goldsboro, North Carolina 1 1998 K-5 Contract 5 yrs June 2003
Nash-Rocky Mountain
Public Schools Whitakers, North Carolina 1 1999 K-5 Contract 5 yrs June 2004
Alliance Community
Schools, Inc. Dayton, Ohio 1 1999 K-5 Charter 5 yrs June 2004
Southwest School
District San Antonio, Texas 3 1997 K-7 Contract 5 yrs June 2002
Sherman School District Sherman, Texas 2 1995 K-6 Contract 5 yrs June 2000
Tyler Independent School
District Tyler, Texas 1 1999 6-8 Contract 5 yrs June 2004
--
Total 79
==
</TABLE>
- ---------------
* Indicates charter schools operated under a charter granted by the local school
board.
GROWTH STRATEGY
We believe the approximately 1,800 medium and large independent school
districts nationwide, which we estimate collectively had operating budgets of
$190 billion in the 1998-1999 school year, represent a significant growth
opportunity. Our strategy is to grow within this market through the
establishment of expanded relationships with existing clients as well as new
relationships. Illustrating the magnitude of the overall market opportunity, we
estimate that just one percentage point market share nationwide within our
market of large and medium size school districts would represent approximately
$1.9 billion in annual revenue, based upon expenditures for the 1998-1999 school
year.
Our marketing efforts will continue to focus on our ability to replicate
the success achieved at other Edison schools throughout the country. We believe
that effective marketing and communication efforts targeted at administrators,
teachers and parents will yield higher levels of perceived benefits among these
constituencies and ultimately generate increased penetration within our market
of K-12 schools.
A core element of our growth strategy is to establish multiple schools
within a given school district to cover the entire K-12 grade range (elementary,
middle and high school). We believe that uninterrupted access to the Edison
system from kindergarten through high school will achieve the most favorable
outcome for students. Historically, our management agreements have provided for
the establishment of one elementary school during the first contract year.
Through our development efforts, we seek to expand upon the initial contract by
opening additional schools within the district in subsequent years. We believe
that our strong academic results will encourage school districts and charter
holders to retain us to operate multiple schools. In addition, we believe that
satisfied parents will push to make our schools available for their children's
entire K-12 education.
We also expect our demonstrated success at our existing schools will
encourage school districts and charter boards to enter into management
agreements providing for us to establish multiple schools either in the first
year or over time. We have opened additional schools for 12 of our first 13
clients. We are operating 79 schools across the country for the 1999-2000 school
year, which brings the total number of students served to over 37,000.
COMPETITIVE STRENGTHS
We believe that the following factors will contribute to our continued
success and future growth:
- QUANTIFIABLE ACADEMIC IMPROVEMENT. Student achievement in our schools
has been substantial, as measured by a range of state and local tests. On
average, in those schools that we have operated long enough to generate
trend data, typically by a school's second year with Edison, our students
have gained six percentage points per year against state
criterion-referenced tests and four percentage points per year against
national norm-referenced tests.
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- PARENTAL SATISFACTION. Our schools enjoy high parental satisfaction.
According to a survey prepared for us by an independent market research
firm for the 1997-1998 school year, covering all 20 of our schools then
in operation, over 50% of the parents of our students gave our schools
grades of A or A-. This compares to 37.2% of parents who give a grade of
A or A- in U.S. public schools generally, according to the same market
research firm.
- EXTENSIVE INFRASTRUCTURE. We have a series of systems and support staff
that permit us to implement our curriculum and school design in contract
and charter schools in communities across the United States. The systems
have been used successfully during our past four years of rapid
expansion. These systems include recruiting capabilities, assessment
mechanisms, professional development systems, financial management and
acquisition systems, and systems to assess prospective management
agreements.
- ADVANTAGES OF SCALE. We expect to achieve advantages of scale as more
schools are added to our school systems, allowing us to increase our
purchasing power and reduce our overhead costs as a percentage of total
revenue. We are also focused on achieving clustering efficiencies by
opening multiple schools in a district. We have successfully opened
additional schools for 12 of our first 13 clients. By focusing on
expanding operations in existing markets, we believe we can better
capitalize on our relationships with the district, our knowledge of the
specific market and economies of scale in the provision of centralized
services.
- EXPERIENCED MANAGEMENT TEAM. We have an experienced management team led
by H. Christopher Whittle, founder of several media enterprises including
the first national electronic news system for middle and high schools in
the United States, Benno C. Schmidt, Jr., former President of Yale
University, Christopher D. Cerf, former Associate Counsel to President
Clinton from 1994 to 1996, and John E. Chubb, senior fellow at the
Brookings Institution and a noted author and speaker on education. Our
management team also has 9 former school system superintendents,
including Deborah M. McGriff, former superintendent of the Detroit public
schools, and Manuel Rivera, former superintendent of the Rochester public
schools.
- SIGNIFICANT INVESTMENT IN RESEARCH AND DEVELOPMENT. Prior to opening our
first four schools during the 1995-1996 school year, we conducted a
three-year research project led by a core team of educators, researchers,
policy experts and other professionals to create an innovative and, we
believe, effective model for operating more efficient and effective
public schools. This research project led to the creation of Edison's
curriculum and school design, which integrate many successful educational
practices into a comprehensive school solution for grades K-12, guided by
high academic standards, supported by research-backed innovations in most
areas of schooling and emphasizing assessment and accountability. In
addition, our Education and Curriculum Division regularly assesses the
effectiveness of our educational design and oversees its modification and
improvement.
ACADEMIC PERFORMANCE
School districts and charter boards generally retain us both to improve the
academic performance of the students who will be in our schools and to create
competition, which they hope will stimulate academic progress in the other
schools in the district. Our students are required to take the same local, state
and national tests administered by other public schools in the district. States
regularly require students to take assessments based on state standards, known
as criterion-referenced tests, and school districts also typically require
students to take tests based on national standards, known as national norm-
referenced tests. Both types of tests are scored by independent authorities and
result in publicly available data about student performance. As of the end of
the 1998-1999 school year, our fourth academic year, these tests have provided
over 300 measures of our students' achievement.
Student academic achievement in our schools has been substantial, as
measured by these external assessments. Since 1995, for those schools that we
have operated long enough to generate trend data, which is generally two years,
the average annual improvement in student achievement, taking into
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consideration gains, losses and instances of no change, has been six percentage
points on state criterion-referenced tests and four percentage points on
national norm-referenced tests. These results compare favorably to the only
available national measure of achievement trends, known as the National
Assessment of Educational Progress, or NAEP. The NAEP is determined from
criterion-referenced tests administered by the federal government every two
years to random samples of students nationwide. From the 1994-1995 school year
to the 1996-1997 school year, the average annual improvement in student
achievement for American nine year olds and 13 year olds, which are ages similar
to our students, has been zero percentage points in math, and from the 1994-1995
school year to the 1997-1998 school year, the average annual improvement in
reading has been less than one percentage point. While the NAEP and the state
tests taken by our students are not identical, these criterion-referenced tests
attempt to measure essentially the same academic skills against the standards of
grade level curricula.
RELATIONSHIP WITH APEX ONLINE LEARNING INC.
In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc., a company that provides interactive advanced placement courses
for high school students over the Internet for $5.0 million. Concurrently,
Vulcan Ventures Incorporated, the majority stockholder of APEX, invested $30.0
million in Edison. We are obligated to invest up to an additional $5.0 million
in APEX in the future, if a third party invests in APEX. We intend to jointly
develop educational programs for students and teachers with APEX, components of
which would be delivered on-line, and we plan to pilot one or more such programs
during the 1999-2000 school year.
LABOR RELATIONS
We are committed to developing a positive relationship with teachers'
unions at both the local and national levels. We work in successful partnership
with local teachers' unions in numerous schools across the country, and believe
our distinctive curriculum and school design can be successfully delivered in
the context of a unionized school. In this regard, we believe we are unique
among school management companies, which generally have declined to operate in
schools subject to collective bargaining.
Our commitment to developing a successful working relationship with unions
reflects the fact that a majority of our schools are contract rather than
charter schools. As a general proposition, teachers at charter schools in the
United States are not represented by unions. In contrast, at least in those
states with strong public employee labor laws, school teachers in traditional
public schools generally have elected to organize. Approximately 30% of our
schools operate under collective bargaining agreements as waived by a memorandum
of understanding. In some charter schools, the charter incorporates by reference
portions of collective bargaining agreements.
Although we prefer positive union relations, we regularly encounter
resistance from teachers unions in local school board debates over whether to
enter into a management agreement with us. The concept of a private sector
school manager in public education is a comparatively new one. In addition, both
national teachers unions historically have opposed privatization in public
schools. While we reject that label and regard our approach to be more of a
public/private partnership that draws on the strengths of both sectors, the
unions' historical perspective often influences local debates. In many
instances, we have pursued a charter in a community only after it became clear
that the local teachers association would decline to participate in discussions
concerning our retention by the district to operate a contract school.
For several reasons, we believe that our relations with unions at all
levels will continue to improve:
- as an organization, we are committed to that improvement;
- many union members recognize that we are the only significant private
sector organization in this area that seeks to work within the existing
public school system;
- notwithstanding the perception of some opinion leaders, significant
elements within teachers unions are committed to meaningful reforms,
including any initiative that improves student performance, preserves the
integrity of the public school system as a whole and protects the rights
of teachers as
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<PAGE> 55
professionals. We believe that our approach, unlike many other reform
initiatives, is consistent with these objectives;
- we believe that some local union leaders have concluded that working with
us is an effective defensive strategy against other more threatening
initiatives, such as vouchers or non-unionized charters; and
- many aspects of our curriculum and school design, such as extensive
professional development and an enhanced leadership role for teachers in
the management of the school, have long enjoyed the support of the
unions.
We typically have employment agreements with our regional and developmental
vice presidents and with the principals, union and non-union teachers and other
personnel of our schools.
BUSINESS DEVELOPMENT
Our development division is responsible for establishing new client
relationships, expanding relationships with current clients and renewing client
management agreements. The division is led by two executive vice presidents, who
supervise 12 development vice presidents, each of whom is responsible for a
regional area. The development cycle for contract and charter schools usually
begins 10 to 20 months prior to a school's opening. The development vice
president typically targets numerous school districts within his or her region
as potential clients for a contract school, based upon a variety of criteria,
including:
- total enrollment and per-pupil expenditures of the district;
- proximity to existing Edison schools;
- perceived district and teacher's union support;
- the school superintendent's perceived receptivity to innovation; and
- number of new public or private schools opening in the district.
The development vice president's decision to focus on an area for a potential
charter school is based on similar factors, as well as other criteria,
including:
- particulars of the applicable state charter legislation;
- an established non-profit community agency interested in holding the
charter;
- a viable site acquisition strategy; and
- the support of state and local officials for charter schools.
The development cycle for contract and charter schools usually involves numerous
presentations to school district governing boards, teachers, teachers' union
leaders, parents, community groups and the media, as well as visits to our
existing contract or charter schools.
CONTRACTUAL ARRANGEMENTS FOR ESTABLISHING CONTRACT AND CHARTER SCHOOLS
CONTRACT SCHOOLS. Our management agreements for operating contract schools
are typically negotiated with the district school board. Management agreements
normally last for three to five years, provide us with per-student funding
generally comparable to that received by other schools in the district and give
us substantial control over a school, under the board's ultimate supervision, in
return for meeting specified academic results. We deliver and support our
curriculum, manage the school's budget, provide periodic assessment reports to
the school district, hire teachers and, in collaboration with the school
district, choose the school's principal.
CHARTER SCHOOLS. Our management agreements for operating charter schools
are negotiated with the charter boards, which generally consist of community
groups or established non-profit entities. Public school districts typically can
also issue charters and may retain us to operate charter schools. The terms
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and conditions of these management agreements are similar to our management
agreements for contract schools. We often also help the charter boards arrange
for financing to obtain the facilities for the charter schools. In some cases,
we have entered into long-term leases for the charter school facilities. We have
also provided permanent credit support for many of our charter school buildings,
typically in the form of loan guarantees or cash advances.
GOVERNMENT LAWS AND REGULATIONS
FEDERAL AND STATE EDUCATION PROGRAMS. We receive funds derived from
numerous federal and state programs to be used for specific educational
purposes. If we fail to comply with the requirements of the various programs, we
could be required to repay the funds and be determined ineligible for receipt of
future federal funds. Most of our schools receive funds under Title I of the
Elementary and Secondary Education Act of 1965. This program supports the
education of children from low-income families. Some of our schools also receive
funds from other programs under this act, including Title II, which provides
funding for the professional development of teachers, Title III, which provides
funding for technology programs, Title VII, which provides funding for bilingual
education programs, and Title X, which provides start-up funding for charter
schools. We have policies and procedures in place in order to comply with the
regulations and requirements of these programs.
Although we receive these federal and state funds indirectly, through local
school boards and charter boards, our receipt of these funds subjects us to
extensive governmental regulation and scrutiny. We could lose all or part of
these funds if we fail to comply with the applicable statutes or regulations, if
the federal or state authorities reduce the funding for the programs or if we
are determined to be ineligible to receive funds under such programs. To the
extent that the laws and regulations governing federal and state programs change
or are interpreted in a manner that would prevent school districts and public
charter schools from using federal funds to pay for the services we provide, the
loss of all or part of these funds would hurt our business.
INDIVIDUALS WITH DISABILITIES IN EDUCATION ACT. This act requires that
students with qualified disabilities receive an appropriate education through
special education and related services provided in a manner reasonably
calculated to enable the child to receive educational benefit in the least
restrictive environment. Our responsibility to provide the expensive services
required by this act varies depending on state law and type of school. We are
generally responsible for ensuring the requirements of this act are met in our
charter schools, unless state law assigns that responsibility to another entity.
School districts are generally responsible for ensuring the requirements of this
act are met in our contract schools. We could be required to provide additional
teachers, aides or special services, at our cost, if we are found in violation
of this act in one of our schools.
FAMILY EDUCATIONAL RIGHTS AND PRIVACY ACT. We are subject to the federal
Family Educational Rights and Privacy Act, which protects the privacy of a
student's educational record, and generally prohibits a school from disclosing a
student's records to a third party without the student's prior consent. The law
also gives parents certain rights with respect to their minor children's
education records. Our failure to comply with this law may result in termination
of our eligibility to receive federal education funds.
GUN-FREE SCHOOLS ACT. The Gun-Free Schools Act, which became effective in
1994, requires us to effect certain policies, assurances and reports regarding
the discipline of students who bring weapons to our schools. If we violate any
of these requirements, we may be deemed ineligible to receive certain Federal
education funds.
FEDERAL CIVIL RIGHTS LAWS. We must comply with federal civil rights laws
or we could be determined ineligible to receive funds from federal programs or
face criminal or civil penalties. These laws include the following:
- TITLE VI OF THE CIVIL RIGHTS ACT OF 1964. Title VI prohibits recipients
of federal financial assistance from discriminating on the basis of race,
color or national origin.
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<PAGE> 57
- TITLE IX OF THE EDUCATION AMENDMENTS OF 1972. Title IX prohibits
discrimination on the basis of gender by recipients of federal financial
assistance.
- SECTION 504 OF THE REHABILITATION ACT OF 1973. Section 504 prohibits
discrimination on the basis of disability by recipients of federal
financial assistance.
- AMERICANS WITH DISABILITIES ACT OF 1990. This act prohibits
discrimination in employment against a qualified individual with a
disability and requires that buildings, facilities and vehicles
associated with public services be accessible to individuals with
disabilities.
- AGE DISCRIMINATION ACT OF 1975. This act prohibits recipients of federal
financial assistance from discriminating on the basis of age.
- AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967. This act prohibits
discrimination on the basis of age in employment.
- EQUAL PAY ACT OF 1963. This act prohibits discrimination on the basis of
gender in the payment of wages.
- TITLE VII OF THE CIVIL RIGHTS ACT OF 1964. Title VII prohibits
discrimination on the basis of gender in employment.
DRUG-FREE WORKPLACE ACT OF 1988. The Drug-Free Workplace Act requires a
recipient of federal funds to certify that it provides a drug-free workplace. If
we violate the certification and reporting requirements of this act, then we
could be determined ineligible to receive federal funds.
STATE REGULATIONS. We are also subject to state statutory and regulatory
requirements in the states in which we operate. All states have standards for
the operation of schools concerning, for example, the length of the school year,
curriculum, hours of the school day, physical education and other areas. We
could be in violation of our management agreements with charter boards or school
districts if we fail to comply with these standards.
For more information on the effect of government laws and regulations on
our business, see "Risk Factors -- We rely on government funds for specific
education programs, and our business could suffer if we fail to comply with
rules concerning the receipt and use of the funds" and "-- We could be subject
to extensive government regulation because we benefit from federal funds, and
our failure to comply with government regulations could result in the reduction
or loss of federal education funds."
SECURITY
We believe our school design helps maintain order and security by
encouraging closer relationships between teachers, students and families. In
addition, we recently began to implement the following three-step program for
ensuring security at our schools:
- first, we have engaged a national school security consultant to oversee
the design and effectiveness of security at our schools;
- second, we have convened a security committee, consisting of school
administrators, superintendents, and security experts, to develop
detailed security procedures and standards for all Edison schools; and
- third, we are including security training module as part of the
leadership training for all principals.
HUMAN RESOURCES
As of June 30, 1999, we had 150 full-time headquarters employees. In
addition, 38 principals, approximately 1,300 teachers and approximately 900
members of administrative staff and management worked in our schools as of June
30, 1999.
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FACILITIES
Of our 79 schools, our 55 contract schools generally operate in existing
facilities provided by our school district clients, though we manage the
maintenance and operation of these facilities. Of our 55 contract schools, 15
are operated under a charter held by a public school district which provides a
facility.
Significant real estate investments are often necessary when we establish a
charter school for a charter board and existing facilities are not available.
These investments are generally either made by the charter board or by us, and
we work closely with the charter board to locate, develop and finance the
charter school's facilities. A suitable location often needs to be found prior
to completing a charter application for a particular jurisdiction. The building
or renovation process generally lasts at least several months and can vary
widely in expense from minimal upgrades to new construction, which can cost from
$4.0 million to more than $8.0 million. Innovative financing methods are often
needed to compensate for the limited amount of state and local funding available
to develop charter school facilities and we have employed a variety of
approaches, including owning or leasing the building, advancing funds for the
building to the charter board with various repayment terms, or having the
charter board directly own or lease the facility, sometimes assisted by a
subordinated loan from us. We also consider providing guarantees to lending
institutions to allow the charter board flexibility in obtaining financing. We
intend to develop tax-exempt financing structures for charter boards and expand
our relationships with real estate investment trusts to provide additional
potential sources of financing for charter boards.
Our executive offices are located in New York, New York in a leased
facility consisting of approximately 38,000 square feet.
COMPETITION
We have few direct competitors. We believe the companies that are most
similar to us in terms of corporate strategy focus primarily or exclusively on
operating charter schools, rather than contracting with school districts. These
companies include Advantage Schools, Beacon Education Management, Charter
Schools USA, The Leona Group, National Heritage Academy and SABIS Educational
Systems. In addition, there are at least two companies that operate private
schools with plans for charter schools. The TesseracT Group is currently
managing one charter school and has been awarded several more charters. Nobel
Learning Communities was recently awarded its first charter to operate a school
in Pennsylvania. In addition, other private school operators, post-secondary
education providers or child care providers could possibly enter our market. For
example, Bright Horizons Family Solutions, a provider of corporate sponsored
child care, just opened its first private school and it or other child care
providers could seek opportunities in the charter or contract schools market as
well.
LEGAL PROCEEDINGS
We are involved in various legal proceedings from time to time incidental
to the conduct of our business. We currently believe that any ultimate liability
arising out of such proceedings will not have a material adverse effect on our
financial condition or results of operations.
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<PAGE> 59
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of September 30,
1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
H. Christopher Whittle.................... 52 President, Chief Executive Officer and
Director
Benno C. Schmidt, Jr...................... 57 Chairman of the Board of Directors
Christopher D. Cerf....................... 44 Chief Operating Officer and General
Counsel
James L. Starr............................ 36 Chief Financial Officer and Executive Vice
President
John E. Chubb, Ph.D....................... 45 Chief Education Officer and Executive Vice
President
Laura K. Eshbaugh(1)...................... 51 Executive Vice President and Director
Michael Finnerty.......................... 55 Executive Vice President of Schools
Deborah M. McGriff, Ph.D.................. 50 Executive Vice President of Development
Manuel Rivera, Ed.D....................... 47 Executive Vice President of Development
Donald Sunderland......................... 49 Chief Information Officer and Executive
Vice President
Virginia G. Bonker(1)..................... 35 Director
John W. Childs(2)......................... 58 Director
Ramon C. Cortines(3)...................... 62 Director
Charles J. Delaney........................ 39 Director
Robert Finzi(2)........................... 45 Director
John B. Fullerton(1)...................... 39 Director
Janet A. Hickey(1)........................ 54 Director
Klas Hillstrom(1)......................... 33 Director
Bert Kolde................................ 45 Director
Jeffrey T. Leeds(2)....................... 43 Director
Brian P. Mathis........................... 33 Director
William F. Weld(3)........................ 54 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Messrs. Cortines and Weld will become directors effective on October 7,
1999.
Set forth below is certain information regarding the professional
experience for each of the above-named persons.
H. Christopher Whittle, Edison's founder, has served as President since
March 1997 and as Chief Executive Officer since July 1998. He has served as a
director since 1992 and also served as our Chairman of the Board of Directors
from 1992 until March 1995. He is the President and sole stockholder of WSI Inc.
WSI Inc. is a corporation wholly owned by Mr. Whittle whose current primary
purpose is to hold Mr. Whittle's personal investments. From 1986 to 1994, Mr.
Whittle was Chairman and Chief Executive Officer of Whittle Communications L.P.,
which developed magazines and other print publications as well as Channel One,
an advertising-supported daily news and information television program for
schools. Before that, Mr. Whittle was the founder of 13-30 Corporation, the
predecessor of Whittle Communications L.P., and served as the publisher of
Esquire magazine from 1979 to 1986.
Benno C. Schmidt, Jr. has served as Chairman of the Board of Directors
since March 1997. He also served as our Chief Executive Officer from 1992 to
June 1998, our President from 1992 to February 1997 and our Chief Education
Officer from July 1998 through April 1999. Mr. Schmidt served as President of
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<PAGE> 60
Yale University from 1986 to 1992. He also served as Dean of the Columbia
University School of Law from 1984 to 1986.
Christopher D. Cerf has served as General Counsel since June 1997 and as
Chief Operating Officer since May 1999. Prior to joining us, he was a partner in
the law firm of Wiley, Rein and Fielding from May 1996 to June 1997. Between
1994 and April 1996, he served in the White House as Associate Counsel to the
President. Mr. Cerf is also a former high school history teacher.
James L. Starr has served as Chief Financial Officer and Executive Vice
President since April 1998. Prior to joining us, he served as Senior Vice
President and Chief Financial Officer of Sierra Health Services, Inc., a health
services company, from August 1994 to April 1998. From 1989 to August 1994, he
served as Sierra's Director of Finance and Controller. Prior to that, Mr. Starr
was a senior accountant at Deloitte and Touche. He is a certified public
accountant.
John E. Chubb has served as Chief Education Officer and Executive Vice
President since May 1999. Prior to that, he served as Executive Vice President
of Curriculum, Instruction and Assessment from 1992 to April 1999.
Laura K. Eshbaugh has served in a variety of roles since joining us at our
inception in 1992, most recently serving as Executive Vice President since July
1998. She has been a director since 1992. From 1989 to September 1994, Ms.
Eshbaugh served as Vice Chairman of Whittle Communications L.P.
Michael Finnerty has served as Executive Vice President of Schools since
April 1998. He also served as our Chief Financial Officer from our founding in
1992 to April 1998. Prior to joining us, he was Vice President for Finance and
Administration at Yale University. Before joining Yale, Mr. Finnerty was
Director of the Budget for the State of New York and chief financial and
economic advisor to Governor Mario M. Cuomo. He earlier served as Chief of Staff
to New York Governor Hugh L. Carey.
Deborah M. McGriff has served as Executive Vice President of Development
since February 1998. From November 1993 to February 1998, she served as our
Senior Vice President of Charter School Development. Before joining us, she was
General Superintendent of the Detroit public schools. Ms. McGriff earlier served
as Assistant Superintendent in Cambridge, Massachusetts and Deputy
Superintendent in Milwaukee, Wisconsin.
Manuel Rivera has served as Executive Vice President of Development since
February 1998. Prior to that, Mr. Rivera served as Executive Vice President and
Director of Schools from July 1994 to February 1998. From 1991 to 1994, he
served as Superintendent of the Rochester public schools.
Donald Sunderland has served as Chief Information Officer and Executive
Vice President since January 1999. He previously served as Managing Director and
Head of Global Technology for Fixed Income and FX Derivatives at the Union Bank
of Switzerland from October 1995 to September 1998. Prior to that time, from
July 1994 to August 1995, he served as Head of Global Technology for Sumitomo
Bank Capital Markets.
Virginia G. Bonker has served as a director since November 1996. She has
been a partner with Blue Rock Capital L.P., a private investment firm, since
August 1995. From 1988 until August 1995, Ms. Bonker was a Vice President with
the Sprout Group, a division of DLJ Capital Corporation, which is a wholly-owned
subsidiary of Donaldson, Lufkin & Jenrette Inc.
John W. Childs has served as a director since November 1996. He has served
as President of J.W. Childs Associates L.P., a private investment firm, since
June 1995. Mr. Childs was previously a Senior Managing Director at Thomas H. Lee
Co., a private investment firm, from 1987 to June 1995.
Ramon C. Cortines will become a director effective October 7, 1999. He has
served as Director of the Pew Network for Standard Space Reform at Stanford
University since July 1996 and a senior advisor to the Secretary of Education of
the U.S. Department of Education since November 1995. From February 1999 to June
1999, Mr. Cortines was a lecturer on education with Harvard University. From
January 1998 to October 1998, he served as the Interim Director of the Annenberg
Institute at Brown University.
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Mr. Cortines served as the Acting Assistant Secretary for Educational Research
and School Improvement at the U.S. Department of Education from March 1997 to
August 1997. From November 1993 to October 1995, he served as the Chancellor of
the New York City Public Schools. Mr. Cortines serves on the Board of Directors
of Scholastic Corporation.
Charles J. Delaney has served as a director since July 1999. Mr. Delaney
has served as President of UBS Capital LLC since 1989. UBS Capital LLC is
affiliated with UBS AG. Mr. Delaney serves on the Board of Directors of Aurora
Foods, Inc.
Robert Finzi has served as a director since March 1995. He has been a
general partner of the Sprout Group since May 1991. The Sprout Group is a
division of DLJ Capital Corporation, which is a wholly-owned subsidiary of
Donaldson, Lufkin & Jenrette Inc. Mr. Finzi serves on the Boards of Directors of
Interdent, Inc. and Phase Metrics Inc. The Sprout Group, DLJ Capital Corporation
and Donaldson, Lufkin & Jenrette Inc. are affiliated with Donaldson, Lufkin &
Jenrette Securities Corporation, an underwriter of this offering.
John B. Fullerton has served as a director since January 1998. He has been
a managing director at J.P. Morgan Capital Corporation and J.P. Morgan
Investment Corporation since 1991. J.P. Morgan Capital Corporation and J.P.
Morgan Investment Corporation are affiliated with J.P. Morgan Securities Inc.,
an underwriter of this offering.
Janet A. Hickey has served as a director since March 1995. She has been a
general partner of the Sprout Group and a Senior Vice President of DLJ Capital
Corporation since 1986. Ms. Hickey serves on the Board of Directors of Corporate
Express, Inc. The Sprout Group and DLJ Capital Corporation are affiliated with
Donaldson, Lufkin & Jenrette Securities Corporation, an underwriter of this
offering.
Klas Hillstrom has served as a director since January 1998. Mr. Hillstrom
has served as Senior Investment Manager with Investor International (U.S.) Inc.
since February 1999. From February 1995 to January 1999, Mr. Hillstrom served as
Senior Investment Manager of Investor UK Ltd., and as President of Investor U.K.
Ltd. from January 1998 to February 1999. Prior to February 1995, Mr. Hillstrom
served as an Investment Manager with Investor AB.
Bert Kolde has served as a director since July 1999. Mr. Kolde has served
as Vice President of Vulcan Ventures Incorporated since 1994. Vulcan Ventures
Incorporated is the majority stockholder of APEX Online Learning Inc. Mr. Kolde
serves on the Boards of Directors of Asymetrix Learning Systems, Inc.,
Beyond.com Corporation, CyberSource Corporation and MetaCreations Corporation.
Jeffrey T. Leeds has served as a director since November 1996. He has been
a principal of Leeds Associates L.L.C., a private investment firm, since April
1999. He has also been a principal of Advance Capital Management L.L.C., a
private investment firm, since November 1995, and has served as President of
Leeds Group Inc., an investment banking firm, since January 1993. Mr. Leeds
serves on the Board of Directors of Elsinore Corporation.
Brian P. Mathis has served as a director since July 1999. Mr. Mathis has
served as a Vice President of J.P. Morgan Capital Corporation and J.P. Morgan
Investment Corporation since July 1999. He was a Vice President with J.P. Morgan
Securities Inc. from January 1999 to July 1999 and an associate from August 1995
to December 1998. From 1993 to August 1995, Mr. Mathis held various positions in
the U.S. Treasury Department. J.P. Morgan Capital Corporation and J.P. Morgan
Investment Corporation are affiliated with J.P. Morgan Securities Inc., an
underwriter of this offering.
William F. Weld will become a director effective October 7, 1999. He has
been a partner with the law firm of McDermott, Will & Emory since November 1997.
From January 1991 to July 1997, Mr. Weld served as the Governor of the
Commonwealth of Massachusetts. Mr. Weld serves on the Boards of Directors of
Affiliated Managers Group, Inc. and NovaCare Employee Services, Inc.
See "Related Party Transactions" and "Principal Stockholders" for certain
information concerning Edison's directors and executive officers.
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<PAGE> 62
One of our investors has the right to attend meetings of our Board of
Directors. This right can be terminated by our board at any time.
ELECTION OF DIRECTORS
Our Board of Directors currently consists of 15 directors. Beginning with
the first annual meeting of stockholders occurring after the closing of this
offering, which we expect to occur in the fall of 2000, the number of directors
on our Board of Directors will be fixed at 11. At that meeting, the holders of
class A common stock will be entitled, as a separate class, to elect seven of
the 11 directors and the holders of class B common stock will be entitled, as a
separate class, to elect the remaining four directors. Holders of both class A
common stock and class B common stock will have cumulative voting rights in the
election of directors. For more information concerning cumulative voting rights,
see "Description of Capital Stock -- Common Stock."
Each executive officer serves at the discretion of the Board of Directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of the directors or executive officers of Edison. Edison's charter and
bylaws do not require that the Board of Directors include independent directors.
However, The Nasdaq Stock Market requires us to include two independent
directors on the Board of Directors.
Many of our current directors were elected to the board under rights held
by the various classes of our existing stock. These rights, which will terminate
upon completion of this offering, are as follows:
- The holder of the share of series B common stock was entitled prior to
the offering to elect five representatives to the Board of Directors; Mr.
Whittle, Mr. Cortines, Ms. Eshbaugh, Mr. Delaney and Mr. Weld were elected
as the representatives of the holder of series B common stock.
- Holders of the shares of series C common stock, series D common stock and
series G common stock were each entitled, prior to the offering, to elect
two representatives to the Board of Directors; Ms. Hickey and Mr. Finzi
were elected as the representatives of the holder of series C common
stock, Mr. Childs was elected as the representative of holder of series D
common stock and Mr. Fullerton and Mr. Mathis were elected as the
representatives of the holder of series G common stock.
- Holders of the share of series E common stock, series F common stock,
series H common stock and series I common stock were entitled prior to the
offering to each elect one representative to the Board of Directors; Ms.
Bonker was elected as the representative of the holder of series E common
stock, Mr. Leeds was elected as the representative of the holder of series
F common stock, Mr. Hillstrom was elected as the representative of the
holder of series H common stock and Mr. Kolde was elected as the
representative of the holder of series I common stock.
- A majority of the directors elected by the holders of the series B common
stock, series C common stock, series D common stock, series E common
stock, series F common stock, series G common stock, series H common stock
and series I common stock were entitled prior to the offering to elect one
representative to the Board of Directors; Mr. Schmidt was elected as the
representative of these directors.
COMPENSATION OF DIRECTORS
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the Board of Directors. We may, in our discretion, grant
stock options and other equity awards to our non-employee directors from time to
time pursuant to our 1999 Stock Incentive Plan. Other equity awards could
include stock appreciation rights, which represent the right to receive any
excess in value of the shares of class A common stock over the exercise price;
restricted stock awards, which entitle recipients to acquire shares of class A
common stock, subject to our right to repurchase all or part of such shares at
their purchase price in the event that the conditions specified in the award are
not satisfied; and unrestricted stock awards, which represent grants of shares
to participants free of any restrictions under this plan. For more information
on this plan, see "-- Benefit Plans -- 1999 Stock Incentive Plan." We have not
yet determined the amount and timing of such grants or awards. No director who
is an employee of Edison receives separate compensation for services rendered as
a director.
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BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Board of Directors selects the members of these committees.
The number of directors on these committees is not fixed and there is no
requirement that any members of these committees be independent. The
Compensation Committee, which will consist of Mr. Childs, Mr. Finzi and Mr.
Leeds following this offering, reviews executive salaries, administers our
bonus, incentive compensation and stock plans, and approves the salaries and
other benefits of our executive officers. In addition, the Compensation
Committee consults with our management regarding our pension and other benefit
plans and compensation policies and practices.
The Audit Committee, which will consist of Ms. Bonker, Ms. Eshbaugh, Mr.
Fullerton, Ms. Hickey and Mr. Hillstrom following this offering, reviews the
professional services provided by our independent accountants, the independence
of such accountants from our management, our annual financial statements and our
system of internal accounting controls. The Audit Committee also reviews such
other matters with respect to our accounting, auditing and financial reporting
practices and procedures as it may find appropriate or may be brought to its
attention.
EXECUTIVE COMPENSATION
The table below sets forth, for the year ended June 30, 1999, the total
compensation earned by our President and Chief Executive Officer and each of the
four other most highly compensated executive officers who received annual
compensation in excess of $100,000 for the year ended June 30, 1999. In
accordance with the rules of the Securities and Exchange Commission the
compensation set forth in the table below does not include medical, group life
or other benefits which are available to all of our salaried employees, and
perquisites and other benefits, securities or property which do not exceed the
lesser of $50,000 or 10% of the person's salary and bonus shown in the table. In
the table below, columns required by the regulations of the Securities and
Exchange Commission have been omitted where no information was required to be
disclosed under those columns.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- -------- ------- ---------------
<S> <C> <C> <C>
H. Christopher Whittle.................................. $296,636 $ -- $ 2,762(1)
President and Chief Executive Officer
Benno C. Schmidt, Jr.(2)................................ 296,636 -- 14,760(3)
Chairman of the Board of Directors
Christopher D. Cerf..................................... 225,631 50,000 500(3)
Chief Operating Officer and General Counsel
James L. Starr.......................................... 225,000 40,000 13,000(4)
Chief Financial Officer and Executive Vice President
John E. Chubb........................................... 225,000 40,000 500(3)
Chief Education Officer and Executive Vice President
</TABLE>
- ---------------
(1) Represents fees paid to WSI Inc. pursuant to its management agreement with
Edison. Mr. Whittle is the President and sole stockholder of WSI Inc. For
more information on the management agreement, see "Related Party
Transactions -- Managements Agreement with WSI Inc."
(2) Mr. Schmidt's compensation does not include accrued interest relating to
loans to Mr. Schmidt from Edison. For more information on these loans, see
"Related Party Transactions -- Loans to Executive." This interest is not due
until the earlier of February 15, 2002 or the termination of Mr. Schmidt's
employment with us.
(3) Represents 401k matching contributions and/or life insurance premiums paid
on behalf of the executive.
(4) Represents a payment of $12,500 made pursuant to a relocation arrangement
and 401k matching contributions.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the year
ended June 30, 1999 to the named executive officers. We amended during fiscal
1999 options previously granted to some of these executives, and these options
are not reflected in this table. For more information on these amendments, see
"Related Party Transactions -- Option Amendments."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM(3)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------------
GRANTED(1) IN FISCAL YEAR PER SHARE(2) DATE 5% 10%
---------- ---------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
H. Christopher
Whittle............... 500,000 40.4% $22.00 6/2009 $10,017,702 $15,951,516
Benno C. Schmidt........ -- -- -- -- -- --
Christopher D.
Cerf(4)............... 338,000 27.3 12.30 6/2009 6,771,967 10,783,225
James L. Starr(5)....... 37,500 3.0 12.30 6/2009 751,328 1,196,364
John E. Chubb........... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Of the securities indicated as underlying options granted, 90% were shares
of class A common stock and 10% were shares of class B common stock.
(2) These options were granted with an exercise price equal to the fair market
value of our common stock on the date of grant as determined by our board of
directors.
(3) The 5% and 10% assumed annual rates of compound stock price appreciation are
prescribed by the rules and regulations of the Securities and Exchange
Commission and do not represent our estimate or projection of the future
trading prices of our class A common stock. There can be no assurance that
the actual stock price appreciation over the ten-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Actual gains,
if any, on stock option exercises are dependent on numerous factors,
including our future performance, overall market conditions and the option
holder's continued employment with us throughout the entire vesting period
and the option term, which factors are not reflected in this table. The
potential realizable value is calculated by multiplying the fair market
value per share of the class A common stock on the date of grant as
determined by the board of directors, which is equal to the exercise price
per share, by the stated annual appreciation rate compounded annually for
the option term, subtracting the exercise price per share from the product,
and multiplying the remainder by the number of shares underlying the option
granted.
(4) This option vests over ten years, subject to acceleration.
(5) This option is fully vested.
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FISCAL YEAR-END OPTION VALUES
The table below sets forth information for each of the named executive
officers with respect to the value of options outstanding as of June 30, 1999:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END(1) AT FISCAL YEAR-END
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
H. Christopher Whittle(2)............... 1,710,056 3,839,944 $ 6,742,500 $ --
Benno C. Schmidt, Jr. .................. 498,964 244,592 4,889,847 2,334,502
Christopher D. Cerf..................... 162,500 338,000 1,511,250 --
James L. Starr.......................... 101,874 73,126 276,808 314,442
John E. Chubb........................... 146,433 33,977 1,435,043 332,975
</TABLE>
- ---------------
(1) Of the shares indicated as being exercisable under these options, 90% were
class A common stock and 10% were class B common stock.
(2) Includes options held by WSI Inc., a corporation of which Mr. Whittle is the
President and sole stockholder.
There was no public trading market for our common stock as of June 30,
1999. Accordingly, as permitted by the rules of the Securities and Exchange
Commission, the value of unexercised in-the-money options at fiscal year-end has
been calculated on the basis of the fair market value of our common stock as of
June 30, 1999 of $12.30 per share, as determined by the Board of Directors, less
the aggregate exercise price.
EMPLOYMENT AGREEMENTS
Edison and H. Christopher Whittle entered into an agreement in March 1997,
which was later amended in December 1997 and July 1999, in which we agreed to
employ Mr. Whittle until July 2004, with an annual base salary of $276,000 and
subject to annual increases of 8% or more for successful achievement of our
fiscal year business plan. Mr. Whittle's salary for fiscal 1999 was $296,636.
Under this agreement, beginning in fiscal year 1998, Mr. Whittle became eligible
to receive an annual bonus of up to 50% of his current base salary. We also
agreed to maintain long-term disability insurance and term life insurance in the
amount of $800,000 for Mr. Whittle's benefit. If we terminate Mr. Whittle's
employment without cause, Mr. Whittle will receive as severance pay his then
current base salary and his maximum permitted bonus for the then current year
for two years following the effective date of his termination. If we terminate
Mr. Whittle for cause, he is entitled to receive his base salary only through
the effective date of termination. If Mr. Whittle terminates the relationship
without "good reason," he is entitled to receive his then current base salary
for twelve months following the effective date of his termination less any
amount he earns as a result of new employment. Under this agreement, "good
reason" is defined as Mr. Whittle's assignment to materially less significant
duties, our failure to reappoint Mr. Whittle to his then current position or our
failure to perform our material obligations under this agreement. Mr. Whittle
has agreed not to compete against us during the term of his employment and for
one year thereafter.
Edison and Benno C. Schmidt, Jr. entered into an agreement in March 1997,
which was later amended in December 1997, in which we agreed to employ Mr.
Schmidt until June 2000, with an annual base salary of $255,000 and subject to
annual increases of 8% or more for successful achievement of our fiscal year
business plan. Mr. Schmidt's salary for fiscal 1999 was $296,636. In fiscal
1997, Mr. Schmidt was eligible to receive an annual bonus of up to one-third of
his base salary and, beginning in fiscal 1998, Mr. Schmidt became eligible to
receive an annual bonus of up to 50% of his current base salary. We also agreed
to maintain term life insurance in the amount of $5.0 million for Mr. Schmidt's
benefit.
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<PAGE> 66
Mr. Schmidt's termination provisions in this agreement are the same as Mr.
Whittle's described above, except we have also agreed to pay Mr. Schmidt a lump
sum of $2.5 million if he is terminated for any reason except death, though this
amount may be used to offset any outstanding balance on two loans we have made
to Mr. Schmidt. We also agreed to purchase from Mr. Schmidt the minimum amount
of Edison stock necessary to provide Mr. Schmidt with enough money to pay the
taxes associated with the lump sum payment. We will be unable to claim a
deduction for a portion of this lump sum if we pay the lump sum to Mr. Schmidt
in connection with the termination of his employment due to a change in control
of Edison. For more information on our loans to Mr. Schmidt, see "Related Party
Transactions -- Loans to Executive." Mr. Schmidt has agreed not to compete
against us during the term of his employment and for one year thereafter.
Edison and Christopher D. Cerf entered into an agreement in June 1997,
which was amended in July 1999, in which we agreed to employ Mr. Cerf until June
2002, with an annual base salary of $240,000. The agreement is annually
renewable for successive one-year terms. Mr. Cerf is entitled to a bonus of up
to 50% of his base salary based on our achievement of specified academic and
financial performance goals. Mr. Cerf will receive a relocation assistance
payment of up to $50,000 if he is required to relocate to New York City. Edison
also agreed to maintain long-term disability insurance and term life insurance
in the amount of $800,000 for Mr. Cerf's benefit. If Mr. Cerf is terminated
without cause, he is entitled to receive his base salary for twelve months
following the effective date of his termination less any amount he earns during
the last six months of this period as a result of new employment. If Mr. Cerf is
terminated for cause, he is entitled to receive his base salary only through the
effective date of termination. Mr. Cerf has agreed not to compete against us
during his term of employment and for one year thereafter.
Edison and James L. Starr entered into an agreement in April 1998, in which
we agreed to employ Mr. Starr until April 2001 at an annual base salary of
$225,000. The agreement automatically renews for successive one-year terms. Mr.
Starr is eligible to receive a bonus of up to 33% of his base salary each fiscal
year based upon the reasonable achievement of annual objectives, as well as an
additional $12,500 bonus on each of the first four anniversaries of his
employment. Mr. Starr received relocation expense reimbursement upon his
relocation to the New York City area. We also agreed to maintain long-term
disability insurance and term life insurance in the amount of $300,000 for Mr.
Starr's benefit. If Mr. Starr is terminated without cause, he is entitled to
receive his base salary for six months following the effective date of his
termination. If Mr. Starr is terminated for cause, he is entitled to receive his
base salary only through the effective date of his termination. Mr. Starr has
agreed not to compete against us during the term of his employment and for one
year thereafter.
Edison and John E. Chubb entered into an agreement in March 1995, in which
we agreed to employ Mr. Chubb with an annual base salary of $200,000. Mr.
Chubb's salary for fiscal 1999 was $225,000. This agreement also provided for a
one-time cash transition payment of $110,000 to Mr. Chubb. If Mr. Chubb is
terminated without cause, he is entitled to receive as severance pay his base
salary for six months following the effective date of his termination less any
amount he earns as a result of new employment. If Mr. Chubb is terminated for
cause, he is entitled to receive his base salary only through the effective date
of termination. Mr. Chubb has agreed not to compete against us during his term
of employment and for one year thereafter.
BENEFIT PLANS
1998 SITE OPTION PLAN
Our 1998 Site Option Plan provided for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986 and
nonstatutory stock options. Options under this plan could be granted to all
persons who were performing services at an Edison school and were considered our
employees. As of June 30, 1999, options to purchase 617,850 shares of class A
common stock and 68,689 shares of class B common stock were outstanding under
this plan. Following this offering, the Board of Directors has provided that no
additional grants or awards will be made under this plan.
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<PAGE> 67
1999 STOCK OPTION PLAN
Our 1999 Stock Option Plan provided for the grant of incentive stock
options and nonstatutory stock options. Options under this plan could be granted
to all of our employees except senior executives. As of June 30, 1999, options
to purchase 271,350 shares of class A common stock and 30,150 shares of class B
common stock were outstanding under this plan. Following this offering, the
Board of Directors has provided that no additional grants or awards will be made
under this plan.
1999 KEY STOCK INCENTIVE PLAN
Our 1999 Key Stock Incentive Plan provided for the grant of a variety of
stock-based awards to our senior executives, officers and directors, though only
incentive stock options and nonstatutory stock options were granted under this
plan. As of June 30, 1999, options to purchase 55,800 shares of class A common
stock and 6,200 shares of class B common stock were outstanding under this plan.
Following this offering, the Board of Directors has provided that no additional
grants or awards will be made under this plan.
1999 STOCK INCENTIVE PLAN
Our 1999 Stock Incentive Plan was adopted in October 1999. Under this plan,
a variety of stock-based awards may be granted to our officers, employees,
directors, consultants and advisors, as well as those of our subsidiaries.
Principals and teachers are also eligible to participate in this plan. The Board
of Directors has authorized the Compensation Committee to administer this plan.
While we currently anticipate that most grants under this plan will consist of
incentive stock options or nonstatutory stock options, we could also grant other
stock-based awards, including stock appreciation rights, which represent the
right to receive any excess in value of the shares of class A common stock over
the exercise price; restricted stock awards, which entitle recipients to acquire
shares of class A common stock, subject to our right to repurchase all or part
of such shares at their purchase price in the event that the conditions
specified in the award are not satisfied; or unrestricted stock awards, which
represent grants of shares to participants free of any restrictions under this
plan. Options or other awards that are granted under this plan but expire
unexercised are available for future grants. We can issue up to 2,500,000 shares
of class A common stock under this plan. We are not authorized to issue class B
common stock under this plan. No options or other awards have been granted under
this plan.
401(k) PLAN
We have an employee savings and retirement plan qualified under Section 401
of the Internal Revenue Code and covering all of our employees. Pursuant to the
401(k) plan, employees may elect to reduce their current compensation by up to
the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) plan. We may make matching or additional contributions
to the 401(k) plan in our discretion. Participants become fully vested in our
matching contribution after one year. We contributed to the 401(k) plan
approximately $9,000 in fiscal 1996, $19,000 in fiscal 1997, $29,000 in fiscal
1998 and $62,876 in fiscal 1999.
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RELATED PARTY TRANSACTIONS
LOANS TO EXECUTIVE
Mr. Schmidt borrowed $1.6 million from us on June 5, 1992 and $200,000 from
us on January 23, 1996, as evidenced by promissory notes. The promissory notes
were amended in October 1999 to provide that they bear interest at a rate equal
to the prime rate in effect from time to time, and that all principal and
accrued interest is due on the earlier of February 15, 2002 or the termination
of Mr. Schmidt's employment with us. Prior to this amendment, the notes bore
interest at an annual compound rate of 5.83% and all principal and accrued
interest payable under the notes was due on the earlier of February 15, 2000 or
the termination of Mr. Schmidt's employment with us. The loans are non-recourse
and are secured by a life insurance policy on Mr. Schmidt. The amount due from
Mr. Schmidt under this loan may be offset by us against the amount owed by us to
Mr. Schmidt under his severance agreement. The loans do not require periodic
interest or principal payments, and Mr. Schmidt has not made any payments of
interest or principal to date. The balance of principal and interest outstanding
under these loans was $1.8 million and $340,856, respectively, as of June 30,
1999. Mr. Schmidt is our Chairman of the Board of Directors. Prior to the March
1997 amendment, we forgave accrued interest of $100,000 annually on the loans
beginning on July 1, 1995 and ending on the date of the amendment.
MANAGEMENT AGREEMENT WITH WSI INC.
On March 15, 1995, we entered into a five-year management agreement with
WSI Inc. to provide us with professional services, including those of Mr.
Whittle, and cover all related expenses for a fixed annual fee of $275,000, paid
monthly. WSI beneficially owns 1,533,934 shares of our class A common stock and
170,443 shares of our class B common stock. In November 1996, a lump sum payment
of $500,000 was made to WSI in lieu of all further fixed fee payments. The
agreement was amended March 1, 1997 to provide only for the payment of fees and
expenses specifically approved by our Board of Directors. Under this agreement,
we paid WSI $141,400 in fiscal 1996, $867,619 in fiscal 1997, $65,123 in fiscal
1998 and $2,762 in fiscal 1999. These payments represent reimbursements of Mr.
Whittle's and WSI's expenses incurred in connection with marketing efforts on
behalf of Edison, including staff, office, travel and secretarial expenses,
during the period from March 1995 to March 1997 when he was not an employee of
Edison. We no longer pay WSI for Mr. Whittle's services. Pursuant to this
agreement, WSI was also granted options to purchase 382,500 shares of class A
common stock and 42,500 shares of class B common stock at an exercise price of
$20.00 per share and 450,000 shares of class A common stock and 50,000 shares of
class B common stock at an exercise price of $40.00 per share. Mr. Whittle, our
President and Chief Executive Officer and one of our directors, is also the
President and sole stockholder of WSI. See "-- Option Amendments" below for a
discussion of subsequent amendments to these options.
OPTION AMENDMENTS
In June 1999, we amended substantially all of our then-existing employee
stock options to, among other things, (1) extend the exercise period through the
tenth anniversary of the date of grant, (2) eliminate provisions prohibiting
transfers of the shares purchased upon exercise and (3) eliminate provisions
requiring exercise only in full and only on the first day of our fiscal year.
Among the options amended were the following options held by our executives:
<TABLE>
<CAPTION>
OPTION OPTION PRICE CLASS A COMMON CLASS B COMMON
NAME GRANT DATE PER SHARE STOCK PURCHASABLE STOCK PURCHASABLE
---- ---------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
H. Christopher Whittle..... 3-1-97 $3.00 270,000 30,000
12-15-97 3.00 382,500 42,500
Benno C. Schmidt, Jr. ..... 3-15-95 2.50 556,700 61,856
12-15-97 3.00 112,500 12,500
Christopher D. Cerf........ 6-15-97 3.00 146,250 16,250
James L. Starr............. 4-20-98 8.00 123,750 13,750
John E. Chubb.............. 3-15-95 2.50 162,369 18,041
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
OPTION OPTION PRICE CLASS A COMMON CLASS B COMMON
NAME GRANT DATE PER SHARE STOCK PURCHASABLE STOCK PURCHASABLE
---- ---------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Laura K. Eshbaugh.......... 5-15-98 2.50 31,500 3,500
5-15-98 8.00 90,000 10,000
Michael Finnerty........... 3-15-95 2.50 185,567 20,619
Deborah M. McGriff......... 3-15-95 2.50 37,139 4,127
5-5-98 8.00 53,100 5,900
Manuel Rivera.............. 3-15-95 2.50 69,588 7,732
12-15-97 3.00 65,412 7,268
</TABLE>
With respect to the options of Mr. Whittle and Mr. Cerf shown above, we
also amended the options to provide that they were immediately fully vested.
Prior to this action, (1) Mr. Whittle's March 1997 option was vested as to 77%
of the shares, (2) Mr. Whittle's December 1997 option vested upon its tenth
anniversary, subject to acceleration upon an initial public offering at a price
of at least $16.00 per share, and (3) Mr. Cerf's option was vested as to 71% of
the shares.
In addition, we agreed with Mr. Whittle to lend him the total amount
required to purchase the shares upon exercise of his March 1997 option to
purchase 270,000 shares of class A common stock and 30,000 shares of class B
common stock at $3.00 per share and his December 1997 option to purchase 382,500
shares of class A common stock and 42,500 shares of class B common stock at
$3.00 per share and to pay any related income tax obligations. These loans would
bear interest at the greater of the prime rate or our actual borrowing rate in
effect from time to time and would become due in full on the fifth anniversary
of the loans.
In July 1999, we amended other options held by Mr. Whittle and WSI to,
depending upon the option, (1) extend the exercise period through the tenth
anniversary of the date of grant and (2) modify the vesting provisions. The
following table summarizes these amendments:
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON COMMON VESTING
OPTION STOCK STOCK EXERCISE ------------------------------------------------------------
GRANT DATE PURCHASABLE PURCHASABLE PRICE PRIOR AMENDED
- ---------- ----------- ----------- -------- ---------------------------- ----------------------------
<C> <C> <C> <C> <S> <C>
3-95 382,500 42,500 $20.00 100% 100%
3-95 450,000 50,000 40.00 90% 90%
12-97 675,000 75,000 16.00 10 years, subject to 10 years, subject to
acceleration if shares trade acceleration upon IPO or
at $32 change in control
12-97 1,125,000 125,000 32.00 10 years, subject to 10 years, subject to
acceleration if shares trade acceleration if shares trade
at $64 at $50 or higher for 90 days
or upon change in control
</TABLE>
In addition, the options which were not fully vested were amended to provide
that vesting accelerates fully, if our common stock is then trading at specified
levels, upon termination of Mr. Whittle's employment by Edison without cause or
by him with good reason, upon his death or disability or upon a change in
control of Edison.
After the June and July 1999 amendments, all of our then outstanding
employee stock options had been amended.
INVESTMENT IN APEX ONLINE LEARNING INC.
In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc. for $5.0 million. We are obligated to invest up to an additional
$5.0 million in APEX in the future, if a third party invests in APEX. Vulcan
Ventures Incorporated, one of our stockholders, is the majority stockholder of
APEX. Mr. Kolde, one of our directors, serves as Vice President of Vulcan as
well as Chairman of the Board of Directors of APEX. Vulcan owns 2,195,123 shares
of our class A common stock and 243,904 shares of our class B common stock.
Through its ownership of one share of series I common stock, Vulcan had the
right to elect one representative, Mr. Kolde, to our Board of Directors. This
right terminates upon completion of
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<PAGE> 70
this offering. For more information on our investment in APEX Online Learning
Inc., see "Risk Factors -- We must recognize a portion of any losses of APEX
Online Learning Inc." and "Business -- Relationship with APEX Online Learning
Inc."
STOCK PURCHASES BY AFFILIATES AND RELATED MATTERS
JULY 1996 FINANCING. In July 1996, DLJ Capital Corporation, Sprout Capital
VI, L.P., Sprout Capital VII, L.P. and Sprout CEO Fund, L.P., through a holding
company, made a $7.0 million capital contribution to Edison. Mr. Finzi and Ms.
Hickey, our directors, are also general partners of the Sprout Group. The Sprout
Group is a division of DLJ Capital Corporation, which is a wholly owned
subsidiary of Donaldson, Lufkin & Jenrette Inc. Sprout Capital VI, L.P., Sprout
Capital VII, L.P., and Sprout CEO Fund, L.P. are affiliated with the Sprout
Group. Also in July 1996, WEG L.P. made a $2,725,000 capital contribution to
Edison and WEG II L.P. made a $3,833,000 capital contribution to Edison. Mr.
Whittle, our President, Chief Executive Officer and a director, is the President
and sole stockholder of WSI Inc., which controls and is the general partner of
WEG L.P., WEG II L.P., WEG III L.P., WEG IV L.P., WEG V L.P., WEG VI L.P., WEG
VII L.P. and WPA Investment L.P.
CONVERSION FROM PARTNERSHIP TO CORPORATE FORM. In November 1996, we
converted our business from a partnership to a corporation. In connection with
this transaction, we issued shares of series A common stock and series A
convertible preferred stock in exchange for partnership interests. Upon
completion of this offering, each share of series A common stock and series A
convertible preferred stock will convert into 0.45 shares of class A common
stock and 0.05 shares of class B common stock.
Shares issued to affiliates upon conversion of partnership interests in
November 1996:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES OF
SHARES OF SERIES A SERIES A CONVERTIBLE
NAME OF INVESTOR COMMON STOCK PREFERRED STOCK
- ---------------- ------------------ --------------------
<S> <C> <C>
WSI Inc. .......................................... 814,177 2,770,822
WPA Investment L.P................................. 738,096 2,511,903
WEG L.P. .......................................... 1,110,605 3,779,629
WEG II L.P. ....................................... 666,459 2,268,103
Sprout Capital VI, L.P. ........................... 697,589 2,374,046
Sprout Capital VII, L.P. .......................... 1,327,524 4,517,851
DLJ Capital Corporation............................ 110,671 376,639
Sprout CEO Fund, L.P. ............................. 15,121 51,461
Blue Rock Capital, L.P. ........................... 84,113 286,256
Benno C. Schmidt, Sr. ............................. 205,944 700,873
John R. Schmidt.................................... 10,839 36,888
John W. Childs..................................... 216,783 737,761
</TABLE>
The shares listed above represented approximately 95% of the ownership of
the partnership at the time of conversion.
In this conversion from partnership to corporate form, WSI Inc. and WPA
Investment L.P., WEG L.P. and WEG II L.P., which are affiliates of WSI Inc.,
acquired an aggregate of 3,329,337 shares of series A common stock and
11,330,457 shares of series A convertible preferred stock, which represent 53.6%
of the shares of series A common stock and 53.6% of the shares of series A
convertible preferred stock issued in this transaction. In addition, Sprout
Capital VI L.P., Sprout Capital VII, L.P., DLJ Capital Corporation and Sprout
CEO Fund, L.P., each of which is affiliated with Donaldson, Lufkin & Jenrette
Inc., acquired an aggregate of 2,150,905 shares of series A common stock and
7,319,997 shares of series A convertible preferred stock, which represent 34.6%
of the shares of series A common stock and 34.6% of the shares of series A
convertible preferred stock issued in this transaction.
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<PAGE> 71
Mr. Whittle, our President, Chief Executive Officer and a director, is the
President and sole stockholder of WSI Inc., which controls and is the general
partner of WPA Investment L.P. Ms. Bonker, one of our directors, is a partner
with Blue Rock Capital, L.P. Benno C. Schmidt, Sr. is the father of Benno C.
Schmidt, Jr., who is our Chairman of the Board of Directors, and John R. Schmidt
is Benno C. Schmidt, Jr.'s brother. Mr. Childs is one of our directors.
NOVEMBER 1996 FINANCING. In November 1996, we entered into a financing
agreement with certain of our existing stockholders as well as several new
investors, which provided for the following:
- the sale of an aggregate of 9,144,442 shares of series A convertible
preferred stock on November 18, 1996 for a purchase price of $1.50 per
share for an aggregate sale price of $13,716,656;
- the sale of an aggregate of 5,201,135 shares of series C convertible
exchangeable preferred stock on May 1, 1997 for a purchase price of $2.90
per share for an aggregate sale price of $15,083,291;
- the sale of an aggregate of 1,010,101 shares of series B convertible
exchangeable preferred stock for $1.65 per share on February 28, 1997 for
an aggregate sale price of $1,666,666; and
- the sale of one share of series B common stock to WSI Inc., one share of
series C common stock to the Sprout Group, one share of series D common
stock to J.W. Childs Investments L.L.C., one share of series E common
stock to Blue Rock Capital, L.P. and one share of series F common stock
to Richmont Leeds Education Company LLC, each for $1.50 per share. The
shares of series C convertible exchangeable preferred stock issued in the
second installment were subject to price adjustment based on certain
performance criteria, and as a result, additional shares of series C
convertible exchangeable preferred stock were issued on December 18, 1997
for no additional consideration.
Upon completion of this offering, each share of series B convertible
exchangeable preferred stock, series C convertible exchangeable preferred stock,
series B common stock, series C common stock, series D common stock, series E
common stock and series F common stock will convert into 0.45 shares of class A
common stock and 0.05 shares of class B common stock.
The holders of the shares of series B common stock, series C common stock,
series D common stock, series E common stock and series F common stock had
rights to elect members of our Board of Directors. These rights, which will
terminate upon completion of this offering, are as follows:
- WSI, through its ownership of the share of series B common stock, was
entitled prior to the offering to elect five representatives to the Board
of Directors; Mr. Whittle, Mr. Cortines, Ms. Eshbaugh, Mr. Delaney and
Mr. Weld were elected as the representatives of the holder of series B
common stock.
- The Sprout Group, through its ownership of the share of series C common
stock, was entitled prior to the offering to elect two representatives to
the Board of Directors; Ms. Hickey and Mr. Finzi were elected as the
representatives of the holder of series C common stock.
- J.W. Childs Investments L.L.C., through its ownership of the share of
series D common stock, was entitled prior to the offering to elect two
representatives to the Board of Directors; Mr. Childs was elected as the
representative of the holder of series D common stock.
- Blue Rock Capital, L.P., through its ownership of the share of series E
common stock, was entitled prior to the offering to elect one
representative to the Board of Directors; Ms. Bonker was elected as the
representative of the holder of series E common stock; and
- Richmont Leeds Education Company LLC, through its ownership of the share
of series F common stock, was entitled prior to the offering to elect one
representative to the Board of Directors; Mr. Leeds was elected as the
representative of the holder of series F common stock.
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<PAGE> 72
Shares sold to affiliates in the first investment installment in November
1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF SERIES A
NAME OF INVESTOR CONVERTIBLE PREFERRED STOCK
- ---------------- ----------------------------
<S> <C>
Blue Rock Capital, L.P...................................... 666,666
Benno C. Schmidt, Sr........................................ 333,333
J.W. Childs Investments L.L.C............................... 4,000,000
Richmont Leeds Education Company LLC........................ 1,666,666
</TABLE>
Mr. Childs, one of our directors, is the managing member of J.W. Childs
Investments L.L.C. Mr. Leeds, one of our directors, is an affiliate of Richmont
Leeds Education Company LLC.
Shares sold to affiliates in the second investment installment in May 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
SERIES C
CONVERTIBLE EXCHANGEABLE
NAME OF INVESTOR PREFERRED STOCK
- ---------------- ------------------------
<S> <C>
WEG III L.P................................................. 919,540
Benno C. Schmidt, Sr........................................ 172,413
J.W. Childs Investments L.L.C............................... 2,068,965
Richmont Leeds Education Company LLC........................ 793,103
</TABLE>
Mr. Whittle, our President, Chief Executive Officer and a director, is the
President and sole stockholder of WSI Inc., which controls and is the general
partner of WEG III L.P.
Shares issued to affiliates upon the price adjustment in December 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
SERIES C
CONVERTIBLE EXCHANGEABLE
NAME OF INVESTOR PREFERRED STOCK
- ---------------- ------------------------
<S> <C>
WEG III L.P................................................. 186,960
Benno C. Schmidt, Jr........................................ 35,055
J.W. Childs Investments L.L.C............................... 420,661
Richmont Leeds Education Company LLC........................ 175,276
</TABLE>
In the transactions constituting this November 1996 financing, WEG III
L.P., which is affiliated with WSI Inc., purchased 1,010,101 shares of series B
convertible exchangeable preferred stock and 1,106,500 shares of series C
convertible exchangeable preferred stock. These amounts represent 100% of the
series B convertible exchangeable preferred stock and 17.7% of the series C
convertible exchangeable preferred stock issued in these transactions.
DECEMBER 1997 FINANCING. In December 1997, August 1998 and December 1998,
we raised an aggregate of $56,124,880 through the sale of units at a price of
$3.98 per unit to certain of our existing stockholders and several new
investors. Each unit consisted of the following:
- one share of series D convertible preferred stock; a promissory note in
the principal amount of $.114;
- two options each to purchase 0.019191 share of series A common stock
(known as the WSI A option and Tranche 1 option); and
- one option to purchase 0.028786 share of series A common stock (known as
the Tranche 2 option).
We also issued one share of series G common stock to J.P. Morgan Investment
Corporation and one share of series H common stock to Investor Investments AB
for $3.98 per share. Upon completion of this offering, each share of series D
convertible preferred stock, series G common stock and series H common stock
will convert into 0.45 shares of class A common stock and 0.05 shares of class B
common stock, and
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each option to purchase series A common stock will convert into an option to
purchase 0.45 shares of class A common stock and 0.05 shares of class B common
stock.
The holders of the shares of series G common stock and series H common
stock had rights to elect members of our Board of Directors. These rights, which
will terminate upon completion of this offering, are as follows:
- J.P. Morgan Investment Corporation, through its ownership of the share of
series G common stock, was entitled prior to the offering to elect two
representatives to the Board of Directors; Mr. Fullerton and Mr. Mathis
were elected as the representatives of the holder of series G common
stock; and
- Investor Investments AB, through its ownership of the share of series H
common stock, was entitled prior to the offering to elect one
representative to the Board of Directors; Mr. Hillstrom was elected as
the representative of the holder of series H common stock.
Shares sold to affiliates in the first investment installment in December
1997:
<TABLE>
<CAPTION>
NUMBER OF WSI A TRANCHE 1 TRANCHE 2
SHARES OPTIONS TO OPTIONS TO OPTIONS TO
OF SERIES D PURCHASE PURCHASE PURCHASE PRINCIPAL
CONVERTIBLE SERIES A SERIES A SERIES A AMOUNT OF
PREFERRED COMMON COMMON COMMON PROMISSORY
NAME OF INVESTOR STOCK STOCK STOCK STOCK NOTES
- ---------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
WEG III L.P......................... 150,753 2,893 2,893 4,339 $ 17,217
WEG IV L.P.......................... 903,015 17,329 17,329 25,994 103,136
J.P. Morgan Investment
Corporation....................... 1,909,547 36,646 36,646 54,968 216,095
Sixty Wall Street SBIC Fund, L.P.... 100,502 1,928 1,928 2,893 11,478
Investor Investments AB............. 2,010,050 38,574 38,574 57,861 229,573
Richmont Leeds Education Company
LLC............................... 535,233 10,271 10,271 15,407 38,777
</TABLE>
Mr. Whittle, our President, Chief Executive Officer and a director, is the
President and sole stockholder of WSI Inc., which controls and is the general
partner of WEG IV L.P. Mr. Fullerton and Mr. Mathis, our directors, are officers
of J.P. Morgan Capital Corporation. J.P. Morgan Investment Corporation and Sixty
Wall Street SBIC Fund, L.P. are affiliated with J.P. Morgan Capital Corporation.
Mr. Hillstrom, one of our directors, is an officer of Investor Investments AB.
Shares sold to affiliates in the second investment installment in August
1998:
<TABLE>
<CAPTION>
NUMBER OF WSI A TRANCHE 1 TRANCHE 2
SHARES OPTIONS TO OPTIONS TO OPTIONS TO
OF SERIES D PURCHASE PURCHASE PURCHASE PRINCIPAL
CONVERTIBLE SERIES A SERIES A SERIES A AMOUNT OF
PREFERRED COMMON COMMON COMMON PROMISSORY
NAME OF INVESTOR STOCK STOCK STOCK STOCK NOTES
- ---------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
WEG III L.P. ....................... 100,502 1,928 1,928 2,893 $ 11,478
WEG IV L.P. ........................ 604,522 11,601 11,601 17,401 69,044
WEG V L.P. ......................... 53,322 1,023 1,023 1,534 6,090
J.P. Morgan Investment
Corporation....................... 1,494,479 28,680 28,680 43,020 170,688
Sixty Wall Street SBIC Fund, L.P.... 72,895 1,399 1,399 2,098 8,325
Investor Investments AB............. 1,567,374 30,079 30,079 45,118 179,014
Richmont Leeds Education Company
LLC............................... 163,007 3,128 3,128 4,692 18,617
</TABLE>
Mr. Whittle, our President, Chief Executive Officer and a director, is the
President and sole stockholder of WSI Inc., which controls and is the general
partner of WEG V L.P.
71
<PAGE> 74
Shares sold to affiliates in the third investment installment in December
1998:
<TABLE>
<CAPTION>
NUMBER OF WSI A TRANCHE 1 TRANCHE 2
SHARES OPTIONS TO OPTIONS TO OPTIONS TO
OF SERIES D PURCHASE PURCHASE PURCHASE PRINCIPAL
CONVERTIBLE SERIES A SERIES A SERIES A AMOUNT OF
PREFERRED COMMON COMMON COMMON PROMISSORY
NAME OF INVESTOR STOCK STOCK STOCK STOCK NOTES
- ---------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
WEG V L.P. ......................... 700,446 13,442 13,442 20,163 $ 80,000
J.P. Morgan Investment
Corporation....................... 1,380,371 26,490 26,490 39,735 157,656
Sixty Wall Street SBIC Fund, L.P.... 67,330 1,292 1,292 1,938 7,689
Investor Investments AB............. 1,447,701 27,782 27,782 41,673 165,346
Richmont Leeds Education Company
LLC............................... 150,561 2,889 2,889 4,334 17,196
</TABLE>
In the transactions constituting the December 1997 financing, WEG III L.P.,
WEG IV L.P. and WEG V L.P., which are all affiliated with WSI Inc., purchased an
aggregate of 2,512,560 shares of series D convertible preferred stock, options
to purchase an aggregate of 168,756 shares of series A common stock and
promissory notes in the aggregate principal amount of $286,965. These amounts
represent 17.8% of the shares of series D convertible preferred stock, 17.8% of
the options to purchase series A common stock and 10.1% of the aggregate
principal amount of promissory notes issued in these transactions. In addition,
J.P. Morgan Investment Corporation and Sixty Wall Street SBIC Fund, L.P., which
are both affiliated with J.P. Morgan Securities Inc., purchased an aggregate of
5,025,124 shares of series D convertible preferred stock, options to purchase an
aggregate of 337,522 shares of series A common stock and promissory notes in the
aggregate principal amount of $571,931. These amounts represent 35.6% of the
shares of series D convertible preferred stock, 35.6% of the options to purchase
series A common stock and 20.1% of the aggregate principal amount of promissory
notes issued in these transactions.
JUNE 1999 FINANCING. In June 1999 and July 1999, we issued shares of
series F convertible preferred stock to certain of our existing stockholders and
several new investors at a price of $6.15 per share. In the same transaction, we
issued 800,000 shares of non-voting series G convertible preferred stock to UBS
Capital XV LLC and one share of series I common stock to Vulcan Ventures
Incorporated at a price of $6.15 per share. Upon completion of this offering,
each share of series F convertible preferred stock, non-voting series G
convertible preferred stock and series I common stock will convert into 0.45
shares of class A common stock and 0.05 shares of class B common stock.
Vulcan Ventures Incorporated, through its ownership of the share of series
I common stock, was entitled prior to this offering to elect one representative
to the board of directors. Mr. Kolde was elected as the representative of the
holder of series I common stock. These rights will terminate upon completion of
this offering.
Shares sold to affiliates in the first investment installment in June 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES F
NAME OF INVESTOR PREFERRED STOCK
- ---------------- ----------------
<S> <C>
J.P. Morgan Investment Corporation.......................... 395,280
Sixty Wall Street SBIC Fund, L.P. .......................... 98,820
Investor Investments AB..................................... 494,100
WEG VII L.P. ............................................... 441,069
UBS Capital XV LLC.......................................... 1,773,098
WEG VI L.P. ................................................ 446,011
Leeds II L.P. .............................................. 227,111
</TABLE>
Mr. Whittle, our President, Chief Executive Officer and a director, is the
President and sole stockholder of WSI Inc., which controls and is the general
partner of WEG VI L.P. and WEG VII L.P.
72
<PAGE> 75
Mr. Delaney, one of our directors, is President of UBS Capital LLC, which is the
managing member of UBS Capital XV LLC. Mr. Leeds, one of our directors, is
affiliated with Leeds II L.P.
Shares sold to affiliates in the second investment installment in July
1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES F
NAME OF INVESTOR PREFERRED STOCK
- ---------------- ----------------
<S> <C>
WEG V L.P. ................................................. 149,304
WEG VII L.P. ............................................... 75,714
Leeds III L.P. ............................................. 310,457
J.P. Morgan Investment Corporation.......................... 244,419
Sixty Wall Street SBIC Fund, L.P. .......................... 114,413
Investor Investments AB..................................... 358,832
Vulcan Ventures Incorporated................................ 4,878,048
</TABLE>
Mr. Kolde, one of our directors, is Vice President of Vulcan Ventures
Incorporated. Mr. Whittle, our President, Chief Executive Officer and a
director, is the President and sole stockholder of WSI Inc., the general partner
of WEG VII L.P. Mr. Leeds, one of our directors, is affiliated with Leeds III
L.P.
In the transactions constituting the June 1999 financing, WEG V L.P., WEG
VI L.P. and WEG VII L.P., all of which are affiliated with WSI Inc., purchased
an aggregate of 1,112,098 shares of series F convertible preferred stock,
representing 10.4% of the shares of series F convertible preferred stock issued
in these transactions. In addition, J.P. Morgan Investment Corporation and Sixty
Wall Street SBIC Fund, L.P., both of which are affiliated with J.P. Morgan
Securities Inc., purchased an aggregate of 852,932 shares of series F
convertible preferred stock, representing 7.9% of the shares of series F
convertible preferred stock issued in these transactions.
In connection with the above transactions relating to purchases of various
classes of our equity securities, on July 2, 1999, we entered into a Third
Amended and Restated Shareholders Agreement with our existing stockholders. The
Shareholders Agreement provides for registration rights for our existing
stockholders that will continue following the completion of this offering. The
Shareholders Agreement also generally permits the existing stockholders to have
their shares of common stock included in any proposed sale by any other existing
stockholder, if the proposed sale involves more than 5% of the aggregate number
of shares of common stock held by all existing stockholders. This right to
participate in certain sales terminates two years after the completion of the
offering. For more information on these registration rights, see "Shares
Eligible for Future Sale -- Registration Rights."
POLICY ON FUTURE TRANSACTIONS
The Board of Directors has adopted a policy that all future transactions,
including loans between us and our officers, directors, principal stockholders
and their affiliates will be approved by a majority of the Board of Directors,
including a majority of the independent and disinterested outside member
directors of the Board of Directors, and will be on terms no less favorable to
us than could be obtained from unaffiliated third parties.
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<PAGE> 76
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of September 30, 1999 by:
- each person who owns beneficially more than 5% of the outstanding shares
of our common stock;
- each director and each executive officer named in the Summary
Compensation Table; and
- all of our directors and executive officers as a group.
Unless otherwise indicated below, to our knowledge, all persons named in
the table have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially owned by a
person includes shares of common stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of September 30,
1999. The shares issuable pursuant to these options are deemed outstanding for
computing the percentage ownership of the person holding these options but are
not deemed outstanding for the purposes of computing the percentage ownership of
any other person.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES PERCENTAGE OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER THE OFFERING
-------------------------- --------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) A SHARES B SHARES A SHARES B SHARES A SHARES B SHARES
- --------------------------------------- ------------ ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
D2F2 Foundation(2)....................... 1,698,750 188,750 5.2% 5.2% 4.3% 5.2%
268 Bush Street, PMB No. 4209,
San Francisco, CA 94104
Entities associated with the Sprout 4,125,532 458,396 13.2 13.2 10.8 13.2
Group(3)...............................
277 Park Avenue, New York, NY 10172
Investor Investments AB(4)............... 2,770,390 307,827 8.8 8.8 7.3 8.8
320 Park Avenue, New York, NY 10022
J.P. Morgan Investment Corporation(5).... 2,641,972 293,561 8.4 8.4 6.9 8.4
60 Wall Street, New York, NY 10260
J.W. Childs Investments, L.L.C. ......... 2,920,334 324,484 9.3 9.3 7.7 9.3
1 Federal Street, Boston, MA 02110
Richmont Leeds Education Company LLC(6).. 1,899,221 1,550 6.1 * 5.0 *
660 Madison Avenue
New York, NY 10021
WSI Inc.(7).............................. 9,317,536 1,244,789 29.2 34.9 24.0 34.9
800 South Gay St., Knoxville, TN 37929
UBS Capital XV L.L.C. ................... 1,737,809 193,091 5.6 5.6 4.6 5.6
299 Park Avenue, New York, NY 10171
Vulcan Ventures Incorporated............. 2,195,123 243,904 7.0 7.0 5.8 7.0
110 110th Avenue N.E.
Bellevue, WA 98004
Benno C. Schmidt, Jr.(8)................. 836,129 92,906 2.6 2.6 2.2 2.6
H. Christopher Whittle(9)................ 10,069,085 1,328,295 30.7 36.4 25.4 36.4
John E. Chubb(10)........................ 137,201 15,245 * * * *
Christopher D. Cerf(11).................. 146,250 16,250 * * * *
James L. Starr(12)....................... 96,372 10,708 * * * *
Laura K. Eshbaugh(13).................... 68,751 7,639 * * * *
Virginia G. Bonker(14)................... 466,667 51,854 1.5 1.5 1.2 1.5
John W. Childs(15)....................... 3,349,880 372,213 10.7 10.7 8.8 10.7
Ramon C. Cortines........................ 0 0 * * * *
Charles J. Delaney(16)................... 1,737,809 193,091 5.6 5.6 4.6 5.6
Robert Finzi(17)......................... 4,125,532 458,396 13.2 13.2 10.8 13.2
John B. Fullerton(18).................... 2,641,972 293,561 8.4 8.4 6.9 8.4
Janet A. Hickey(19)...................... 4,125,532 458,396 13.2 13.2 10.8 13.2
(continued on the following page)
</TABLE>
74
<PAGE> 77
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES PERCENTAGE OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER THE OFFERING
-------------------------- --------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) A SHARES B SHARES A SHARES B SHARES A SHARES B SHARES
- --------------------------------------- ------------ ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Klas Hillstrom(20)....................... 2,770,390 307,827 8.8 8.8 7.3 8.8
Bert Kolde(21)........................... 2,195,123 243,904 7.0 7.0 5.8 7.0
Jeffrey T. Leeds(22)..................... 1,913,870 3,183 6.1 * 5.0 *
Brian P. Mathis(23)...................... 2,641,972 293,561 8.4 8.4 6.9 8.4
William F. Weld(24)...................... 2,551 284 * * * *
All executive officers and directors as a
group
(22 persons)(25)....................... 30,837,666 3,426,475 90.2 90.2 75.2 90.2
</TABLE>
- ---------------
* Less than 1%.
(1) Except as set forth herein, the business address of the named beneficial
owner is c/o Edison Schools Inc., 521 Fifth Avenue, 15th Floor, New York,
New York 10175.
(2) Consists of 1,698,750 shares of class A common stock and 188,750 shares of
class B common stock issuable upon exercise of a warrant within 60 days of
September 30, 1999.
(3) Consists of 212,274 shares of class A common stock and 23,587 shares of
class B common stock held of record by DLJ Capital Corporation, 1,338,006
shares of class A common stock and 148,668 shares of class B common stock
held of record by Sprout Capital VI, L.P., 2,546,246 shares of class A
common stock and 282,917 shares of class B common stock held of record by
Sprout Capital VII, L.P., 29,005 shares of class A common stock and 3,223
shares of class B common stock held of record by Sprout CEO Fund, L.P. and
one share of class A common stock and one share of class B common stock
held jointly by all of the above-named Sprout entities. Of these shares,
shares of class A common stock and shares of class B
common stock are subject to a voting trust agreement and are held and voted
by an independent third party, , as voting trustee.
(4) Includes 82,454 shares of class A common stock and 9,164 shares of class B
common stock issuable upon exercise of options that will be exercisable
within 60 days of September 30, 1999.
(5) Includes 182,880 shares of class A common stock and 20,322 shares of class
B common stock held of record by Sixty Wall Street SBIC Fund, L.P., 78,504
shares of class A common stock and 8,725 shares of class B common stock
issuable upon exercise of an option that will be exercisable within 60 days
of September 30, 1999 and 3,952 shares of class A common stock and 441
shares of class B common stock issuable upon exercise of options held of
record by Sixty Wall Street, SBIC Fund, L.P. that will be exercisable
within 60 days of September 30, 1999. Does not include 768,934 shares of
class A common stock and 85,443 shares of class B common stock pledged to
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Investment Corporation, by WSI Inc., of which 105,750 shares of class A
common stock and 11,750 shares of class B common stock are subject to an
option held by Morgan Guaranty Trust Company of New York. See Footnote 9.
(6) Includes 170,432 shares of class A common stock held of record by Leeds II
L.P., 257,381 shares of class A common stock held of record by Leeds III
L.P., 13,929 shares of class A common issuable upon exercise of options
that will be exercisable within 60 days of September 30, 1999, 1,550 shares
of class B common issuable upon exercise of options that will be
exercisable within 60 days of September 30, 1999, 17,045 shares of class A
common stock to be transferred to Leeds II L.P. from WSI Inc. upon
completion of this offering, 25,740 shares of class A common stock to be
transferred to Leeds III L.P. from WSI Inc. upon completion of this
offering and 145,751 shares of class A common stock to be transferred to
Richmont Leeds Education Company LLC from WSI Inc. upon completion of this
offering.
(7) Includes 1,462,501 shares of class A common stock and 162,501 shares of
class B common stock held of record by WPA Investment L.P., 2,200,607
shares of class A common stock and 244,513 shares of class B common stock
held of record by WEG L.P., 1,299,624 shares of class A common stock and
144,403 shares of class B common stock held of record by WEG II L.P.,
1,245,536 shares of class A common stock and 138,395 shares of class B
common stock held of
75
<PAGE> 78
record by WEG III L.P., 650,197 shares of class A common stock and 72,245
shares of class B common stock held of record by WEG IV L.P., 517,188
shares of class A common stock and 57,468 shares of class B common stock
held of record by WEG V L.P., 301,228 shares of class A common stock and
33,472 shares of class B common stock held of record by WEG VI L.P.,
232,554 shares of class A common stock and 25,840 shares of class B common
stock held of record by WEG VII L.P., 787,500 shares of class A common
stock and 87,500 shares of class B common stock issuable upon exercise of
options that will be exercisable within 60 days of September 30, 1999,
4,123 shares of class A common stock and 460 shares of class B common stock
issuable upon exercise of options held of record by WEG III L.P. that will
be exercisable within 60 days of September 30, 1999, 23,710 shares of class
A common stock and 2,635 shares of class B common stock issuable upon
exercise of options held of record by WEG IV L.P. that will be exercisable
within 60 days of September 30, 1999, 12,369 shares of class A common stock
and 1,378 shares of class B common stock issuable upon exercise of options
held of record by WEG V L.P. that will be exercisable within 60 days of
September 30, 1999, 17,045 shares of class B common stock to be transferred
to WSI Inc. from Leeds II L.P. upon completion of this offering, 25,470
shares of class B common stock to be transferred to WSI Inc. from Leeds III
L.P. upon completion of this offering and 145,751 shares of class B common
stock to be transferred to WSI Inc. from Richmont Leeds Education Company
LLC upon completion of this offering. WEG V L.P.'s holdings do not include
67,500 shares of class A common stock and 7,500 shares of class B common
stock issuable to WEG V L.P. by WSI if the price of the class A common
stock fails to meet specified threshholds in the future.
(8) Includes 6,165 shares of class A common stock and 685 shares of class B
common stock held of record by Christina W. Schmidt. Mr. Schmidt disclaims
beneficial ownership of all such shares of common stock. Also includes
462,056 shares of class A common stock and 51,340 shares of class B common
stock issuable upon exercise of options that will be exercisable within 60
days of September 30, 1999. Does not include 6,165 shares of class A common
stock and 685 shares of class B common stock held of record by Elizabeth H.
Schmidt, 9,855 shares of class A common stock and 1,095 shares of class B
common stock held of record by Benno C. Schmidt, III, 21,478 shares of
class A common stock and 2,387 shares of class B common stock held of
record by John R. Schmidt and 1,440 shares of class A common stock and 160
shares of class B common stock held of record by Asher J. Liftin.
(9) Consists of 580,398 shares of class A common stock and 273,979 shares of
class B common stock held of record by WSI Inc., 1,462,501 shares of class
A common stock and 162,501 shares of class B common stock held of record by
WPA Investment L.P., 2,200,607 shares of class A common stock and 244,513
shares of class B common stock held of record by WEG L.P., 1,299,624 shares
of class A common stock and 144,403 shares of class B common stock held of
record by WEG II L.P., 1,245,536 shares of class A common stock and 138,395
shares of class B common stock held of record by WEG III L.P., 650,197
shares of class A common stock and 72,245 shares of class B common stock
held of record by WEG IV L.P., 517,188 shares of class A common stock and
57,468 shares of class B common stock held of record by WEG V L.P., 301,228
shares of class A common stock and 33,472 shares of class B common stock
held of record by WEG VI L.P., 232,554 shares of class A common stock and
25,840 shares of class B common stock held of record by WEG VII L.P.,
751,550 shares of class A common stock and 83,506 shares of class B common
stock issuable upon exercise of options that will be exercisable within 60
days of September 30, 1999, 787,500 shares of class A common stock and
87,500 shares of class B common stock issuable upon exercise of options
held of record by WSI Inc. that will be exercisable within 60 days of
September 30, 1999, 4,123 shares of class A common stock and 460 shares of
class B common stock issuable upon exercise of options held of record by
WEG III L.P. that will be exercisable within 60 days of September 30, 1999,
23,710 shares of class A common stock and 2,635 shares of class B common
stock issuable upon exercise of options held of record by WEG IV L.P. that
will be exercisable within 60 days of September 30, 1999 and 12,369 shares
of class A common stock and 1,378 shares of class B common stock issuable
upon exercise of options held of record by WEG V L.P. that will be
exercisable within 60 days of September 30, 1999. WSI Inc has pledged all
of its shares of
76
<PAGE> 79
class A common stock and class B common stock, including all options to
acquire class A common stock and class B common stock, to Morgan Guaranty
Company of New York to secure personal obligations of Mr. Whittle. Of WSI's
shares pledged to Morgan Guaranty Trust Company of New York, 105,750 shares
of class A common stock and 11,750 shares of class B common stock are also
subject to an option held by Morgan Guaranty Trust Company of New York and
67,500 shares of class A common stock and 7,500 shares of class B common
stock are issuable to WEG V L.P. if the price of the class A common stock
fails to meet specified thresholds in the future. WEG V L.P.'s holdings do
not include the 67,500 shares of class A common stock and 7,500 shares of
class B common stock are issuable to WEG V L.P. by WSI referenced in the
previous sentence.
(10) Consists of 137,201 shares of class A common stock and 15,245 shares of
class B common stock issuable upon exercise of options that will be
exercisable within 60 days of September 30, 1999.
(11) Consists of 146,250 shares of class A common stock and 16,250 shares of
class B common stock issuable upon exercise of options that will be
exercisable within 60 days of September 30, 1999.
(12) Consists of 96,372 shares of class A common stock and 10,708 shares of
class B common stock issuable upon exercise of options that will be
exercisable within 60 days of September 30, 1999.
(13) Consists of 68,751 shares of class A common stock and 7,639 shares of class
B common stock issuable upon exercise of options that will be exercisable
within 60 days of September 30, 1999.
(14) Consists 466,667 shares of class A common stock and 51,854 shares of class
B common stock held of record by Blue Rock Capital, L.P.
(15) Includes 2,920,334 shares of class A common stock and 324,484 shares of
class B common stock held of record by J.W. Childs Investments, L.L.C.
(16) Consists of 1,737,809 shares of class A common stock and 193,091 shares of
class B common stock held of record by UBS Capital XV L.L.C.
(17) Consists of 212,274 shares of class A common stock and 23,587 shares of
class B common stock held of record by DLJ Capital Corporation, 1,338,066
shares of class A common stock and 148,668 shares of class B common stock
held of record by Sprout Capital VI, L.P., 2,546,246 shares of class A
common stock and 282,917 shares of class B common stock held of record by
Sprout Capital VII, L.P., 29,005 shares of class A common stock and 3,223
shares of class B common stock held of record by Sprout CEO Fund, L.P. and
one share of class A common stock and one share of class B common stock
held jointly by DLJ Capital Corporation, Sprout Capital VI, L.P., Sprout
Capital VII, L.P. and Sprout CEO Fund, L.P.
(18) Consists of 2,376,636 shares of class A common stock and 264,073 shares of
class B common stock held of record by J.P. Morgan Investment Corporation,
182,880 shares of class A common stock and 20,332 shares of class B common
stock held of record by Sixty Wall Street SBIC Fund, L.P., 78,504 shares of
class A common stock and 8,725 shares of class B common stock issuable upon
exercise of options held of record by J.P. Morgan Investment Corporation
that will be exercisable within 60 days of September 30, 1999 and 3,952
shares of class A common stock and 441 shares of class B common stock
issuable upon exercise of options held of record by Sixty Wall Street SBIC
Fund, L.P. that will be exercisable within 60 days of September 30, 1999.
Does not include 580,398 shares of class A common stock and 273,979 shares
of class B common stock pledged to Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan Investment Corporation, by WSI Inc.
(19) Consists of 212,274 shares of class A common stock and 23,587 shares of
class B common stock held of record by DLJ Capital Corporation, 1,338,066
shares of class A common stock and 148,668 shares of class B common stock
held of record by Sprout Capital VI, L.P., 2,546,246 shares of class A
common stock and 282,917 shares of class B common stock held of record by
Sprout Capital VII, L.P., 29,005 shares of class A common stock and 3,223
shares of class B common stock held of record by Sprout CEO Fund, L.P. and
one share of class A common stock and one share of class B common stock
held jointly by DLJ Capital Corporation, Sprout Capital VI, L.P., Sprout
Capital VII, L.P. and Sprout CEO Fund, L.P.
(20) Consists of 2,687,936 shares of class A common stock and 298,663 shares of
class B common stock held of record by Investor Investments AB and 82,454
shares of class A common stock and 9,164 shares of class B common stock
issuable upon exercise of options held of record by Investor Investments AB
that will be exercisable within 60 days of September 30, 1999.
77
<PAGE> 80
(21) Consists of 2,195,123 shares of class A common stock and 243,904 shares of
class B common stock held of record by Vulcan Ventures Incorporated.
(22) Consists of 1,457,479 shares of class A common stock held of record by
Richmont Leeds Education Company L.L.C., 170,432 shares of class A common
stock held of record by Leeds II L. P., 257,381 shares of class A common
stock held of record by Leeds III L.P., 720 shares of class A common stock
and 82 shares of class B common stock issuable upon exercise of options
that will be exercisable within 60 days of September 30, 1999 and 13,929
shares of class A common stock and 1,550 shares of class B common stock
issuable upon exercise of options held of record by Richmont Leeds
Education Company L.L.C. that will be exercisable within 60 days of
September 30, 1999.
(23) Consists of 2,376,636 shares of class A common stock and 264,073 shares of
class B common stock held of record by J.P. Morgan Investment Corporation,
182,880 shares of class A common stock and 20,322 shares of class B common
stock held of record by Sixty Wall Street SBIC Fund, L.P., 78,504 shares of
class A common stock and 8,725 shares of class B common stock issuable upon
exercise of options held of record by J.P. Morgan Investment Corporation
that will be exercisable within 60 days of September 30, 1999 and 3,952
shares of class A common stock and 441 shares of class B common stock
issuable upon exercise of options held of record by Sixty Wall Street SBIC
Fund, L.P. that will be exercisable within 60 days of September 30, 1999.
Does not include 580,398 shares of class A common stock and 273,979 shares
of class B common stock pledged to Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan Investment Corporation, by WSI Inc.
(24) Consists of 2,551 shares of class A common stock and 284 shares of class B
common stock issuable upon exercise of options that will be exercisable
within 60 days of September 30, 1999.
(25) Includes an aggregate of 280,083 shares of class A common stock and 31,121
shares of class B common stock issuable upon exercise of options and
warrants exercisable within 60 days of September 30, 1999. Also includes
other shares described in footnotes 8 through 24 above.
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DESCRIPTION OF CAPITAL STOCK
On the closing of this offering, our authorized capital stock will consist
of 150,000,000 shares of class A common stock, $.01 par value per share,
5,000,000 shares of class B common stock, $.01 par value per share, and
5,000,000 shares of preferred stock, $.01 par value per share. The following is
a summary of the material features of our capital stock. For more detail, please
see our amended and restated certificate of incorporation and amended and
restated by-laws to be effective upon the closing of this offering, filed as
exhibits to the Registration Statement of which this prospectus is a part.
COMMON STOCK
As of September 30, 1999, assuming the conversion of all outstanding shares
of our existing common stock and preferred stock into class A common stock and
class B common stock, there would have been 31,241,018 shares of class A common
stock and 3,471,300 shares of class B common stock outstanding held of record by
80 stockholders. Based upon the number of shares outstanding as of that date,
and giving effect to the issuance of the shares of class A common stock offered
by Edison in this offering, there will be 38,041,018 shares of class A common
stock and 3,471,300 shares of class B common stock outstanding upon the closing
of this offering.
Our common stock is divided into two classes, class A common stock and
class B common stock. Holders of class A common stock and class B common stock
have identical rights, except that the holders of class A common stock are
entitled to one vote per share held of record and holders of class B common
stock are entitled to ten votes per share held of record on all matters
submitted to a vote of the stockholders, other than the election of directors.
In addition, beginning with the first annual meeting of stockholders occurring
after the completion of this offering, the holders of class B common stock will
have the right, as a separate class, to elect four of the 11 members of our
board of directors and holders of class A common stock will have the right, as a
separate class, to elect the remaining seven directors. Holders of both class A
common stock and class B common stock have cumulative voting rights in the
election of their respective directors. Holders of class A common stock and
holders of class B common stock vote together as a single class on all other
matters presented to the stockholders for their vote or approval, except as may
otherwise be required by Delaware law.
Cumulative voting means that a stockholder may, in the election of
directors, cast a total number of votes equal to the number of directors to be
elected multiplied by the number of shares held by the stockholder. The
stockholder may cumulate these votes and cast them all for one candidate or may
allocate them among candidates as the stockholder sees fit. For example, a
stockholder holding 100 shares of class A common stock will be entitled at the
annual election of the class A directors to cast 700 votes. This stockholder
could cast these votes in any combination, including all 700 votes for one
nominee or 100 votes for seven nominees. Cumulative voting is intended to
provide holders of smaller blocks of stock with more meaningful influence in the
election of directors than they would have without cumulative voting.
Each share of class B common stock is convertible at any time, at the
option of the holder, into one share of class A common stock. Each share of
class B common stock will convert automatically into one share of class A common
stock upon transfer, with limited exceptions for transfers to related parties,
estate-planning transfers, certain permitted pledges and transfers to Mr.
Whittle, our President, Chief Executive Officer and a director, or entities
affiliated with Mr. Whittle. In addition, all of a stockholder's shares of class
B common stock will convert automatically into shares of class A common stock on
a one-for-one basis if the stockholder and its affiliates transfer securities
representing more than 50% of their aggregate holdings of Edison's securities as
of the date of this prospectus, excluding shares of any class of our stock
purchasable upon the exercise of options, to a person or entity that is not a
related party on the date of the transfer. In addition, all remaining
outstanding shares of class B common stock will automatically convert into
shares of class A common stock on a one-for-one basis upon the earlier to occur
of (1) the 12th anniversary of the date of this prospectus and (2) the date upon
which fewer than 90,025 shares of class B common stock in the aggregate are
outstanding.
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Once converted to class A common stock, the class B common stock will be
cancelled and not reissued. None of either the class A common stock or the class
B common stock may be subdivided or combined unless the shares of the other
class are subdivided or combined in the same proportion. The class B common
stock is not being registered as part of this offering and currently we have no
plans to do so in the future.
Holders of both class A common stock and class B common stock are entitled
to receive ratably dividends, if any, as our board of directors may declare out
of legally available funds, subject to preferences that may be applicable to any
then-outstanding preferred stock. We may not make any dividend or distribution
to any holder of either class of common stock unless simultaneously with such
dividend or distribution we make the same dividend or distribution with respect
to each outstanding share of the other class of common stock. In the case of a
dividend or other distribution payable in shares of a class of common stock,
including distributions pursuant to stock splits or divisions of common stock,
only shares of class A common stock may be distributed with respect to class A
common stock and only shares of class B common stock may be distributed with
respect to class B common stock. Whenever a dividend or distribution, including
distributions pursuant to stock splits or divisions of the common stock, is
payable in shares of a class of common stock, the number of shares of each class
of common stock payable per shares of such class of common stock shall be equal
in number. In the event of a liquidation, dissolution, or winding up of Edison,
holders of class A common stock and holders of class B common stock will be
entitled to share ratably in the net assets legally available for distribution
to stockholders after payment of all of our liabilities and the liquidation
preferences of any preferred stock then outstanding. Holders of class A common
stock and holders of class B common stock have no preemptive rights,
subscription rights or conversion rights, except as described above. There are
no redemption or sinking fund provisions applicable to the class A common stock
or the class B common stock. All outstanding shares of class A and class B
common stock are, and the shares of class A common stock sold in this offering
when issued and paid for will be, fully paid and non-assessable.
In the event of a merger or consolidation of Edison with or into another
entity (whether or not Edison is the surviving entity), the holders of class A
common stock shall be entitled to receive the same per-share consideration as
the per-share consideration, if any, received by any holder of the class B
common stock in such merger or consolidation.
No additional shares of class B common stock may be issued except (a) upon
the exercise of stock options or warrants existing upon the closing of this
offering or (b) in connection with a stock split or stock dividend on the class
B common stock in which the class A common stock is similarly split or receives
a similar dividend.
The rights, preferences and privileges of holders of class A common stock
and holders of class B common stock are subject to the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future. After the closing of this offering, no shares of preferred stock will be
outstanding.
At present, there is no established trading market for the class A common
stock. We have applied to list the shares of class A common stock on The Nasdaq
Stock Market's National Market under the symbol "EDSN."
PREFERRED STOCK
On the closing of this offering, the Board of Directors will be authorized,
subject to any limitations prescribed by law, without further stockholder
approval, to issue up to an aggregate of shares of preferred
stock. The preferred stock may be issued in one or more series and on one or
more occasions. Each series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as the Board of Directors may determine. These rights and
privileges may include, among others, dividend rights, voting rights, redemption
provisions, liquidation preferences, conversion rights and preemptive rights.
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Our stockholders have granted the Board of Directors authority to issue the
preferred stock in order to eliminate delays associated with a stockholder vote
on specific issuances. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power or other rights of
the holders of common stock. In addition, the issuance of preferred stock could
make it more difficult for a third party to acquire us, or discourage a third
party from attempting to acquire us.
WARRANTS
In March 1995, we issued an option to Dillon, Read & Co. Inc. which
currently represents the right to purchase up to 90,000 shares of class A common
stock and 10,000 shares of class B common stock at an exercise price of $0.50
per share. This option expires on July 2, 2002.
In July 1995, January 1996 and February 1997, we issued warrants to an
equipment leasing firm which currently represent the right to purchase up to
258,810 shares of class A common stock and 28,757 shares of class B common stock
at a weighted average exercise price of $2.49 per share. Each of these warrants
expires on the fifth anniversary of this offering.
In December 1997, August 1998 and December 1998, we issued options which
currently represent the right to purchase 121,775 shares of class A common stock
and 13,531 shares of class B common stock. Of these options, options to purchase
109,598 shares of class A common stock and 12,178 shares of class B common stock
are currently exercisable, and options to purchase the remaining 12,177 shares
of class A common stock and 1,353 shares of class B common stock become
exercisable on June 30, 2000.
In December 1997, August 1998 and December 1998, we issued options which
currently represent the right to purchase 121,775 shares of class A common stock
and 13,531 shares of class B common stock at an exercise price of $20.00 per
share. All of these options will become exercisable upon completion of this
offering.
In December 1997, August 1998 and December 1998, we issued options which
currently represent the right to purchase 182,663 shares of class A common stock
and 20,296 shares of class B common stock. All of these options will become
exercisable after our class A common stock has been publicly traded with closing
prices above $32.00 per share for 90 consecutive days.
In June 1997 and January 1998, we issued warrants to an equipment leasing
firm which currently represent the right to purchase up to 33,807 shares of
class A common stock and 3,757 shares of class B common stock at a weighted
average exercise price of $5.32 per share. Each of these warrants expires on the
tenth anniversary of the final loan that may be made to us under our agreement
with this firm.
In June 1997, we issued a warrant to an equipment leasing firm which
currently represents the right to purchase up to 20,250 shares of class A common
stock and 2,250 shares of class B common stock at an exercise price of $4.00 per
share. This warrant expires on the fifth anniversary of this offering.
In August 1997 and October 1997, we issued warrants to an equipment leasing
firm which currently represents the right to purchase up to 147,150 shares of
class A common stock and 16,350 shares of class B common stock at a weighted
average exercise price of $4.46 per share. Each of these warrants expires seven
years after the date of issuance.
In July 1998, we issued a warrant to an equipment leasing firm which
currently represents the right to purchase up to 45,000 shares of class A common
stock and 5,000 shares of class B common stock at an exercise price of $8.00 per
share. This warrant expires on July 16, 2003.
In November 1997, we issued a warrant to an equipment leasing firm which
currently represents the right to purchase up to 58,277 shares of class A common
stock and 6,476 shares of class B common stock at an exercise price of $5.00 per
share. The warrant expires on November 25, 2007.
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In June 1998, we issued a warrant to the D2F2 Foundation which currently
represents the right to purchase up to 1,698,750 shares of class A common stock
and 188,750 shares of class B common stock at an exercise price of $7.96 per
share. This warrant expires on June 1, 2005.
DELAWARE LAW AND ANTI-TAKEOVER PROVISIONS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, consolidations,
asset sales and other transactions involving Edison and an interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or more
of the corporation's voting stock.
The certificate of incorporation provides that a director may be removed
only for cause by the affirmative vote of the holders of 80% of the shares of
the class of common stock that elected that director. Any vacancy on the board
of directors may only be filled by a vote of a majority of the directors then in
office. The limitation on removal of directors and filling of vacancies could
make it more difficult for a third party to acquire, or discourage a third party
from acquiring, control of Edison.
The certificate of incorporation also provides that, after this offering,
any action required or permitted to be taken by our stockholders at an annual
meeting or special meeting of stockholders may only be taken if it is properly
brought before the meeting and may not be taken by written action in lieu of a
meeting. Special meetings of the stockholders may only be called by the Chairman
of the Board, the President or the board of directors. In order for any matter
to be considered properly brought before an annual meeting of stockholders, a
stockholder must comply with advance notice and information disclosure
requirements specified in the certificate of incorporation. These provisions
could have the effect of delaying until the next annual stockholders meeting
stockholder actions which are favored by the holders of a majority of our
outstanding voting securities. These provisions could also discourage a third
party from making a tender offer for the class A common stock, because even if
it acquired a majority of our outstanding voting securities, the third party
would be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called annual stockholders' meeting, and not
by written consent.
Delaware corporate law provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless the certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. Our
certificate of incorporation and by-laws require the affirmative vote of holders
of at least 80% of the class A common stock and 80% of the class B common stock
entitled to vote to amend or repeal any of the provisions described in the prior
three paragraphs.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation provides that our directors and officers
shall be indemnified by us to the fullest extent authorized by Delaware law.
This indemnification would cover all expenses and liabilities reasonably
incurred in connection with their services for or on behalf of us. In addition,
our amended and restated certificate of incorporation provides that our
directors will not be personally liable for monetary damages to us for breaches
of their fiduciary duty as directors, unless they violated their duty of loyalty
to us or our stockholders, acted in bad faith, knowingly or intentionally
violated the law, authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 38,041,018 shares of class A
common stock and 3,471,300 shares of class B common stock outstanding (assuming
no exercise of outstanding options). Each share of class B common stock is
convertible at any time, at the option of the holder, into one share of class A
common stock. Each share of class B common stock shall convert automatically
into one share of class A common stock upon their transfer, with limited
exceptions for related party and estate planning transfers. Of these shares, the
6,800,000 shares to be sold in this offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, as
amended, except that any shares purchased by our affiliates, as that term is
defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
- ------------------ ------------------------ -------
<S> <C> <C>
On effectiveness.......................... 6,800,000 Sold in offering
90 days................................... 350,000 Shares salable under Rule 144 or
701 and not locked up
180 days.................................. 30,134,212 Lockup released; shares salable
under Rule 144, 144(k) or 701
Thereafter................................ 7,146,498 Restricted securities held for
one year or more at time of sale
</TABLE>
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period, a number of
such shares that does not exceed the greater of 1% of the then outstanding
shares of class A common stock (approximately 380,410 shares immediately after
this offering) or the average weekly trading volume in the class A common stock
in the over-the-counter market during the four calendar weeks preceding the date
on which notice of such sale is filed, provided certain requirements concerning
availability of public information, manner of sale and notice of sale are
satisfied. In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, in
order to sell shares of common stock which are not restricted securities.
Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale and who has beneficially
owned shares for at least two years may resell such shares without compliance
with the foregoing requirements. In meeting the one- and two-year holding
periods described above, a holder of shares can include the holding periods of a
prior owner who was not an affiliate. The one- and two-year holding periods
described above do not begin to run until the full purchase price or other
consideration is paid by the person acquiring the shares from the issuer or an
affiliate. Rule 701 provides that currently outstanding shares of common stock
acquired under our employee compensation plans may be resold beginning 90 days
after the date of this prospectus (1) by persons, other than affiliates, subject
only to the manner of sale provisions of Rule 144, and (2) by affiliates under
Rule 144 without compliance with its one-year minimum holding period, subject to
certain limitations.
STOCK OPTIONS
As of September 30, 1999, approximately 2,507,025 shares of class A common
stock and 278,610 shares of class B common stock were issuable pursuant to
vested options, of which an aggregate of approximately 350,000 shares of class A
common stock and class B common stock are not subject to lock-up agreements with
the underwriters.
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We intend to file a registration statement on Form S-8 under the Securities
Act following the date of this prospectus, to register up to 8,087,342 shares of
class A common stock and 898,616 shares of class B common stock issuable
including the 7,141,990 shares of class A common stock and 793,577 shares of
class B common stock subject to outstanding options as of June 30, 1999. This
registration statement is expected to become effective upon filing.
WARRANTS
As of September 30, 1999, warrants to purchase approximately 3,249,153
shares of class A common stock and 361,033 shares of class B common stock were
exercisable, all of which are subject to lock-up agreements with the
underwriters.
LOCK-UP AGREEMENTS
Subject to the exceptions described below, we and our executive officers,
directors, stockholders, warrantholders and option holders, except for the
holders of options to purchase up to 350,000 shares of common stock, have agreed
that, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, none of us will, during the period ending 180 days after the date
of this prospectus, (1) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for class A common stock (regardless of
whether such shares or any such securities are then owned by such person or are
thereafter acquired), or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the class A common stock, regardless of whether any such
transactions described in clauses (1) or (2) of this paragraph are to be settled
by delivery of such common stock or such other securities, in cash or otherwise.
In addition, for a period of 180 days from the date of this prospectus, except
as required by law, we have agreed that our Board of Directors will not consent
to any offer for sale, sale or other disposition, or any transaction which is
designed or could be expected, to result in, the disposition by any person,
directly or indirectly, of any shares of class A common stock without the prior
written consent of Merrill Lynch. See "Underwriting."
With respect to the officers, directors, shareholders, warrantholders and
holders of options to purchase shares of the common stock, the exceptions to the
lock-up agreements described above are for:
- transfers made by gift, will or intestacy, if the donee thereof agrees in
writing to be bound by the terms of the lock-up;
- transfers to the transferor's affiliates, as such term is defined in Rule
405 under the Securities Act, if each transferee agrees in writing to be
bound by the terms of the lock-up;
- transfers made with prior written consent of Merrill Lynch; and
- in the event the stockholder is an individual, transfers to his or her
immediate family or to a trust the beneficiaries of which are exclusively
the stockholder or a member or members of his or her immediate family, if
the transferee agrees in writing to be bound by the terms of the lock-up.
With respect to Edison, the exceptions to the lock-up agreements described above
are for:
- shares of class A or class B common stock issued by Edison upon the
exercise of outstanding options or warrants or the conversion of
outstanding securities referred to in this prospectus,
- shares of class A or class B common stock issued or options to purchase
class A or class B common stock granted under existing employee benefit
plans of Edison referred to in this prospectus; or
- conversions of class B common stock into class A common stock.
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REGISTRATION RIGHTS
Pursuant to a shareholders agreement entered into among us and the holders
of our outstanding common stock and preferred stock, stockholders holding an
aggregate of 28,774,747 shares of class A and class B common stock, including
shares of common stock issuable upon the exercise of outstanding warrants,
following completion of this offering will be entitled to certain rights with
respect to the registration of such shares (or, in the case of shares of class B
common stock, the shares of class A common stock into which such shares may be
converted) under the Securities Act. At any time following this offering and the
expiration of lock-up agreements between the underwriters and the stockholders
described above, these investors may request that we file a registration
statement that covers the sale of the shares of class A common stock held by the
investors, if:
- the number of shares sought to be registered is at least 1,735,616, or
- the proposed aggregate offering price would be at least $10 million.
These investors may request that we register our class A common stock for resale
on an unlimited number of occasions. In addition, if we propose to register any
of our securities under the Securities Act, either for our own account or for
the account of other security holders, the investors described above and other
additional investors holding 9,881,474 shares of our class A or class B common
stock, including shares of common stock issuable upon the exercise of
outstanding warrants, are entitled to notice of the registration and to include
shares of class A common stock in the registration at our expense. All of these
registration rights are subject to conditions and limitations, among them the
right of the underwriters to limit the number of shares included in the
registration. For more information on the lock-up agreements discussed above,
see "-- Lock-up Agreements."
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UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of our class A common
stock by non-U.S. holders. As used herein, "non-U.S. holder" means any person or
entity that holds our class A common stock, other than:
- an individual citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States, or of any state of the United States or the District of Columbia;
or
- a partnership, trust or estate treated, for United States federal income
tax purposes, as a domestic partnership, trust or estate.
This summary is based on provisions of the U.S. Internal Revenue Code of
1986, as amended, existing, temporary and proposed United States Treasury
regulations promulgated thereunder and administrative and judicial
interpretations of each, all as of the date hereof and all of which are subject
to change, possibly on a retroactive basis.
This summary is for general information only. The tax treatment of a
particular non-U.S. holder may vary depending on the holder's particular
situation. In addition, this summary does not include any description of the tax
laws of any state, local or non-U.S. government that may be applicable to a
particular non-U.S. holder.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF THE OWNERSHIP AND DISPOSITION OF OUR CLASS A COMMON STOCK, AS WELL AS
THE TAX CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL INCOME
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN TAX LAWS.
INCOME TAX
DIVIDENDS
Generally, dividends paid on our class A common stock to a non-U.S. holder
will be subject to U.S. federal income tax. Except for dividends that are
effectively connected with a non-U.S. holder's conduct of a trade or business
within the United States, this tax is imposed and collected by withholding at
the rate of 30% of the amount of the dividend, unless reduced by an applicable
income tax treaty. Currently, dividends paid to an address in a country other
then the United States are presumed to be paid to a resident of that country in
determining whether a non-U.S. holder can benefit from a reduced withholding tax
rate pursuant to a tax treaty.
However, under United States Treasury regulations applicable to dividend
and other payments made after December 31, 2000, a non-U.S. holder who is the
beneficial owner (within the meaning of the regulations) of dividends paid on
our common stock and who wishes to claim the benefit of an applicable treaty is
generally required to satisfy certification and documentation requirements,
including (in certain cases) the need to make recertifications for periods after
December 31, 2000. Special rules apply to claims for treaty benefits made by
non-U.S. persons that are entities rather than individuals and to beneficial
owners (within the meaning of the regulations) of dividends paid to entities in
which the beneficial owners are interest holders.
Except as may be otherwise provided in an applicable income tax treaty,
dividends paid on our class A common stock to a non-U.S. holder that are
effectively connected with the holder's conduct of a trade or business within
the United States are subject to tax at ordinary U.S. federal income tax rates.
This tax is not collected by withholding (except as described below under
"-- Backup Withholding and Information Reporting"). All or part of any
effectively connected dividends received by a non-U.S. corporation may also,
under certain circumstances, be subject to an additional branch profits tax
which will be imposed at a 30% rate or, possibly, a reduced rate under an
applicable income tax treaty. A non-U.S. holder who wishes to claim an exemption
from withholding for effectively connected dividends is generally required to
satisfy certain certification and documentation requirements.
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A non-U.S. holder that is eligible for a reduced rate of U.S. withholding
tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld
by filing an appropriate claim for refund with the Internal Revenue Service.
DISPOSITION OF OUR CLASS A COMMON STOCK
Generally, non-U.S. holders will not be subject to U.S. federal income tax
(or withholding thereof) in respect of gain recognized on a disposition of our
class A common stock unless:
(i) the gain is effectively connected with the holder's conduct of a trade
or business within the United States (in which case the branch profits
tax described above may also apply if the holder is a non-U.S.
corporation);
(ii) in the case of a holder who is a non-resident alien individual and
holds our class A common stock as a capital asset, the holder is
present in the United States for 183 or more days in the taxable year
of the sale and other conditions are met;
(iii) we are or have been a "United States real property holding
corporation" for the U.S. federal income tax purposes (which we do
not believe we are or have been and do not expect to become in the
future) and certain other conditions are met; or
(iv) the holder is subject to tax pursuant to United States federal income
tax provisions applicable to certain United States expatriates.
ESTATE TAX
If an individual non-U.S. holder owns, or is treated as owning, our class A
common stock at the time of his or her death, such stock would be includable in
the individual's gross estate for U.S. federal estate tax purposes and may be
subject to U.S. federal estate tax imposed on the estates of nonresident aliens,
in the absence of a contrary provision contained in an applicable tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
DIVIDENDS
Under current law, dividends paid on our class A common stock to a non-U.S.
holder at an address outside the United States are generally exempt from backup
withholding tax and U.S. information reporting requirements (but not from
regular withholding tax as discussed above). Under the Treasury regulations that
are applicable to dividends paid after December 31, 2000, a non-U.S. person must
generally provide proper documentation indicating the person's non-U.S. status
to a withholding agent in order to avoid backup withholding tax; however,
dividends paid to certain exempt recipients (not including individuals) will not
be subject to backup withholding even if documentation is not provided if the
withholding agent is allowed to rely on presumptions concerning the recipient's
non-U.S. status (including payment to an address outside the United States).
BROKER SALES
Payments of proceeds from the sale of our class A common stock by a
non-U.S. holder made to or through a U.S. office of a broker are generally
subject to both information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes entitlement to an exemption. Payments of proceeds from the
sale of our class A common stock by a non-U.S. holder made to or through a
non-U.S. office of a broker generally will not be subject to information
reporting or backup withholding. However, payments made to or through certain
non-U.S. offices, including the non-U.S. offices of a U.S. broker, are generally
subject to information reporting (but not backup withholding) unless the holder
certifies its non-U.S. status under penalties or perjury or otherwise
establishes entitlement to an exemption.
A non-U.S. holder may obtain a refund of any excess amounts withheld under
the backup withholding rules by filing an appropriate claim for refund with the
I.R.S.
87
<PAGE> 90
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America
Securities LLC, Credit Suisse First Boston Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation and J.P. Morgan Securities Inc. are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a U.S. purchase agreement among Edison and the U.S.
underwriters, and concurrently with the sale of 1,360,000 shares of class A
common stock to the international managers, Edison has agreed to sell to the
U.S. underwriters, and each of the U.S. underwriters severally and not jointly
has agreed to purchase from Edison the number of shares of class A common stock
set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Banc of America Securities LLC..............................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
J.P. Morgan Securities Inc..................................
---------
Total.......................................... 5,440,000
=========
</TABLE>
Edison has also entered into an international purchase agreement with
certain underwriters outside the United States and Canada for whom Merrill Lynch
International, Bank of America International Limited, Credit Suisse First Boston
(Europe) Limited, Donaldson, Lufkin & Jenrette International and J.P. Morgan
Securities Ltd. are acting as lead managers. Subject to the terms and conditions
set forth in the international purchase agreement, and concurrently with the
sale of 5,440,000 shares of class A common stock to the U.S. underwriters
pursuant to the U.S. purchase agreement, Edison has agreed to sell to the
international managers, and the international managers severally have agreed to
purchase from Edison, an aggregate of 1,360,000 shares of class A common stock.
The initial public offering price per share and the total underwriting discount
per share of class A common stock are identical under the U.S. purchase
agreement and the international purchase agreement.
In the U.S. purchase agreement and the international purchase agreement,
the several U.S. underwriters and the several international managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of class A common stock being sold
pursuant to each such agreement if any of the shares of class A common stock
being sold pursuant to such agreement are purchased. In the event of a default
by an underwriter, the U.S. purchase agreement and the international purchase
agreement provide that, in specified circumstances, the purchase commitments of
non-defaulting underwriters may be increased or the purchase agreements may be
terminated. The closings with respect to the sale of shares of class A common
stock to be purchased by the U.S. underwriters and the international managers
are conditioned upon one another.
The representatives have advised Edison that the U.S. underwriters propose
initially to offer the shares of class A common stock to the public at the
initial public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession not in excess of $ per
share of class A common stock. The U.S. underwriters may allow, and such dealers
may reallow, a discount not in excess of $ per share of class A common stock
to certain other dealers. After the initial public offering, the public offering
price, concession and discount may change.
88
<PAGE> 91
OVER-ALLOTMENT OPTION
Edison has granted options to the U.S. underwriters, exercisable for 30
days after the date of this prospectus, to purchase up to an aggregate of
816,000 additional shares of class A common stock at the initial public offering
price set forth on the cover page of this prospectus, less the underwriting
discount. The U.S. underwriters may exercise these options solely to cover
over-allotments, if any, made on the sale of the class A common stock offered in
this prospectus. To the extent that the U.S. underwriters exercise these
options, each U.S. underwriter will be obligated, subject to certain conditions,
to purchase a number of additional shares of class A common stock proportionate
to that U.S. underwriter's initial amount reflected in the above table. Edison
has granted options to the international managers, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 204,000
additional shares of class A common stock to cover over-allotments, if any, on
terms similar to those granted to the U.S. underwriters.
COMMISSIONS AND DISCOUNTS
The following table shows the per share and total underwriting discount to
be paid by Edison to the underwriters and the proceeds before expenses to
Edison. The underwriting discount was determined based on negotiations between
the representatives of the underwriters and Edison. In addition, the table
includes certain other items considered by the NASD to be underwriting
compensation for purposes of the NASD's Rules of Fair Practice. This information
is presented assuming either no exercise or full exercise by the underwriters of
their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................................. $ $ $
Underwriting discount..................................
Other items............................................
Proceeds, before expenses, to Edison...................
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $2.6 million and are payable by Edison. Affiliates of J.P. Morgan
own 472,432 shares of Edison's series F preferred stock which were purchased in
June and July 1999. Each of these shares of Series F preferred stock will
automatically convert into .45 shares of class A common stock and .05 shares of
class B common stock at the time of this offering. The compensation included in
the chart above in the line titled "other items" was computed based on the
difference between the $ offering price and $6.15, the price paid for the
shares of series F preferred stock held by J.P. Morgan's affiliates. See
"Related Party Transactions" and "Principal Stockholders."
The shares of class A common stock are being offered by the several
underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
underwriters, including the validity of the shares of class A common stock, and
other customary conditions, such as the receipt by the underwriters of officer's
certificates and legal opinions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
RESERVED SHARES
At Edison's request, the underwriters have reserved for sale, at the
initial public offering price, up to of the shares offered hereby
for employees, directors and other persons with relationships with Edison who
have expressed an interest in purchasing shares of class A common stock in the
offering. The number of shares of class A common stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered in this
prospectus.
89
<PAGE> 92
NO SALES OF CLASS A COMMON STOCK OR SIMILAR SECURITIES
Edison and Edison's executive officers and directors, stockholders,
warrantholders and optionholders, except for the holders of options to purchase
up to 350,000 shares of common stock, have agreed, subject to the exceptions
described under "Shares Eligible for Future Sale -- Lock-up Agreements", not to
directly or indirectly
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option -- other than options granted by Edison pursuant its stock options
plans -- right or warrant for the sale of or otherwise dispose of or
transfer any shares of class A common stock or securities convertible
into exchangeable or exercisable for class A common stock, including
class B common stock, whether now owned or thereafter acquired by them or
with respect to which they thereafter acquire the power of disposition,
or file a registration statement under the Securities Act with respect to
the foregoing; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequences of ownership of the class A common stock
whether any such swap or transaction is to be settled by delivery of
class A common stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the underwriters
for a period of 180 days after the date of this prospectus. See "Shares Eligible
for Future Sale -- Lock-up Agreements."
NASDAQ NATIONAL MARKET LISTING
Application has been made to list the class A common stock on the Nasdaq
National Market under the trading symbol "EDSN."
Prior to the offering, there has been no public market for Edison's class A
common stock. The initial public offering price will be determined through
negotiations between Edison and the representatives and the lead managers. The
factors to be considered in determining the initial public offering price, in
addition to prevailing market conditions, are:
- price-earnings ratio of publicly traded companies that the
representatives and the lead managers believe to be comparable to Edison;
- certain financial information of Edison;
- the history of, and the prospects for, Edison and the industry in which
it competes; and
- an assessment of (1) Edison's management, (2) its past and present
operations, (3) the prospects for, and timing of, future revenue of
Edison, (4) the present state of Edison's developments and (5) the above
factors in relation to market values and various valuation measures of
other companies engaged in activities similar to Edison.
There can be no assurance that an active trading market will develop for
the class A common stock or that the class A common stock will trade in the
public market subsequent to the offering at or above the initial public offering
price.
The underwriters do not expect sales of the class A common stock to any
accounts over which they exercise discretionary authority to exceed 5% of the
number of shares being offered hereby. The underwriters will not confirm sales
of the class A common stock to any account over which they exercise
discretionary authority without the prior written specific approval of the
customer.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Pursuant to the intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of class A common stock to
each other for purposes of resale at the initial public offering price, less an
amount not greater than the selling
90
<PAGE> 93
concession. Under the terms of the intersyndicate agreement, the U.S.
underwriters and any dealer to whom they sell shares of class A common stock
will not offer to sell or sell shares of class A common stock to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, and the international managers
any dealer to whom they sell shares of class A common stock will not offer to
sell or sell shares of class A common stock to U.S. persons or to Canadian
persons or to persons they believe intend to resell to U.S. or Canadian persons,
except in the case of transactions pursuant to the intersyndicate agreement.
Edison has agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make for those
liabilities.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the class A common stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the underwriters
and certain selling group members to bid for and purchase the class A common
stock. As an exception to these rules, the representatives are permitted to
engage in certain transactions that stabilize the price of the class A common
stock. Those transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the class A common stock.
The underwriters may create a short position in the class A common stock in
connection with the offering. This means that if they sell more shares of class
A common stock than are set forth on the cover page of this prospectus. In that
case, the representatives and lead managers, respectively, may reduce that short
position by purchasing class A common stock in the open market. The
representatives and lead managers, respectively, may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
PENALTY BIDS
The Depository Trust Company Tracking System tracks shares sold from
accounts established on each underwriter's and selling group member's behalf for
this offering. When the representatives or lead managers, respectively,
repurchase shares of the class A common stock in the open market to reduce the
underwriters' short position or to stabilize the price of the class A common
stock, Merrill Lynch may, in its sole discretion, impose a penalty bid on the
underwriters and selling group members who initially sold these "flipped"
shares. This means that Merrill Lynch may reclaim part or all of the amount of
the selling concession from the underwriters and selling group members who sold
these flipped shares. Should Merrill Lynch decide to assess a penalty bid on any
of the underwriters or selling group members for flipping shares, the reclaimed
selling concessions are to be used only to reduce any loss incurred in making
open market repurchases of the class A common stock. Merrill Lynch would not
reclaim selling concessions if no shares were repurchased in the open market,
and selling concessions may be reclaimed only to the extent that losses are
incurred in making open market purchases.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the class A common stock to the extent
that it discourages resales of the class A common stock.
Neither Edison nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the class A common stock. In addition,
neither Edison nor any of the underwriters makes any representation that the
representatives or lead managers will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
QUALIFIED INDEPENDENT UNDERWRITER
Sprout Capital VI, L.P., Sprout Capital VII, L.P., The Sprout CEO Fund,
L.P. and DLJ Capital Corporation (collectively, the "Sprout Entities") are
affiliates of Donaldson, Lufkin & Jenrette Securities
91
<PAGE> 94
Corporation, one of the underwriters. As described under "Principal
Stockholders," the Sprout Entities beneficially own an aggregate of 4,125,532
shares of the outstanding class A common stock and 458,396 shares of the
outstanding class B common stock, which represent more than 10% of the
outstanding class A and class B common stock. Of these shares, shares of
Class A common stock and
shares of class B common stock are subject to a voting trust agreement and are
held and voted by an independent third party, as voting trustee. For
additional information concerning the Sprout Entities' ownership of Edison's
capital stock, see "Related Party Transactions."
Because the Sprout Entities affiliated with Donaldson, Lufkin & Jenrette
Securities Corporation beneficially own more than 10% of the outstanding class A
and class B common stock, the offering will be conducted in accordance with
Conduct Rule 2720 of the National Association of Securities Dealers, Inc., which
requires that the public offering price of an equity security be no higher than
the price recommended by a Qualified Independent Underwriter which has
participated in the preparation of the Registration Statement and performed its
usual standard of due diligence with respect thereto. Merrill Lynch has agreed
to act as Qualified Independent Underwriter with respect to the U.S. offering
and the international offering, and the public offering price of the class A
common stock will be no higher than that recommended by Merrill Lynch. Edison
has agreed to indemnify Merrill Lynch in its capacity as Qualified Independent
Underwriter against certain liabilities including certain liabilities under the
Securities Act.
Two representatives of the Sprout Entities serve on Edison's board of
directors. See "Management."
OTHER RELATIONSHIPS
Merrill Lynch, Banc of America Securities LLC and J.P. Morgan Securities
Inc. have acted as placement agents, in connection with private placements of
Edison's capital stock. Affiliates of J.P. Morgan are stockholders of Edison and
two representatives of these affiliates serve on Edison's board of directors.
See "Management," "Principal Stockholders" and "Related Party Transactions".
92
<PAGE> 95
LEGAL MATTERS
The validity of the shares of class A common stock we are offering will be
passed upon for us by Hale and Dorr LLP, Washington, D.C. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Debevoise & Plimpton, New York, New York.
EXPERTS
Our financial statements as of June 30, 1998 and 1999 and for each of the
three years in the period ended June 30, 1999 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the class A
common stock we propose to sell in this offering. This prospectus, which
constitutes part of the registration statement, does not contain all of the
information set forth in the registration statement. For further information
about us and the class A common stock we propose to sell in this offering, we
refer you to the registration statement and the exhibits filed as a part of the
registration statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to the
copy of the contract or document that has been filed. The registration statement
may be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C. and copies of all or any part of which
may be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. You can obtain information on the operation of the public reference
facilities maintained by the Commission by calling 1-800-SEC-0330. Copies of
such material can also be obtained at prescribed rates by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Securities and Exchange Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
93
<PAGE> 96
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of June 30, 1998 and 1999................. F-3
Statements of Operations for the years ended June 30, 1997,
1998 and 1999............................................. F-4
Statements of Changes in Stockholders' Equity for the years
ended June 30, 1997, 1998 and 1999........................ F-5
Statements of Cash Flows for the years ended June 30, 1997,
1998 and 1999............................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Edison Schools Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Edison Schools Inc. (the
"Company") at June 30, 1998 and 1999, and the results of its operations and its
cash flows for each of the years in the three-year period ended June 30, 1999,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the financial statements, the Company, in
accordance with Accounting Principles Board Opinion No. 20 "Accounting Changes,"
has retroactively expensed all start up costs that had been previously deferred.
PRICEWATERHOUSECOOPERS LLP
New York, New York
August 13, 1999, except for footnote
No. 15
which is dated October 5, 1999
F-2
<PAGE> 98
EDISON SCHOOLS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 7,491,644 $ 27,922,576
Accounts receivable....................................... 9,027,283 12,034,962
Notes and other receivables............................... 712,325 9,711,772
Other current assets...................................... 816,164 1,439,920
------------ -------------
Total current assets.............................. 18,047,416 51,109,230
Property and equipment, net................................. 31,642,444 42,871,238
Restricted cash............................................. 3,972,000 2,431,416
Notes and other receivables, less current portion........... 838,520 3,893,084
Other assets................................................ 1,434,487 4,086,887
------------ -------------
Total assets...................................... $ 55,934,867 $ 104,391,855
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long term debt......................... $ 4,601,683 $ 6,660,789
Accounts payable.......................................... 3,845,958 12,014,443
Accrued expenses.......................................... 6,914,934 9,799,721
------------ -------------
Total current liabilities......................... 15,362,575 28,474,953
Long term debt, less current portion........................ 6,877,425 8,263,824
Stockholders' notes payable................................. 5,672,155 6,610,594
Other liabilities........................................... 1,191,864 478,128
------------ -------------
Total liabilities................................. 29,104,019 43,827,499
------------ -------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock:
Series A-G, par value $.01; 70,105,972 and 77,931,054
shares authorized in 1998 and 1999, respectively;
43,448,289 and 56,422,341 shares issued and
outstanding in 1998 and 1999, respectively (aggregate
liquidation preference of $85,219,974, and
$146,990,753 in 1998 and 1999, respectively)......... 712,177 1,868,380
Common stock:
Series A-H and non-voting common, par value $.01;
99,468,096 and 107,293,178 shares authorized in 1998
and 1999, respectively; 6,214,711 shares issued and
outstanding in 1998 and 1999......................... 62,147 62,147
Additional paid-in capital................................ 58,786,885 145,877,150
Unearned stock-based compensation......................... (874,987) (5,836,556)
Accumulated deficit....................................... (29,714,518) (79,265,909)
Stockholder receivable.................................... (2,140,856) (2,140,856)
------------ -------------
Total stockholders' equity........................ 26,830,848 60,564,356
------------ -------------
Total liabilities and stockholders' equity........ $ 55,934,867 $ 104,391,855
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 99
EDISON SCHOOLS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from educational services........................... $ 38,559,233 $ 69,406,841 $132,762,491
------------ ------------ ------------
Education and operating expenses:
Direct site expenses...................................... 32,149,738 59,576,224 114,096,875
Administration, curriculum and development................ 12,755,088 18,257,818 49,984,180
Depreciation and amortization............................. 3,552,440 7,231,628 12,525,904
Preopening expenses....................................... 1,486,740 2,485,813 5,457,113
Design team compensation.................................. -- 2,723,902 --
------------ ------------ ------------
Total education and operating expenses.............. 49,944,006 90,275,385 182,064,072
------------ ------------ ------------
Loss from operations................................ (11,384,773) (20,868,544) (49,301,581)
Other income (expense):
Interest income........................................... 390,599 723,410 3,363,082
Interest expense.......................................... (527,421) (1,761,821) (3,244,782)
Loss on disposal of property and equipment................ -- (126,500) (368,110)
------------ ------------ ------------
Total other......................................... (136,822) (1,164,911) (249,810)
------------ ------------ ------------
Net loss.................................................... $(11,521,595) $(22,033,455) $(49,551,391)
============ ============ ============
Net loss attributable to common stockholders:
Net loss.................................................. $(11,521,595) $(22,033,455) $(49,551,391)
Dividends declared on preferred stock..................... -- (4,290,200) --
Preferred stock accretion................................. -- (277,694) (1,026,462)
------------ ------------ ------------
Net loss attributable to common stockholders........ $(11,521,595) $(26,601,349) $(50,577,853)
============ ============ ============
Per common share data:
Basic and diluted net loss per share...................... $ (1.85) $ (4.28) $ (8.14)
============ ============ ============
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share....... 6,214,709 6,214,711 6,214,711
============ ============ ============
Pro forma per share data (see Note 15):
Pro forma basic and diluted net loss per share (see Note
15)..................................................... $ (0.89)
============
Pro forma weighted average shares outstanding used in
computing basic and diluted net loss per share (see Note
15)..................................................... 55,721,620
============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 100
EDISON SCHOOLS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------------------------
SERIES A SERIES B SERIES C
PARTNERS' --------------------- ------------------- -------------------
CONTRIBUTIONS SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ---------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1996................. $ 71,877,070
Partner contributions -- Edison Project
LP..................................... 1,224,965
Net loss for the period from July 1,
1996 through November 18, 1996.........
Effect of reorganization................ (73,102,035) 21,149,993 $211,500
Issuance of Series A, B and C preferred
stock, net............................. 9,144,442 91,445 1,010,101 $10,101 5,201,135 $52,011
Deferred compensation related to stock
options................................
Stock-based compensation................
Interest on stockholder note
receivable.............................
Net loss for the period from November
19, 1996 through June 30, 1997.........
------------ ---------- -------- --------- ------- --------- -------
Balances, June 30, 1997................. 0 30,294,435 302,945 1,010,101 10,101 5,201,135 52,011
Issuance of Series D preferred stock,
net....................................
Issuance of stock warrants..............
Issuance of Series C preferred stock as
purchase price adjustment.............. 1,057,473 10,575
Deferred compensation related to stock
options................................
Stock-based compensation................
Dividends declared......................
Accretion of Series D preferred PIK
dividend...............................
Net loss for the year ended June 30,
1998...................................
------------ ---------- -------- --------- ------- --------- -------
Balances, June 30, 1998................. 0 30,294,435 302,945 1,010,101 10,101 6,258,608 62,586
Issuance of Series D preferred stock,
net....................................
Issuance of Series F preferred stock,
net....................................
Issuance of Series G preferred stock,
net....................................
Deferred compensation related to stock
options................................
Stock-based compensation................
Accretion of Series D preferred PIK
dividend...............................
Net loss for the year ended June 30,
1999...................................
------------ ---------- -------- --------- ------- --------- -------
Balances, June 30, 1999................. $ 0 30,294,435 $302,945 1,010,101 $10,101 6,258,608 $62,586
============ ========== ======== ========= ======= ========= =======
<CAPTION>
PREFERRED STOCK
---------------------------------------------------------------------------------------
SERIES D SERIES E SERIES F SERIES G
----------------------- ------------------- ------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- --------- ------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1996.................
Partner contributions -- Edison Project
LP.....................................
Net loss for the period from July 1,
1996 through November 18, 1996.........
Effect of reorganization................
Issuance of Series A, B and C preferred
stock, net.............................
Deferred compensation related to stock
options................................
Stock-based compensation................
Interest on stockholder note
receivable.............................
Net loss for the period from November
19, 1996 through June 30, 1997.........
---------- ---------- --------- ------- --------- ------- ------- -------
Balances, June 30, 1997.................
Issuance of Series D preferred stock,
net.................................... 5,885,145 $ 58,851
Issuance of stock warrants..............
Issuance of Series C preferred stock as
purchase price adjustment..............
Deferred compensation related to stock
options................................
Stock-based compensation................
Dividends declared......................
Accretion of Series D preferred PIK
dividend............................... 277,694
Net loss for the year ended June 30,
1998...................................
---------- ---------- --------- ------- --------- ------- ------- -------
Balances, June 30, 1998................. 5,885,145 336,545
Issuance of Series D preferred stock,
net.................................... 8,216,576 82,166
Issuance of Series F preferred stock,
net.................................... 3,957,476 $39,575
Issuance of Series G preferred stock,
net.................................... 800,000 $8,000
Deferred compensation related to stock
options................................
Stock-based compensation................
Accretion of Series D preferred PIK
dividend............................... 1,026,462
Net loss for the year ended June 30,
1999...................................
---------- ---------- --------- ------- --------- ------- ------- -------
Balances, June 30, 1999................. 14,101,721 $1,445,173 $ 3,957,476 $39,575 800,000 $8,000
========== ========== ========= ======= ========= ======= ======= =======
<CAPTION>
COMMON STOCK
-------------------------------------
SERIES A SERIES B-H ADDITIONAL UNEARNED
------------------- --------------- PAID IN STOCK-BASED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
--------- ------- ------ ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1996................. $(57,948,468)
Partner contributions -- Edison Project
LP.....................................
Net loss for the period from July 1,
1996 through November 18, 1996......... (3,840,532)
Effect of reorganization................ 6,214,704 $62,147 5 $0 $ 11,039,388 61,789,000
Issuance of Series A, B and C preferred
stock, net............................. 29,883,106
Deferred compensation related to stock
options................................ 165,771 $ (165,771) --
Stock-based compensation................ 45,342
Interest on stockholder note
receivable.............................
Net loss for the period from November
19, 1996 through June 30, 1997......... (7,681,063)
--------- ------- --- -- ------------ ----------- ------------
Balances, June 30, 1997................. 6,214,704 62,147 5 0 41,088,265 (120,429) (7,681,063)
Issuance of Series D preferred stock,
net.................................... 2 0 19,147,771
Issuance of stock warrants.............. 2,500,000
Issuance of Series C preferred stock as
purchase price adjustment.............. (10,575)
Deferred compensation related to stock
options................................ 1,339,118 (1,339,118)
Stock-based compensation................ 584,560
Dividends declared...................... (5,000,000)
Accretion of Series D preferred PIK
dividend............................... (277,694)
Net loss for the year ended June 30,
1998................................... (22,033,455)
--------- ------- --- -- ------------ ----------- ------------
Balances, June 30, 1998................. 6,214,704 62,147 7 0 58,786,885 (874,987) (29,714,518)
Issuance of Series D preferred stock,
net.................................... 31,681,398
Issuance of Series F preferred stock,
net.................................... 24,208,647
Issuance of Series G preferred stock,
net.................................... 4,893,755
Deferred compensation related to stock
options................................ 27,332,927 (27,332,927)
Stock-based compensation................ 22,371,358
Accretion of Series D preferred PIK
dividend............................... (1,026,462)
Net loss for the year ended June 30,
1999................................... (49,551,391)
--------- ------- --- -- ------------ ----------- ------------
Balances, June 30, 1999................. 6,214,704 $62,147 7 $0 $145,877,150 $(5,836,556) $(79,265,909)
========= ======= === == ============ =========== ============
<CAPTION>
STOCKHOLDER
NOTE
RECEIVABLE TOTAL
----------- ------------
<S> <C> <C>
Balances, June 30, 1996................. $(2,122,256) $ 11,806,346
Partner contributions -- Edison Project
LP..................................... 1,224,965
Net loss for the period from July 1,
1996 through November 18, 1996......... (3,840,532)
Effect of reorganization................ --
Issuance of Series A, B and C preferred
stock, net............................. 30,036,663
Deferred compensation related to stock
options................................
Stock-based compensation................ 45,342
Interest on stockholder note
receivable............................. (18,600) (18,600)
Net loss for the period from November
19, 1996 through June 30, 1997......... (7,681,063)
----------- ------------
Balances, June 30, 1997................. (2,140,856) 31,573,121
Issuance of Series D preferred stock,
net.................................... 19,206,622
Issuance of stock warrants.............. 2,500,000
Issuance of Series C preferred stock as
purchase price adjustment.............. --
Deferred compensation related to stock
options................................ --
Stock-based compensation................ 584,560
Dividends declared...................... (5,000,000)
Accretion of Series D preferred PIK
dividend............................... --
Net loss for the year ended June 30,
1998................................... (22,033,455)
----------- ------------
Balances, June 30, 1998................. (2,140,856) 26,830,848
Issuance of Series D preferred stock,
net.................................... 31,763,564
Issuance of Series F preferred stock,
net.................................... 24,248,222
Issuance of Series G preferred stock,
net.................................... 4,901,755
Deferred compensation related to stock
options................................ --
Stock-based compensation................ 22,371,358
Accretion of Series D preferred PIK
dividend............................... --
Net loss for the year ended June 30,
1999................................... (49,551,391)
----------- ------------
Balances, June 30, 1999................. $(2,140,856) $ 60,564,356
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 101
EDISON SCHOOLS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(11,521,595) $(22,033,455) $(49,551,391)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and
equipment............................................. 3,552,440 7,231,628 11,491,955
Amortization of deferred charter costs and original
issue discount........................................ -- -- (68,688)
Stock-based compensation................................ 45,342 584,560 22,371,358
Equipment write-off..................................... -- -- 1,090,768
Loss on disposal of property and equipment.............. -- 126,500 368,110
Issuance of note receivable in lieu of interest
income................................................ (18,600) -- --
Changes in operating assets and liabilities:
Accounts receivable................................... (5,079,091) (2,726,658) (3,007,679)
Other current assets.................................. (334,238) (422,429) (623,756)
Accounts payable and accrued expenses................. 2,414,428 5,497,686 2,563,812
Other liabilities..................................... -- 1,191,864 (713,736)
------------ ------------ ------------
Cash used in operating activities................... (10,941,314) (10,550,304) (16,079,247)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment....................... (9,090,450) (21,180,550) (25,533,246)
Proceeds from disposition of property and
equipment, net.......................................... -- 35,670 10,537,786
Proceeds from notes receivable and advances due from
charter schools......................................... -- 2,331,667 1,880,989
Notes receivable and advances due from charter schools.... (3,858,238) -- (15,768,384)
Other assets.............................................. (81,762) (1,269,192) (1,445,035)
------------ ------------ ------------
Cash used in investing activities................... (13,030,450) (20,082,405) (30,327,890)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from partner contributions....................... 7,557,965 -- --
Proceeds from issuance of stock and warrants.............. 30,466,663 25,251,971 62,060,480
Costs in connection with equity financing................. (430,000) (3,545,349) (1,146,939)
Proceeds from stockholders' notes payable................. -- 672,155 938,439
Proceeds from notes payable............................... -- 10,797,304 9,624,131
Payments on notes payable and capital leases.............. (1,313,145) (7,293,088) (6,178,626)
Restricted cash........................................... (472,000) (3,500,000) 1,540,584
------------ ------------ ------------
Cash provided by financing activities............... 35,809,483 22,382,993 66,838,069
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents............ 11,837,719 (8,249,716) 20,430,932
Cash and cash equivalents at beginning of period............ 3,903,641 15,741,360 7,491,644
------------ ------------ ------------
Cash and cash equivalents at end of period.................. $ 15,741,360 $ 7,491,644 $ 27,922,576
============ ============ ============
Supplemental disclosure of cash flow information:
Additional paid in capital charged to the accumulated
deficit of the
Partnership through the date of reorganization.......... $ 61,789,000
Cash paid during the periods for:
Interest.................................................. $ 527,421 $ 1,761,821 $ 3,008,260
Supplemental disclosure of non-cash investing and financing
activities:
Dividends declared and settled with notes in lieu of
cash.................................................... $ 5,000,000
Capitalized lease obligations incurred.................... $ 6,462,686
Amounts due from bank under note payable incurred......... $ 1,419,690
Accretion of Series D preferred PIK dividend.............. $ 277,694 $ 1,026,462
Additions to property and equipment included in accounts
payable................................................. $ 8,489,460
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 102
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Edison Schools Inc. (the "Company") (formerly known as The Edison Project
Inc. and Subsidiaries) manages elementary and secondary public schools under
contracts with school districts and charter schools located in 11 states and
Washington, D.C. The Company opened its first four schools in the fall of 1995,
and, as of June 30, 1999, operated 51 schools with approximately 23,900
students.
The Company provides the education program, recruits and manages personnel,
and maintains and operates the facilities at each school it manages. The Company
also assists charter schools in obtaining facilities and the related financing.
As compensation for its services, the Company receives revenues which
approximate, on a per pupil basis, the average per pupil spending of the school
district in which the school is located.
Prior to November 18, 1996, the Company was a partnership. On November 18,
1996, the partners transferred their interests in the assets and liabilities of
the partnership, in a tax free conversion to the Company, in exchange for common
and preferred stock. This transaction was accounted for as a reorganization of
entities under common control, in a manner similar to a pooling-of-interests.
On July 26, 1999, the Company's board of directors approved the filing of a
registration statement with the Securities and Exchange Commission for an
initial public offering ("IPO") of its Common Stock. No assurance can be given
that this offering will become effective.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents consist of
highly liquid debt instruments with original maturities of three months or less.
The Company maintains funds in accounts in excess of FDIC insurance limits;
however, management believes that it minimizes risk by maintaining deposits in
high quality financial institutions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Routine maintenance and repairs
are expensed as incurred. The cost of major additions, replacements, and
improvements are capitalized. Gains and losses from sales or retirements of
property and equipment are included in earnings for the period. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
respective assets (30 years for buildings, the remaining lease term or shorter
for leasehold improvements and 3-5 years for all other items).
The Company purchases or renovates existing buildings to ready them for
charter school use. It is the Company's intention to recapture purchase or
renovation costs through sale to a third party or through the sale or lease of
the building to the charter school board. Buildings or renovations completed and
ready for charter school use are depreciated on a straight line basis over the
shorter of the estimated useful life of the building or until the sale of the
building to a third party. The Company's policy is not to capitalize interest
costs on renovation expenditures since the sale transaction does not provide for
recovery of interest expense.
LONG-LIVED ASSETS
The carrying amount of assets is reviewed on a regular basis for the
existence of facts or circumstances, both internally and externally, that
suggest impairment. No such impairment has been recorded in fiscal 1999 and
fiscal 1998. The Company determines if the carrying amount of a long-lived asset
is impaired based on anticipated undiscounted cash flows before interest. In the
event of impairment, a loss is recognized based on the amount by which the
carrying amount exceeds the fair value of the asset.
F-7
<PAGE> 103
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair value is determined primarily using the anticipated cash flows, discounted
at a rate commensurate with the risk involved.
RESTRICTED CASH
Restricted cash consists of cash held in escrow in compliance with certain
debt agreements, credit issued for the benefit of certain technology suppliers
and certain amounts restricted for use in the start-up of future Edison schools.
REVENUE RECOGNITION
The Company recognizes revenue from each school pro rata over eleven months
from August through June (the "School year").
PREOPENING COSTS
The Company expenses certain preopening training, personnel and other
costs, which are incurred prior to the fiscal year in which operations commence
at new school sites.
Effective July 1, 1997, the Company elected for early adoption of Statement
of Position 98-5, "Accounting for the Costs of Start-Up Activities" ("SOP
98-5"). SOP 98-5 establishes standards for the expensing of start-up costs as
incurred as defined in the statement. The Company had originally accounted for
the adoption through a cumulative effect adjustment in the year ended June 30,
1998. For purposes of these financial statements, the Company has applied
certain provisions of Accounting Principles Board ("APB") No. 20, "Accounting
Changes," and retroactively expensed all start-up costs that had previously been
deferred.
DEFERRED CHARTER COSTS-UNSTATED RIGHTS OR PRIVILEGES
Deferred charter costs are unstated rights or privileges that, in
accordance with Accounting Principles Board No. 21, are given accounting
recognition by establishing a discount on the non-interest bearing
notes-receivable. The discount is the difference between the present value of
the notes-receivable and the cash loaned to the charter school. The discount is
amortized as interest income over the life of the notes. (See Note 3).
As of June 30, 1999, deferred charter costs, net of accumulated
amortization are included in other assets. Net deferred charter costs and
accumulated amortization as of June 30, 1999 were $1,102,637 and $1,833,384,
respectively.
STOCK-BASED COMPENSATION
For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method of accounting
prescribed by APB No. 25 "Accounting for Stock Issued to Employees." In
accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the Company's stock,
as of the grant date, is not greater than the amount an employee must pay to
acquire the stock as defined. To the extent that stock options are granted to
employees with variable terms or if the fair value of the Company's stock as of
the measurement date is greater than the amount an employee must pay to acquire
the stock, then the Company will recognize compensation expense. The fair value
of options granted to non-employees in return for goods and services are
included in operating results as an expense.
F-8
<PAGE> 104
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Disclosures, including pro forma operating results had the Company prepared
its financial statements in accordance with the fair value based method as
stated in Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," have been included in Note 10.
ADVERTISING EXPENSES
Advertising costs consist primarily of print media and brochures and are
expensed when the related advertising occurs. Total advertising expense for each
of the three years ended June 30, 1997, 1998 and 1999 amounted to approximately
$113,000, $265,000 and $788,000, respectively.
INCOME TAXES
The Company recognizes deferred income taxes for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each reporting period based on enacted tax
laws and statutory tax rates. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense consists of the tax payable for the period and the change
during the period in deferred tax assets and liabilities. Prior to the
reorganization (Note 1), the entity structure consisted solely of a partnership,
which under present income tax regulations pays no federal income taxes. Any
income or loss was included in the tax returns of the partners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities. The
carrying amount of the Company's capital lease and other equipment financing
obligations approximates the fair value of such instruments based upon
management's best estimate of interest rates that would be available to the
Company for similar debt obligations at June 30, 1999.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 replaced primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effect of options,
warrants and convertible securities. Diluted earnings per share is very similar
to fully diluted earnings per share. Basic earnings per share is computed using
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted-average number of
common and common stock equivalent shares outstanding during the period. Common
stock equivalent shares, such as convertible preferred stock, stock options, and
warrants, have been excluded from the computation, as their effect is
antidilutive for all periods presented.
The pro forma basic and diluted net loss per share is computed by dividing
the net loss by the sum of the weighted average number of shares of common stock
including the shares to be issued as a result of the assumed conversion of all
outstanding shares of convertible preferred stock.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include, among other things, useful
lives, recoverability of equipment, deferred income tax valuation allowance,
F-9
<PAGE> 105
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
certain accrued expenses and expenses in connection with stock options and
warrants; actual results could differ from these estimates.
COMPREHENSIVE INCOME
On July 1, 1997, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes to stockholders' equity during a period from non-owner
sources. To date, the Company has not had any transactions that are required to
be reported as comprehensive income.
SEGMENTS
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." Management evaluates its operating
performance as a single segment. Therefore, the Company has not included the
additional disclosures required by SFAS No. 131. Adoption of this accounting
standard has no impact on the Company's financial position or net income.
IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARD
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. This statement
is effective in fiscal years beginning after June 15, 2000, although early
adoption is permitted. This statement requires the recognition of the fair value
of any derivative financial instruments on the balance sheet. Changes in fair
value of the derivative and, in certain instances, changes in the fair value of
an underlying hedged asset or liability, are recognized through either income or
as a component of other comprehensive income. The adoption of SFAS 133 is not
expected to have any effect on the Company's financial position or results of
operations.
BASIS OF PRESENTATION
The fiscal 1997 and 1998 financial statements of the Company reflect the
consolidated accounts of its two then wholly owned subsidiaries, Edison Project,
LP (the "Partnership") and an inactive corporation. All intercompany balances
and transactions have been eliminated in consolidation. During fiscal 1999, the
two subsidiaries were merged into the Company or dissolved and their assets and
liabilities were assumed by the Company.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1997 and 1998
financial statements to conform with the current year's presentation.
F-10
<PAGE> 106
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES AND OTHER RECEIVABLES:
Notes and other receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Notes receivable due from charter schools(a)............. $1,526,571 $ 6,084,574
Advances due from charter schools(b)..................... -- 5,975,537
Other receivables........................................ 24,274 1,544,745
---------- -----------
1,550,845 13,604,856
Less, current portion.................................... 712,325 10,204,966
---------- -----------
Total notes and other receivables................... $ 838,520 $ 3,399,890
========== ===========
</TABLE>
- ---------------
(a) Notes receivable due from charter schools includes non-interest bearing
notes with an aggregate face value of $839,093 and $6,803,410 at June 30,
1998 and 1999, respectively, less unamortized original issue discount of
$1,465,768 at June 30, 1999. Interest is imputed on the notes at 12% per
annum. This imputed rate is management's estimate of the fair market
interest rate for these loans based on the Company's current estimated
borrowing rate of approximately 10% and management's assessment of the
incremental risk associated with these loans. The notes mature at various
dates through the year 2002.
Notes receivable due from charter schools includes an interest bearing note
at 8.8% per annum. Management believes that the stated rate is the fair
market rate for this note. The rate is less than the imputed rate on the
non-interest bearing notes discussed above because the charter school has
been and plans to continue accumulating cash reserves which would be
sufficient to repay the note receivable when due. The note amounted to
$687,478 and $746,932 at June 30, 1998 and 1999, respectively, and matures
at various dates through the year 2002.
(b) Advances due from charter schools were converted into a non-interest bearing
note receivable in July 1999. The note is due December 31, 1999 and
automatically converts into a 20 year term loan with interest at 10% per
annum and regular amortization. The advances have been discounted at a rate
of 12% over the expected period of refinancing. Consistent with the
treatment of non-interest bearing notes receivable as discussed in (a)
above. The face value of the advances at June 30, 1999 was $6,343,153, less
unamortized original issue discount of $367,616.
Aggregate maturities of notes receivable are as follows:
For the fiscal year ending June 30,
<TABLE>
<S> <C>
2000.................................................... $10,204,966
2001.................................................... --
2002.................................................... --
2003.................................................... 5,198,274
2004 and thereafter..................................... 35,000
-----------
15,438,240
Less: amount representing discount (see note 3(a) and
(b)).................................................. (1,833,384)
-----------
Total notes and other receivables....................... $13,604,856
Less: current portion................................... (9,711,772)
-----------
Notes and other receivables, noncurrent................. 3,893,084
===========
</TABLE>
F-11
<PAGE> 107
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Land and buildings.................................... $ 3,161,019 $ --
Leasehold improvements................................ 11,748,747 11,844,562
Furniture, fixtures and equipment..................... 24,199,478 36,137,855
Educational software and textbooks.................... 4,109,888 16,673,303
------------ ------------
43,219,132 64,655,720
Accumulated depreciation and amortization............. (11,576,688) (21,784,482)
------------ ------------
Property and equipment, net...................... $ 31,642,444 $ 42,871,238
============ ============
</TABLE>
Assets under capital leases at both June 30, 1998 and 1999 totaled
$5,449,180 and related accumulated amortization totaled $3,021,407 and
$4,564,551, respectively. Amortization expense for each of the three years ended
June 30, 1997, 1998 and 1999 related to assets under capital leases amounted to
$1,100,286, $1,602,121 and $1,543,144, respectively. The Company wrote off
approximately $1,100,000 of equipment during the year ended June 30, 1999 in
connection with its year-end physical equipment inventory.
In March 1998, the Company purchased an office building in Trenton, New
Jersey for approximately $618,000 and made significant improvements for use as a
charter school. In September 1998, the Company entered into a non-cancellable
operating lease, which expires on August 31, 1999, with the charter school for
which the Company provides services. In December 1998, the Company sold the
building to a real estate investment trust, and simultaneously entered into an
18 year operating lease for the building with future annual minimum rentals
approximating $950,000. Subsequent to the sale and leaseback, the Company is
expected to continue its operating lease with the charter school (the
"Sublease") on a month-to-month basis (see Note 7). The Company received
approximately $6,000,000 in cash and realized a gain of approximately $28,000 on
the sale of the building, which is included in the loss on disposal of property
and equipment in the statement of operations for the year ended June 30, 1999.
In June 1998, the Company exercised an option to purchase a charter school
building in Detroit, Michigan for $2,500,000 which the Company had been leasing
under a capitalized lease. In September 1998, the Company, which provides
services at the site, sold the building to the charter school for approximately
$6,300,000 and incurred a loss of approximately $79,000, which is included in
the loss on disposal of property and equipment in the statement of operations
for the year ended June 30, 1999. The Company received approximately $4,400,000
in cash and a non-interest bearing subordinated note approximating $1,900,000
before discount, which is due on June 30, 2002 (see Note 3(a)).
As of June 30, 1998, the Company had recorded in Property and Equipment
approximately $8,100,000 from the two buildings noted above. No such amounts
were recorded as of June 30, 1999.
F-12
<PAGE> 108
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued payroll and benefits.............................. $4,801,481 $7,349,776
Accrued taxes other than income........................... 932,633 1,436,092
Accrued other............................................. 1,180,820 1,013,853
---------- ----------
Total accrued expenses............................... $6,914,934 $9,799,721
========== ==========
</TABLE>
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Notes payable(a)......................................... $8,870,955 $13,934,160
Capital leases (Note 7).................................. 2,608,153 990,453
---------- -----------
11,479,108 14,924,613
Current portion.......................................... (4,601,683) (6,660,789)
---------- -----------
Total long-term debt................................ $6,877,425 $ 8,263,824
========== ===========
</TABLE>
- ---------------
(a) Notes payable at June 30, 1998 and 1999 consist of notes with five financing
companies collateralized by computer equipment, furniture and other assets
of the Company. All notes are similarly structured and generally provide for
equal monthly installments, including interest and principal, over a term of
36 to 48 months. Monthly payments to each noteholder range from
approximately $30,000 to $363,000. Certain notes also provide for a final
installment of up to 15% of the original principal amount. Interest rates
are fixed and range from 15.0% to 20.4% per annum.
In connection with amounts currently outstanding under the notes payable
and capital lease agreements (see Note 7), as of June 30, 1998 and 1999, the
Company had outstanding stock purchase warrants to lenders that provide for the
purchase of up to 1,151,762 and 1,251,762 shares of Series A common stock at
purchase prices ranging from $1.00 to $3.98 and $1.00 to $4.00 per share,
respectively. The stock purchase warrants are exercisable either 100% at the
date of grant, or 50% at the date of grant with the remainder vesting ratably
over the next five years. The stock purchase warrants expire at various dates
through 2009. At the time of issuance, the value of the warrants was not deemed
significant pursuant to a calculation using the Black Scholes option pricing
model. Accordingly, no value has been assigned to the warrants.
The Company is subject to certain reporting debt covenants under several of
its debt agreements. The Company received a waiver from one of its lenders for a
capital lease obligation amounting to $2,608,153 as of June 30, 1998 for a
violation of a non-financial covenant. The non-financial covenant required
compliance within ninety days after June 30, 1998. The covenant was waived as of
June 30, 1998. All debt covenants thereafter have been complied with on a timely
basis.
F-13
<PAGE> 109
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of notes payable are as follows:
<TABLE>
<S> <C>
For the fiscal year ending June 30,
2000.................................................... $ 5,688,566
2001.................................................... 5,296,462
2002.................................................... 2,877,224
2003.................................................... 71,908
-----------
Total.............................................. $13,934,160
===========
</TABLE>
7. LEASES:
The Company has entered into several lease agreements for school site
computers and equipment. The agreements, which are accounted for as capital
leases, provide that the Company will lease equipment for terms of 36 or 42
months with interest rates of 9.5% to 9.75%. Also, the Company has entered into
various non-cancelable operating leases for office space and currently leases
school sites. These leases expire at various dates through the year 2027.
At June 30, 1999, the present value of the minimum lease payments under the
capital leases and rental commitments under operating leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
For the fiscal year ending June 30,
2000.................................................... $1,015,055 $ 3,088,637
2001.................................................... 18,230 2,966,202
2002.................................................... -- 2,942,976
2003.................................................... -- 2,888,126
2004.................................................... -- 2,801,566
Thereafter.............................................. -- 17,773,209
---------- -----------
Total commitments....................................... 1,033,285 $32,460,716
===========
Less amount representing interest....................... (42,832)
----------
Present value of minimum lease payments................. 990,453
Less current installments of capital lease obligation... (972,223)
----------
Capital lease obligations, excluding current
installments.......................................... $ 18,230
==========
</TABLE>
Total rental expense for each of the three years ended June 30, 1997, 1998
and 1999 related to operating leases amounted to approximately $524,000,
$1,876,000 and $3,388,000, respectively.
The Company has a sublease with a charter school on a month-to-month basis
in the amount of $28,000 per month (see Note 4). The rental income has been
recorded as a reduction to rental expense included in administration, curriculum
and development expense.
8. RELATED PARTY TRANSACTIONS:
STOCKHOLDER RECEIVABLE
The stockholder receivable reflected as a reduction in stockholders' equity
consists of two non-recourse notes from the Chairman of the Company, which arose
in connection with his employment agreements. The note agreements, as amended
March 1, 1997, bear interest at 5.83% per annum and do not require periodic
interest or principal payments until maturity. The stockholder receivable is
F-14
<PAGE> 110
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
collateralized by the assignment of the proceeds of a life insurance policy and
in the event of termination can be offset against the severance pay obligation
of the Company. The receivable is due on the earlier of February 15, 2002, the
date on which employment of the Chairman is terminated by the Company or upon
the death of the Chairman.
Prior to the aforementioned amendment, accrued interest of $100,000 was
forgiven by the Company from July 1, 1995 through the date of the amendment.
In June 1999, the board of directors agreed to make loans to the Chief
Executive Officer of the Company. The loans would bear interest at the greater
of the prime rate or the Company's actual borrowing rate in effect from time to
time and with payment due in full on the fifth anniversary of the loans.
STOCKHOLDERS' NOTES PAYABLE
The Series A Common and Series A-C Preferred stockholders have been issued
promissory notes dated December 18, 1997 for $4,407,903 and January 1, 1998 for
$592,097 (see Note 9). In addition, as part of the Series D Preferred private
placement (see Note 9), the Company issued to stockholders, promissory notes
dated December 30, 1997 for $611,025, January 28, 1998 for $61,130, August 24,
1998 for $487,844 and December 14, 1998 for $450,595. The principal for each of
the notes is payable on the tenth anniversary of the dates of issuance. Each
note bears interest at 7% per annum, of which 50% is payable at maturity and the
balance payable each April 1, starting in fiscal 1999 and thereafter.
MANAGEMENT AGREEMENT
The Company and WSI Inc. ("WSI"), a shareholder of the Company, entered
into a five-year management agreement, dated March 15, 1995, as amended November
15, 1996, March 1, 1997 and December 15, 1997. This agreement provides for
payments of fees and expenses as approved by the Company's Board of Directors in
return for consulting and other services to be rendered by WSI. Payments for
each of the three years ended June 30, 1997, 1998 and 1999 relating to the
management agreement amounted to $867,619, $65,123 and $2,762, respectively.
The Chief Executive Officer of the Company is also the sole shareholder of
WSI.
PLEDGE OF SHARES
WSI and its sole shareholder have pledged all of their direct and indirect
interests in the Company to a bank in order to obtain personal loans. The due
date of the personal loans has been extended from August 30, 1999 to August 30,
2002. If WSI and its sole shareholder were to default on the personal loans in
the future, their interest would revert to the bank.
F-15
<PAGE> 111
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMON AND PREFERRED STOCK:
PREFERRED STOCK
Preferred stock as of June 30, 1999 consists of the following:
<TABLE>
<CAPTION>
AUTHORIZED PAR
DESCRIPTION SHARES VALUE
----------- ---------- -----
<S> <C> <C>
Series A Convertible Preferred stock ("Series A
Preferred")............................................... 31,000,000 $.01
Series B Convertible Exchangeable Preferred stock ("Series B
Preferred")............................................... 1,010,101 $.01
Series C Convertible Exchangeable Preferred stock ("Series C
Preferred")............................................... 6,258,608 $.01
Series D Convertible Preferred stock ("Series D
Preferred")............................................... 25,077,843 $.01
Non-Voting Series E Convertible Preferred ("Non-Voting
Series E Preferred")...................................... 6,759,420 $.01
Series F Convertible Preferred stock ("Series F
Preferred")............................................... 4,757,476 $.01
Non-Voting Series G Convertible Preferred stock ("Non-Voting
Series G Preferred")...................................... 3,067,606 $.01
----------
Total preferred stock.................................. 77,931,054
==========
</TABLE>
COMMON STOCK
Common stock as of June 30, 1999 consists of the following:
<TABLE>
<CAPTION>
AUTHORIZED PAR
DESCRIPTION SHARES VALUE
----------- ----------- -----
<S> <C> <C>
Series A Common Stock ("Series A Common")................... 97,466,145 $.01
Series B Common Stock ("Series B Common")................... 1 $.01
Series C Common Stock ("Series C Common")................... 1 $.01
Series D Common Stock ("Series D Common")................... 1 $.01
Series E Common Stock ("Series E Common")................... 1 $.01
Series F Common Stock ("Series F Common")................... 1 $.01
Series G Common Stock ("Series G Common")................... 1 $.01
Series H Common Stock ("Series H Common")................... 1 $.01
Non-Voting Common Stock..................................... 9,827,026 $.01
-----------
Total common stock..................................... 107,293,178
===========
</TABLE>
Series B Common through Series H Common are known as "Special Common".
Each share of preferred stock is convertible at any time, at the option of
the holder, into one share of Series A Common. The preferred stock is subject to
mandatory conversion into common stock upon the completion of an initial public
offering resulting in gross proceeds of at least $50,000,000, at a per share
offering price of at least $7.00 per share.
All holders of preferred stock and common stock are entitled to share
ratably in any dividends declared by the board of directors.
On November 30, 1997, the Company's board of directors declared a dividend
to be paid at a rate of 0.114213 per share to all stockholders of record on
December 11, 1997 and payable in the form of interest bearing notes (see Note 8)
in December 1997. The total issued and outstanding shares of common and
preferred stock on the record date was 6,214,711 and 37,563,144 shares,
respectively.
F-16
<PAGE> 112
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Series D Preferred was sold to accredited investors for a unit price of
$3.98. A unit included a share of Series D Preferred, three options for
fractional shares of Series A Common, and a note payable for 11.4 cents per
share. Of the three options included in the unit, the first option entitles the
holder to 0.019191 shares of Series A Common at an exercise price of $10.00 per
share. On December 31, 1997, the grant date, 70% of these options vested
immediately, of which 50% expire five years from the grant date and the
remainder expire ratably over the next two years. The balance vest 10% annually
commencing June 30, 1998 and expire five years after vesting. The second option
entitles the holder to 0.019191 shares of Series A Common at an exercise price
of $1.50 per share. These options vest on or before January 1, 2000 upon the
Company's completion of a Qualified Offering at a price per share of $8.00 or
more or (ii) after January 1, 2000 and on or before January 1, 2001 at a price
per share of $12.00 or more. A Qualified Offering is defined as (i) the sale by
the Company and/or its stockholders of equity securities of the Company to the
public in a bona fide, firm underwriting commitment to a registration statement
on Form S-1 under The Securities Act of 1933, as amended, which has been
declared effective by the Securities and Exchange Commission or (ii) a private
placement by the Company and/or its stockholders with aggregate gross proceeds
of at least $50,000,000 to the Company and/or its stockholders. These options
expire ten years after vesting. The third option entitles the holder to 0.028786
shares of Series A Common at an exercise price of $8.00 per share. However,
these options only vest if the Company is a public company and its closing price
is $16.00 per share for more than 90 consecutive days. These options expire ten
years after vesting.
The Series D Preferred and Non-Voting Series E Preferred ("Dividend
Securities") stockholders are entitled to a cumulative 6% paid in kind ("PIK")
dividend on the issued and outstanding shares at July 1, 2000 (the "First
Dividend Date") and thereafter at a rate of 6% per annum on the issued and
outstanding shares through December 2003. If the Dividend Securities are
converted into shares of common stock, all accrued and unpaid PIK dividends will
be converted into shares of common stock. However, PIK dividends will terminate
upon certain defined future events, including an IPO. Dividends on other
preferred stock series are non-cumulative. With respect to rights of
liquidation, winding up and dissolution, Series D Preferred and Non-voting
Series E Preferred rank prior to the Series A Preferred, Series B Preferred, and
Series C Preferred, which all rank pari passu with each other, and all of the
Company's Preferred Stock rank prior to all Common Stock of the Company. Holders
of Special Common hold rights not afforded to other holders of Common Stock or
Preferred Stock, such as certain rights to elect members of the Company's Board
of Directors and to participate in certain votes regarding the By-Laws. Shares
of Special Common are non-transferable except to the Company and as expressly
set forth in the Company's Shareholders' Agreement. Each existing holder of
Preferred Stock or Series A Common has certain preemptive rights to purchase in
any sale of additional equity by the Company and on the same terms such
additional shares as may be necessary to maintain such holder's relative
percentage ownership.
On July 2, 1999, the Company filed an amended Certificate of Incorporation
with the State of Delaware which changed its capital structure. The authorized
capital stock subsequent to the amendment consists of 114,893,179 shares of
Common Stock, par value $0.01 per share, and 85,531,054 shares of Preferred
Stock, par value $0.01 per share, representing an additional authorization of
7,600,001 shares of Common Stock and an additional 7,600,000 shares of Preferred
Stock. Of the total increase in Common Stock, 7,000,000 shares were designated
as Series A Common, one share was designated as Series I Common Stock, and an
additional 600,000 shares were designated as Non-Voting Common Stock. Of the
total increase in Preferred Stock, 7,000,000 shares were designated as Series F
Preferred and 600,000 shares were designated as Non-Voting Series G Preferred.
The Series F Preferred and the Non-Voting Series G Preferred rank prior to the
Series A, B and C Preferred and the Common Stock. (See Notes 8 and 13).
F-17
<PAGE> 113
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In July 1999, the Company completed two private placement financing
transactions for total proceeds of $41,741,518 in exchange for 6,787,238 shares
of Series F Convertible Preferred and one share of Series I Common.
In March 1995, the Company granted to an investment bank options to
purchase 200,000 shares of Series A Common, exercisable at $0.25 per share, for
services rendered in raising equity financing. The options vested immediately on
the grant date. The options expire on July 2, 2002.
In addition, WSI, a stockholder, holds two options to purchase shares of
the Company's Series A Common. Under the first option, WSI has the right to
purchase up to 850,000 shares at $10 per share whereby 500,000 shares vested
immediately and commencing on June 30, 1996, 100,000 shares vest annually for
each of the following three years and 50,000 shares vest in the final year.
Under the second option, WSI has the right to purchase up to 1,000,000 shares at
$20 per share whereby 500,000 shares vested immediately and commencing on June
30, 1996, 100,000 shares vest annually for each of the next five years. The
options expire in years 2003 through 2005. At the time of the grant in March
1995, the options were accounted for pursuant to the provision of APB No. 25
and, accordingly, the Company recorded no compensation expense.
As of June 30, 1999, stock options issued and outstanding in conjunction
with the Series D preferred private placement entitled the holders to purchase
947,137 shares of Series A Common.
In June 1998, the Company, in exchange for $2,500,000, issued 3,775,000
warrants to a philanthropic foundation to purchase 3,775,000 shares of Series D
Preferred at the price of $3.98 per share. The warrant expires on June 1, 2005.
Certain provisions of the warrant agreement require such funds to be applied
towards the pre-opening expenses and start-up investments with respect to
certain schools that the Company operates.
10. STOCK OPTIONS:
A summary of the Company's employee stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED STOCK WEIGHTED
AVERAGE OF OPTIONS AVERAGE OF
SHARES EXERCISE PRICES EXERCISABLE EXERCISE PRICES
---------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Under option at June 30, 1996.............. 3,194,419 $ 1.24 709,877 $1.22
Options granted in fiscal 1997............. 945,000 $ 1.50
Options exercised in fiscal 1997........... -- --
Options cancelled in fiscal 1997........... (17,690) $ 1.25
----------
Under option at June 30, 1997.............. 4,121,729 $ 1.30 1,276,425 $1.25
Options granted in fiscal 1998............. 9,566,220 $14.14
Options exercised in fiscal 1998........... -- --
Options cancelled in fiscal 1998........... (20,954) $ 1.25
----------
Under option at June 30, 1998.............. 13,666,995 $10.26 2,506,918 $1.28
Options granted in fiscal 1999............. 2,472,217 $ 8.08 303,360 $9.67
Options exercised in fiscal 1999........... -- --
Options cancelled in fiscal 1999........... (303,165) $ 1.78
----------
Under option at June 30, 1999.............. 15,836,047 $10.22 5,217,980 $2.01
==========
</TABLE>
F-18
<PAGE> 114
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The board of directors approved on October 20, 1998 and amended on June 30,
1999, the 1998 Site Option Plan (the "Site Plan"). A maximum of 1,500,000 shares
of Series A Common can be awarded under the Site Plan. The options under this
plan cover all persons who are employed at the Company's schools. The options
granted are intended to be either incentive stock options under section 422 of
the Internal Revenue Code of 1986 or non-qualified options. Options granted will
have an exercise price equal to the fair market value of the Series A Common at
the grant date. The vesting of the options is determined by the board of the
directors, however, these become exercisable on the earlier of an IPO or
February 16, 2006. The options expire ten years after the date of grant. As of
June 30, 1999, the Company has granted 126,217 of these options. On July 9,
1999, the Company granted additional options to purchase 808,731 shares of
Series A Common.
The board of directors on June 30, 1999 approved the adoption of the 1999
Stock Option Plan (the "1999 Plan"). A maximum of 1,000,000 shares of Series A
Common can be awarded under the 1999 Plan. The options granted cover all
employees except senior executives and are intended to be either incentive stock
options under Section 422 of the Internal Revenue Code of 1986 or non-qualified
options. Options granted will have an exercise price equal to the fair market
value of the Series A Common at the grant date. The board determines the vesting
of the options for each employee; however these become exercisable on the
earlier of an IPO or February 16, 2006. The options expire ten years after the
date of grant. On June 30, 1999, the Company granted options to purchase 397,000
shares of Series A Common. Additionally, on July 9, 1999, the Company granted
options to purchase 399,500 shares of Series A Common.
The board of directors on June 30, 1999 approved the adoption of the 1999
Key Stock Incentive Plan (the "Plan"). A maximum of 1,000,000 shares of Series A
Common can be awarded under the Plan. The options granted cover a variety of
stock-based awards to senior executives, officers and directors and are intended
to be either incentive stock options under section 422 of the Internal Revenue
Code of 1986 or non-qualified options. Options granted will have an exercise
price equal to the fair market value of the Series A Common at the grant date.
Each option is exercisable as determined by the board of directors; such terms
are included in each option agreement. On June 30, 1999, the Company granted
options to purchase 876,000 shares of Series A Common.
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE OF AVERAGE OF
RANGE OF SHARES CONTRACTED EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICES EXERCISABLE PRICES
--------------- ------------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$1.00 - $4.00..................... 6,612,680 2.9 $ 1.67 4,871,504 $ 1.50
$6.15...................... 1,408,367 4.9 $ 6.15 126,366 $ 6.15
$8.00...................... 1,500,000 3.8 $ 8.00 -- --
$10.00...................... 15,000 5.0 $10.00 -- --
$11.00...................... 1,000,000 5.0 $11.00 -- --
$16.00...................... 2,500,000 3.8 $16.00 220,110 $16.00
$28.00...................... 2,800,000 3.8 $28.00 -- --
---------- ---------
15,836,047 5,217,980
========== =========
</TABLE>
The Company, during the fourth quarter of fiscal 1999, made amendments to
existing options which resulted in a new measurement date. As a result,
stock-based compensation expense was recorded
F-19
<PAGE> 115
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
representing the difference between the exercise price of the options and the
deemed fair market value of the underlying stock at that time. In this regard,
the Company has recognized an expense of approximately $17,400,000 in the fourth
quarter of fiscal 1999. During fiscal 1999, the Company also recorded an expense
of approximately $4,970,000 in connection with stock options subject to variable
accounting.
Had compensation cost for the Company's stock option issuances been
determined based on the fair value at the grant date for awards in each of the
three years ended June 30, 1997, 1998 and 1999 consistent with the provisions of
SFAS No. 123, the Company's net loss attributable to common stockholders would
have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss attributable to common stockholders -- as
reported......................................... $(11,521,595) $(26,601,349) $(50,577,853)
Net loss attributable to common stockholders -- pro
forma............................................ $(11,586,192) $(26,342,268) $(28,453,380)
Basic and diluted net loss attributable to common
stockholders per share -- as reported............ $ (1.85) $ (4.28) $ (8.14)
Basic net loss attributable to common stockholders
per share -- pro forma........................... $ (1.86) $ (4.24) $ (4.58)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the "Black-Scholes Option-pricing Model" with the following weighted
average assumptions used for grants for each of the years ended June 30, 1997,
1998 and 1999: zero dividend yield; no volatility; a weighted average risk-free
interest rate of 6.33%, 5.69% and 5.40%, respectively; and expected lives of
5.3, 3.0 and 6.7 years, respectively.
The following table summarizes the weighted-average grant-date fair values
of options granted during fiscal 1999:
<TABLE>
<CAPTION>
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
EQUALED FAIR VALUE EXCEEDED FAIR LESS THAN FAIR
AT ISSUANCE VALUE AT ISSUANCE VALUE AT ISSUANCE
------------------ ----------------- -----------------
<S> <C> <C> <C>
Weighted average exercise price of options
granted during the year...................... $6.15 $10.19 $3.13
Weighted average fair value of options granted
during the year.............................. $6.15 $ 5.62 $4.76
</TABLE>
During fiscal 1999, the Company also granted 35,000 options in shares of
Series A Common to certain non-employees. 20,000 options in shares of Series A
Common are exercisable at $4.00 per share and vest 20% upon grant and the
balance vest ratably over the next four years. 15,000 options in shares of
Series A Common are exercisable at $6.15 per share and vest ratably over the
next five years. As of June 30, 1999, 4,000 options were fully vested.
Management believes that the value of the options issued is de minimus as
calculated using the Black-Scholes option pricing model with the following
assumptions: zero dividend yield; 30% volatility, and a weighted average
risk-free interest rate at 5.4% and expected life of 10 years.
11. INCOME TAXES:
There is no provision for federal or state and local income taxes pro forma
or otherwise for the years ended June 30, 1997, 1998 and 1999 since the Company
has incurred operating losses. Due to the uncertainty of the Company's ability
to realize the tax benefit of such losses, a valuation allowance has been
established to equal the total net deferred tax assets.
F-20
<PAGE> 116
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................ $16,938,000 $ 30,277,000
Accrued liabilities.................................... -- 1,874,000
Stock options.......................................... -- 8,501,000
Amortization........................................... -- 2,282,000
Organizational costs................................... 18,000 13,000
----------- ------------
Total deferred tax assets........................... 16,956,000 42,947,000
----------- ------------
Deferred tax liabilities:
Fixed assets........................................... -- 857,000
Book basis of investment in excess of tax basis........ 4,651,000 --
----------- ------------
Total deferred tax liabilities...................... 4,651,000 857,000
----------- ------------
Net benefit for income taxes............................. 12,305,000 42,090,000
Valuation allowance...................................... (12,305,000) (42,090,000)
----------- ------------
Net deferred tax asset.............................. $ -- $ --
=========== ============
</TABLE>
At June 30, 1999, the Company had approximately $80,000,000 of net
operating loss carryforwards available to reduce its future taxable income.
Under current Federal income tax law, approximately $45,000,000 of such
carryforwards will expire in 2013 and approximately $35,000,000 will expire in
2019.
12. EMPLOYEE BENEFIT PLANS:
The Company has established a 401(k) Plan for substantially all full-time
employees. The Company matches each participant's contribution up to 50% of the
first $1,000. Participants become fully vested in the match after one year.
Contributions to the 401(k) Plan made by the Company for each of the three years
ended June 30, 1997, 1998 and 1999 amounted to $19,179, $28,936 and $62,876,
respectively.
13. COMMITMENTS AND CONTINGENCIES:
LONG TERM LEASE OBLIGATIONS
The Company has entered into operating leases for two charter school
facilities with lease terms in excess of the initial term of the management
agreement for the schools operating in those facilities.
One of the facilities, currently housing two schools, has been leased for
an 18 year term expiring in June 2017. The initial term of the management
agreement to operate in this facility expires in June 2002. The annual lease
payments begin at $640,500 per year and increase by approximately 2% per year
resulting in a final year's annual rent of $905,823.
The second facility, currently housing two schools, has been leased for a
15 year term expiring in September 2013. The initial term of the management
agreement to operate in this facility expires in June 2001. The annual lease
payment is $769,000 through fiscal 2008 and increases to $932,400 for fiscal
2009 through fiscal 2013.
Although the Company's lease obligations exceed the length of the initial
management agreement, the Company hopes to renew these management agreements or
enter into management agreements with different charter school boards in the
event the current charter school boards do not renew their
F-21
<PAGE> 117
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
agreements. There can be no assurance that the Company can find substitute
charter school boards in the event its current clients decline to renew. In that
event, the Company would be obligated to continue paying rent although it would
be generating no revenues from these facilities which would have an adverse
effect on the Company's financial results.
LITIGATION
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. Management does not believe
the outcome of any pending claims will have a material adverse impact on the
Company's financial position or results of operations.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
executives. Such agreements may be terminated by either the executive or the
Company at any time and provide, among other things, certain termination
benefits. As of June 30, 1999, the aggregate termination benefits of the
executives and certain other employees approximated $4,800,000.
SETTLEMENT AGREEMENTS
In connection with the development of certain parts of the core curriculum,
agreements were entered into with former employees to compensate them for
services rendered. Two former employees who provided such services had bonus
agreements while employed with the Company which amounted to $888,900 and were
contingent upon the occurrence of a qualified equity transaction. Such a
transaction occurred in December 1997, causing the obligation to be payable in
three equal annual installments beginning twelve months after the equity
transaction. In addition, the Company entered into settlement agreements with
three other former employees who, while employed, rendered such services for an
aggregated obligation of $1,825,000. Upon execution of the settlement agreements
dated January 30, 1998, $825,000 was paid immediately, while the balance of
$1,000,000 is payable in two equal annual installments of principal plus
interest on the first and second anniversary date of the agreements. Interest is
computed at the rate of 6% per annum. In addition, the attorney who rendered
legal services in connection with the settlement agreements was paid $10,000.
The aforementioned expenses are included in design team compensation for the
year ended June 30, 1998.
GUARANTEES
The Company has guaranteed certain debt obligations of charter school
boards with which it has management agreements. As of June 30, 1999, the Company
had provided guarantees totaling approximately $4,900,000. The debt obligations
mature in August 2001 and June 2002.
As of June 30, 1999, the debt obligations of the charter school boards are
current. Under the guarantor agreements, the Company is also required to
maintain minimum cash balances that may increase under certain circumstances, as
well as to satisfy certain financial reporting covenants.
For fiscal 1998 and 1999, all covenants have been met except that the
Company received waivers for June 30, 1998 and 1999, respectively, from one
financial institution as of June 30, 1998 and 1999 due to non-compliance with a
covenant that requires maintenance of certain minimum cash balances aggregating
to $1.5 million at fiscal year end. These instances of non-compliance were cured
on July 1, 1998 and July 5, 1999, respectively.
F-22
<PAGE> 118
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PURCHASE AGREEMENT
In July 1999, the Company entered into a preferred stock purchase agreement
with a corporation providing for the purchase of up to 2,000,000 shares of the
corporation's preferred stock, par value $0.001 per share, for a purchase price
of $5.00 per share. The Company purchased 1,000,000 shares in July 1999 for a
total investment of $5,000,000, which represents approximately 16.5% ownership
in the corporation. The Company expects to account for the investment under the
equity method of accounting. Under the agreement, if the corporation sells
additional shares of its preferred stock prior to the second anniversary of the
investment, the Company will be required to purchase up to $5,000,000 of
additional shares of preferred stock. The chairman of the board of the
corporation is also a director of the Company.
14. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents, notes receivable and advances to
charter schools, and trade receivables. The Company manages its credit risk by
maintaining cash and cash equivalents with financial institutions that it
believes are financially sound and through the contractual arrangements that it
has entered into with each district and charter school.
Trade receivables are primarily short-term receivables from various
district and charter schools. Credit risk is affected by changing conditions
within the economy of individual states and school districts in which the
Company operates. The Company establishes an allowance for doubtful accounts, if
necessary, based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
Notes receivable from charter schools are both short-term and long-term.
Credit risk associated with those amounts is affected not only by the economy of
individual states and school districts in which the charter school operates, but
on the continued existence of charter school laws. The Company establishes an
allowance of uncollectible amounts, if appropriate, based upon factors
surrounding the credit risk of the specific charter schools, historical trends
and other information.
15. SUBSEQUENT EVENTS
In October 1999, the Board of Directors (the "Board") approved the adoption
of the 1999 Stock Incentive Plan (the "Plan") for employees and authorized the
Compensation Committee to administer the Plan for which a maximum of 2,500,000
shares of class A common stock can be issued. Stock based awards issued under
the Plan that are unexercised are available for future award grants.
On October 5, 1999, the Board of Directors approved a proposal to amend the
capitalization structure of the Company. The amendment will become effective
through both approval of the shareholders and the effective date of the initial
public offering.
Under the amendment, outstanding Series A through G Preferred Stock will
convert into Class A Common Stock with the number of shares upon conversion
calculated as the original purchase price for each share plus accrued and unpaid
dividends divided by the conversion price multiplied by nine-twentieths. In
addition, each Preferred share will convert into a number of shares of Class B
Common Stock calculated as the original purchase price for each share plus
accrued and unpaid dividends divided by the conversion price multiplied by
one-twentieth.
All outstanding shares of Series A Common, Special Common, and Non-Voting
Common shall automatically convert into nine-twentieths of a share of Class A
Common Stock and one-twentieth of a share of Class B Common Stock. In addition,
all fractional shares of Class A Common Stock and Class B Common Stock will be
rounded up to the next larger number. The fiscal 1999 financial statements do
not reflect the effects of the conversion on outstanding capital stock because
the conversion does not occur until the initial public offering becomes
effective.
F-23
<PAGE> 119
DESCRIPTION OF GRAPHICAL MATERIAL ON INSIDE OF BACK COVER:
PHOTOGRAPH OF FLOWER ABOVE THE NAME EDISON SCHOOLS.
<PAGE> 120
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS AN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
6,800,000 SHARES
[LOGO]
EDISON SCHOOLS INC.
CLASS A COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN & CO.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 121
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 5, 1999
PROSPECTUS
6,800,000 SHARES [LOGO]
EDISON SCHOOLS INC.
CLASS A COMMON STOCK
----------------------
This is Edison Schools Inc.'s initial public offering of class A common
stock. The international managers will offer 1,360,000 shares of class A common
stock outside the United States and Canada and the U.S. underwriters will offer
5,440,000 shares of class A common stock in the United States and Canada.
We expect the public offering price to be between $21.00 and $23.00 per
share. After pricing of the offering, we expect that the class A common stock
will trade on the Nasdaq National Market under the symbol "EDSN."
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Edison Schools Inc. ......... $ $
</TABLE>
The international managers may also purchase up to an additional 204,000
shares of class A common stock at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an aggregate
of an additional 816,000 shares of class A common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We expect that the shares of class A common stock will be ready for
delivery in New York, New York on or about , 1999.
----------------------
MERRILL LYNCH INTERNATIONAL
BANK OF AMERICA INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN SECURITIES LTD.
----------------------
THE DATE OF THIS PROSPECTUS IS , 1999.
ALT-1
<PAGE> 122
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
GENERAL
Merrill Lynch International, Bank of America International Limited, Credit
Suisse First Boston (Europe) Limited, Donaldson, Lufkin & Jenrette International
and J.P. Morgan Securities Ltd. are acting as lead managers for each of the
international managers named below. Subject to the terms and conditions set
forth in an international purchase agreement among Edison and the international
managers, and concurrently with the sale of 5,440,000 shares of class A common
stock to the U.S. underwriters, Edison has agreed to sell to the international
managers, and each of the international managers severally and not jointly has
agreed to purchase from Edison the number of shares of class A common stock set
forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ----------
<S> <C>
Merrill Lynch International.................................
Bank of America International Limited.......................
Credit Suisse First Boston (Europe) Limited.................
Donaldson, Lufkin & Jenrette International..................
J.P. Morgan Securities Ltd..................................
----------
Total.......................................... 1,360,000
==========
</TABLE>
Edison has also entered into a U.S. purchase agreement with certain
underwriters in the United States and Canada for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Banc of America Securities LLC, Credit Suisse First
Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and J.P.
Morgan Securities Inc. are acting as representatives. Subject to the terms and
conditions set forth in the U.S. purchase agreement, and concurrently with the
sale of 1,360,000 shares of class A common stock to the international managers
pursuant to the international purchase agreement, Edison has agreed to sell to
the U.S. underwriters, and the U.S. underwriters severally have agreed to
purchase from Edison, an aggregate of 5,440,000 shares of class A common stock.
The initial public offering price per share and the total underwriting discount
per share of class A common stock are identical under the international purchase
agreement and the U.S. purchase agreement.
In the international purchase agreement and the U.S. purchase agreement,
the several international managers and the several U.S. underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of class A common stock being sold
pursuant to each such agreement if any of the shares of class A common stock
being sold pursuant to such agreement are purchased. In the event of a default
by an underwriter, the international purchase agreement and the U.S. purchase
agreement provide that, in specified circumstances, the purchase commitments of
non-defaulting underwriters may be increased or the purchase agreements may be
terminated. The closings with respect to the sale of shares of class A common
stock to be purchased by the international managers and the U.S. underwriters
are conditioned upon one another.
The lead managers have advised Edison that the international managers
propose initially to offer the shares of class A common stock to the public at
the initial public offering price set forth on the cover page of this prospectus
and to certain dealers at such price less a concession not in excess of
$ per share of class A common stock. The international managers may allow,
and such dealers may reallow, a discount not in excess of $ per share of
class A common stock to certain other dealers. After the initial public
offering, the public offering price, concession and discount may change.
OVER-ALLOTMENT OPTION
Edison has granted options to the international managers, exercisable for
30 days after the date of this prospectus, to purchase up to an aggregate of
204,000 additional shares of class A common stock at the initial public offering
price set forth on the cover page of this prospectus, less the underwriting
discount.
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<PAGE> 123
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
The international managers may exercise these options solely to cover
over-allotments, if any, made on the sale of the common stock offered in this
prospectus. To the extent that the international managers exercise these
options, each international manager will be obligated, subject to certain
conditions, to purchase a number of additional shares of class A common stock
proportionate to that international manager's initial amount reflected in the
above table. Edison has granted options to the U.S. underwriters, exercisable
for 30 days after the date of this prospectus, to purchase up to an aggregate of
816,000 additional shares of class A common stock to cover over-allotments, if
any, on terms similar to those granted to the international managers.
COMMISSIONS AND DISCOUNTS
The following table shows the per share and total underwriting discount to
be paid by Edison to the underwriters and the proceeds before expenses to
Edison. The underwriting discount was determined based on negotiations between
the representatives of the underwriters and Edison. In addition, the table
includes certain other items considered by the NASD to be underwriting
compensation for purposes of the NASD's Rules of Fair Practice. This information
is presented assuming either no exercise or full exercise by the underwriters of
their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................................. $ $ $
Underwriting discount..................................
Other items............................................
Proceeds, before expenses, to Edison...................
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $2.6 million and are payable by Edison. Affiliates of J.P. Morgan
own 472,432 shares of Edison's series F preferred stock which were purchased in
June and July 1999. Each of these shares of Series F preferred stock will
automatically convert into .45 shares of class A common stock and .05 shares of
class B common stock of Edison at the time of this offering. The compensation
included in the chart above in the line titled "other items" was computed based
on the difference between the $ offering price and $6.15, the price paid for
the shares of series F preferred stock held by J.P. Morgan's affiliates. See
"Related Party Transactions" and "Principal Stockholders."
The shares of class A common stock are being offered by the several
underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
underwriters, including the validity of the shares of class A common stock, and
other customary conditions, such as the receipt by the underwriters of officer's
certificates and legal opinions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
RESERVED SHARES
At Edison's request, the underwriters have reserved for sale, at the
initial public offering price, up to of the shares offered hereby
for employees, directors and other persons with relationships with Edison who
have expressed an interest in purchasing shares of class A common stock in the
offering. The number of shares of class A common stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered in this
prospectus.
NO SALES OF CLASS A COMMON STOCK OR SIMILAR SECURITIES
Edison and Edison's executive officers and directors, stockholders,
warrantholders, and optionholders, except for the holders of options to purchase
up to 350,000 shares of common stock, have agreed, subject
ALT-3
<PAGE> 124
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
to the exceptions described under "Shares Eligible for Future Sale -- Lock-up
Agreements", not to directly or indirectly
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option -- other than options granted by Edison pursuant its stock options
plans -- right or warrant for the sale of or otherwise dispose of or
transfer any shares of class A common stock or securities convertible
into exchangeable or exercisable for class A common stock, including
class B common stock, whether now owned or thereafter acquired by them or
with respect to which they thereafter acquire the power of disposition,
or file a registration statement under the Securities Act with respect to
the foregoing; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequences of ownership of the class A common stock
whether any such swap or transaction is to be settled by delivery of
class A common stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the underwriters
for a period of 180 days after the date of this prospectus. See "Shares Eligible
for Future Sale -- Lock-up Agreements."
NASDAQ NATIONAL MARKET LISTING
Application has been made to list the class A common stock on the Nasdaq
National Market under the trading symbol "EDSN."
Prior to the offering, there has been no public market for Edison's class A
common stock. The initial public offering price will be determined through
negotiations between Edison and the representatives and the lead managers. The
factors to be considered in determining the initial public offering price, in
addition to prevailing market conditions, are:
- price-earnings ratio of publicly traded companies that the
representatives and the lead managers believe to be comparable to Edison;
- certain financial information of Edison;
- the history of, and the prospects for, Edison and the industry in which
it competes; and
- an assessment of (1) Edison's management, (2) its past and present
operations, (3) the prospects for, and timing of, future revenue of
Edison, (4) the present state of Edison's developments and (5) the above
factors in relation to market values and various valuation measures of
other companies engaged in activities similar to Edison.
There can be no assurance that an active trading market will develop for
the class A common stock or that the class A common stock will trade in the
public market subsequent to the offering at or above the initial public offering
price.
The underwriters do not expect sales of the class A common stock to any
accounts over which they exercise discretionary authority to exceed 5% of the
number of shares being offered hereby. The underwriters will not confirm sales
of the class A common stock to any account over which they exercise
discretionary authority without the prior written specific approval of the
customer.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Pursuant to the intersyndicate agreement, the international managers and the
U.S. underwriters are permitted to sell shares of class A common stock to each
other for purposes of resale at the initial public offering price, less an
amount not greater than the selling concession. Under the terms of the
intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell
shares of class A common stock will not offer to sell or sell shares of class A
common stock to persons who are non-U.S. or non-Canadian persons or to persons
they believe intend to resell to persons who are non-U.S. or non-Canadian
persons, and the international managers any dealer to whom they sell shares of
class A common stock will not offer to sell or sell shares of class A common
stock to
ALT-4
<PAGE> 125
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
U.S. persons or to Canadian persons or to persons they believe intend to resell
to U.S. or Canadian persons, except in the case of transactions pursuant to the
intersyndicate agreement.
Edison has agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make for those
liabilities.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the class A common stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the underwriters
and certain selling group members to bid for and purchase the class A common
stock. As an exception to these rules, the representatives are permitted to
engage in certain transactions that stabilize the price of the class A common
stock. Those transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the class A common stock.
The underwriters may create a short position in the class A common stock in
connection with the offering. This means that if they sell more shares of class
A common stock than are set forth on the cover page of this prospectus. In that
case, the representatives and lead managers, respectively, may reduce that short
position by purchasing class A common stock in the open market. The
representatives and lead managers, respectively, may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
PENALTY BIDS
The Depository Trust Company Tracking System tracks shares sold from
accounts established on each underwriter's and selling group member's behalf for
this offering. When the representatives or lead managers, respectively,
repurchase shares of the class A common stock in the open market to reduce the
underwriters' short position or to stabilize the price of the class A common
stock, Merrill Lynch may, in its sole discretion, impose a penalty bid on the
underwriters and selling group members who initially sold these "flipped"
shares. This means that Merrill Lynch may reclaim part or all of the amount of
the selling concession from the underwriters and selling group members who sold
these flipped shares. Should Merrill Lynch decide to assess a penalty bid on any
of the underwriters or selling group members for flipping shares, the reclaimed
selling concessions are to be used only to reduce any loss incurred in making
open market repurchases of the class A common stock. Merrill Lynch would not
reclaim selling concessions if no shares were repurchased in the open market,
and selling concessions may be reclaimed only to the extent that losses are
incurred in making open market purchases.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the class A common stock to the extent
that it discourages resales of the class A common stock.
Neither Edison nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the class A common stock. In addition,
neither Edison nor any of the underwriters makes any representation that the
lead managers or representatives will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
QUALIFIED INDEPENDENT UNDERWRITER
Sprout Capital VI, L.P., Sprout Capital VII, L.P., The Sprout CEO Fund,
L.P. and DLJ Capital Corporation (collectively, the "Sprout Entities") are
affiliates of Donaldson, Lufkin & Jenrette Securities Corporation, one of the
underwriters. As described under "Principal Stockholders," the Sprout Entities
beneficially own an aggregate of 4,125,532 shares of the outstanding class A
common stock and 458,396 shares of the outstanding class B common stock, which
represent more than 10% of the outstanding class A and class B common stock. Of
these shares, shares of class A common stock and shares of class B
common stock are subject to a voting trust agreement and are held and voted by
an
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<PAGE> 126
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
independent third party, , as voting trustee. For additional
information concerning the Sprout Entities' ownership of Edison's capital stock,
see "Related Party Transactions".
Because the Sprout Entities affiliated with Donaldson, Lufkin & Jenrette
Securities Corporation beneficially own more than 10% of the outstanding class A
and class B common stock, the offerings will be conducted in accordance with
Conduct Rule 2720 of the National Association of Securities Dealers, Inc., which
requires that the public offering price of an equity security be no higher than
the price recommended by a Qualified Independent Underwriter which has
participated in the preparation of the Registration Statement and performed its
usual standard of due diligence with respect thereto. Merrill Lynch has agreed
to act as Qualified Independent Underwriter with respect to the U.S. offering
and the international offering, and the public offering price of the class A
common stock will be no higher than that recommended by Merrill Lynch. Edison
has agreed to indemnify Merrill Lynch in its capacity as Qualified Independent
Underwriter against certain liabilities, including certain liabilities under the
Securities Act.
Two representatives of the Sprout Entities serve on Edison's board of
directors. See "Management."
OTHER RELATIONSHIPS
Merrill Lynch, Banc of America Securities LLC and J.P. Morgan Securities
Ltd. have acted as placement agents in connection with private placements of
Edison's capital stock. Affiliates of J.P. Morgan are stockholders of Edison and
two representatives of these affiliates serve on Edison's board of directors.
See "Management," "Principal Stockholders" and "Related Party Transactions".
ALT-6
<PAGE> 127
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS AN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
6,800,000 SHARES
[LOGO]
EDISON SCHOOLS INC.
CLASS A COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH INTERNATIONAL
BANK OF AMERICA INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN SECURITIES LTD.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALT-7
<PAGE> 128
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
class A common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 50,040
NASD filing fee............................................. 18,500
Nasdaq National Market listing fee.......................... 145,000
Printing and engraving expenses............................. 400,000
Legal fees and expenses..................................... 600,000
Accounting fees and expenses................................ 400,000
Blue Sky fees and expenses (including legal fees)........... 20,000
Transfer agent and registrar fees and expenses.............. 10,000
Directors and officers insurance............................ 700,000
Miscellaneous............................................... 256,460
----------
Total............................................. $2,600,000
==========
</TABLE>
- ---------------
* To be filed by amendment
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Fifth Amended and Restated Certificate of Incorporation
(the "Restated Certificate"), which will be in effect following this offering,
provides that, except to the extent prohibited by the Delaware General
Corporation Law (the "DGCL"), the Registrant's directors shall not be personally
liable to the Registrant or its stockholders for monetary damages for any breach
of fiduciary duty as directors of the Registrant. Under the DGCL, the directors
have a fiduciary duty to the Registrant which is not eliminated by this
provision of the Restated Certificate and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of nonmonetary relief will
remain available. In addition, each director will continue to be subject to
liability under the DGCL for breach of the director's duty of loyalty to the
Registrant, for acts or omissions which are found by a court of competent
jurisdiction to be not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are prohibited by the DGCL. This provision also does not affect
the directors' responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws. The Registrant has
obtained liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL including
for an unlawful payment of dividend or unlawful stock purchase or redemption, or
(iv) for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's by-laws, any agreement, a vote
of stockholders or otherwise. The Restated Certificate eliminates the personal
liability of directors to the
II-1
<PAGE> 129
fullest extent permitted by the DGCL and, together with the Registrant's Second
Amended and Restated By-Laws (the "Restated By-Laws"), which will be in effect
following this offering, provides that the Registrant shall fully indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding. Reference is made to the
Registrant's Form of Amended and Restated Certificate of Incorporation and Form
of Amended and Restated By-Laws filed as Exhibits 3.2 and 3.4 hereto,
respectively.
Two of the directors of the Registrant are also officers of DLJ Capital
Corporation ("DLJCC"), and are serving on the Registrant's Board of Directors at
the request of Sprout Capital VI, L.P., Sprout Capital VII, L.P. and Sprout CEO
Fund, L.P. (collectively, the "Sprout Partnerships") and DLJCC. Pursuant to the
partnership agreements of each of the Sprout Partnerships, each Sprout
Partnership will indemnify officers of DLJCC when they are representing such
Sprout Partnership on the board of directors of a corporation of which such
Sprout Partnership is an investor, provided that such officers acted in good
faith and in the manner such officers reasonably believed to be in the best
interests of such Sprout Partnership.
The U.S. Purchase Agreement and the International Purchase Agreement
provide that the Underwriters are obligated, under certain circumstances, to
indemnify directors, officers and controlling persons of the Registrant against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Act"). Reference is made to the forms of the U.S. Purchase
Agreement and the International Purchase Agreement to be filed as Exhibits 1.1
and 1.2 hereto.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1996, the Registrant has issued the following securities
that were not registered under the Securities Act as summarized below.
(a) Issuances of Capital Stock and Warrants.
In July 1996, the Registrant, which was then a partnership, issued
partnership interests to private investors in return for capital contributions
aggregating $12.3 million.
In November 1996, the Registrant converted from a partnership to a
corporation and issued 6,214,704 shares of series A common stock and 21,149,993
shares of series A convertible preferred stock in exchange for partnership
interests of existing investors. In November 1996, the Registrant also sold
9,144,442 shares of series A convertible preferred stock, one share of series B
common stock, one share of series C common stock, one share of series D common
stock, one share of series E common stock and one share of series F common stock
to a group of private investors for an aggregate sale price of $13,716,663.
In February 1997, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 213,333 shares
of series A convertible preferred stock.
In March 1997, the Registrant sold 1,010,101 shares of series B convertible
exchangeable preferred stock to a private investor for an aggregate sale price
of $1,666,666.
In May 1997, the Registrant sold 5,201,135 shares of series C convertible
exchangeable preferred stock to a group of private investors for an aggregate
sale price of $15,083,291.
In June 1997, (i) in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant which currently represents the
right to purchase up to 50,000 shares of series A
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<PAGE> 130
common stock, and (ii) in connection with another equipment financing the
Registrant issued to an equipment financing firm a warrant to purchase up to
45,000 shares of series A common stock.
In August 1997, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 77,000 shares
of series A common stock.
In October 1997, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant which currently represents the
right to purchase up to 250,000 shares of series A common stock.
In November 1997, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 129,504 shares
of series A common stock.
In December 1997, as a purchase price adjustment for the group of private
investors who participated in the May 1997 sale of series C convertible
exchangeable preferred stock, the Registrant issued 1,057,473 shares of series C
convertible exchangeable preferred stock to such investors for no additional
consideration.
In December 1997, the Registrant also sold 5,885,145 shares of series D
convertible preferred stock, one share of series G common stock, one share of
series H common stock, options to purchase 395,280 shares of series A common
stock and promissory notes in the aggregate principal amount of $1,908,429 to a
group of private investors for an aggregate sale price of $23,422,877.
In January 1998, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 25,125 shares
of series A common stock.
In June 1998, in connection with an investment a philanthropic foundation,
the Registrant issued to the foundation a warrant to purchase up to 3,775,000
shares of series D convertible preferred common stock.
In July 1998, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 100,000 shares
of series A common stock.
In August 1998, the Registrant also sold 4,271,352 shares of series D
convertible preferred stock, options to purchase 286,878 shares of series A
common stock and promissory notes in the aggregate principal amount of $487,843
to a group of private investors for an aggregate sale price of $17 million.
In December 1998, the Registrant also sold 3,945,224 shares of series D
convertible preferred stock, options to purchase 264,979 shares of series A
common stock and promissory notes in the aggregate principal amount of $450,595
to a group of private investors for an aggregate sale price of $15,702,003.
In June 1999, the Registrant sold 3,957,476 shares of series F convertible
preferred stock and 800,000 shares of non-voting series G convertible preferred
stock to a group of private investors for an aggregate sale price of
$29,258,477.
In July 1999, the Registrant sold 6,787,238 shares of Series F Convertible
Preferred Stock and one share of series I common stock to a group of private
investors for an aggregate sale price of $41,741,518.
Upon the closing of this offering, each share of common stock and each
share of preferred stock will convert, automatically and without additional
consideration, into 0.45 shares of class A common stock and 0.05 shares of class
B common stock.
(b) Certain Grants and Exercises of Stock Options.
The Registrant's 1998 Site Option Plan (the "Site Plan") was adopted by the
Board of Directors in October 1998 and approved by the stockholders of Edison in
July 1999. As of June 30, 1999, options to purchase 56,798 shares of series A
common stock and 6,310 shares of class B common stock were outstanding under the
Site Plan. The Registrant's 1999 Stock Option Plan (the "Stock Option Plan") was
adopted by the Board of Directors in June 1999 and approved by the stockholders
of Edison in July 1999. As of June 30, 1999, options to purchase 271,350 shares
of series A common stock and 30,150 shares of class B common stock were
outstanding under the Stock Option Plan. The Registrant's 1999 Key Stock
Incentive Plan (the "Key Stock Plan") was adopted by the Board of Directors in
June 1999 and approved
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<PAGE> 131
by the stockholders in July 1999. As of June 30, 1999, options to purchase
55,800 shares of series A common stock and 6,200 shares of class B common stock
were outstanding under the Key Stock Plan.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of the
Securities Act. All of the foregoing securities are deemed restricted securities
for the purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1** Form of U.S. Purchase Agreement
1.2** Form of International Purchase Agreement
3.1 Form of Sixth Amended and Restated Certificate of
Incorporation of the Registrant, to be filed immediately
after the closing of this offering
3.2 Form of Second Amended and Restated By-Laws of the
Registrant, to be effective upon the closing of this
offering
4.1 Specimen class A common stock certificate
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate
of Incorporation and By-Laws of the Registrant defining the
rights of holders of class A common stock of the Registrant
5.1** Opinion of Hale and Dorr LLP
10.1* 1998 Site Option Plan
10.2* 1999 Stock Option Plan
10.3* 1999 Key Stock Incentive Plan
10.4 1999 Stock Incentive Plan
10.5* Third Amended and Restated Shareholders' Agreement, dated as
of July 2, 1999, by and among the Registrant and certain
stockholders, as amended
10.6* Subscription Agreement, dated as of November 18, 1996, by
among the Registrant and certain other parties
10.7* Warrant Purchase Agreement, dated as of January 15, 1998,
between the Registrant and Phoenix Leasing Incorporated
10.8* Warrant, dated as of January 15, 1998, issued to Phoenix
Leasing Incorporated
10.9* Warrant Purchase Agreement, dated as of November 25, 1997,
between the Registrant and BankBoston, N.A.
10.10* Warrant, dated as of November 25, 1997, issued to
BankBoston, N.A.
10.11* Warrant Agreement, dated as of February 1, 1997, between the
Registrant and Comdisco, Inc.
10.12* Amended Warrant Purchase Agreement, dated as of June 1,
1998, between the Registrant and the D2F2 Foundation
10.13* Option Agreement, dated as of March 14, 1995, between the
Registrant and Dillon, Read & Co. Inc.
10.14* Warrant Agreement, dated as of January 1, 1996, between the
Registrant and Comdisco, Inc.
10.15* Warrant Agreement, dated as of July 5, 1995, between the
Registrant and Comdisco, Inc.
10.16* Warrant Purchase Agreement, dated as of June 30, 1997,
between the Registrant and Phoenix Leasing Incorporated and
related warrant
10.17* Warrant Purchase Agreement, dated as of June 30, 1997,
between the Registrant and LINC Capital Management and
related warrant
10.18* Stock Subscription Warrant, dated as of August 20, 1997,
issued to Transamerica Business Credit Corporation
10.19* Stock Subscription Warrant, dated as of October 30, 1997,
issued to Transamerica Business Credit Corporation
</TABLE>
II-4
<PAGE> 132
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.20* Stock Subscription Warrant, dated as of July 17, 1998,
issued to TBCC Trust Funding II
10.21* Series F Subscription Agreement, dated as of July 2, 1999,
between the Registrant and certain stockholders
10.22* Series D Subscription Agreement, dated as of December 30,
1997, between the Registrant and certain stockholders
10.23* Letter Agreement, dated as of March 1, 1997, between the
Registrant and Benno C. Schmidt, Jr., as amended on December
15, 1997
10.24* Letter Agreement, dated as of March 1, 1997, between the
Registrant and H. Christopher Whittle, as amended on
December 15, 1997
10.25* Letter Agreement, dated as of June 16, 1997, between the
Registrant and Christopher D. Cerf
10.26* Letter Agreement, dated as of March 15, 1995, between the
Registrant and John E. Chubb
10.27* Letter Agreement, dated as of April 20, 1998, between the
Registrant and James L. Starr.
10.28* Preferred Stock Purchase Agreement, dated as of July 2,
1999, between the Registrant and Apex Online Learning Inc.
10.29* Shareholders Agreement, dated as of July 2, 1999, between
the Registrant and Apex Online Learning Inc.
10.30* Lease Agreement, dated as of April 4, 1995, between the
Registrant and 521 Fifth Avenue Associates, as amended on
June 6, 1996 and December 8, 1997
10.31* Office Lease, dated as of March 19, 1999, between the
Registrant and 529 Fifth Company
10.32* Management Agreement, dated as of March 14, 1995, between
the Registrant and WSI Inc., as amended on November 15,
1996, March 1, 1997 and December 31, 1997.
10.33* Promissory note, dated as of June 5, 1992, from Benno C.
Schmidt, Jr. to the Registrant
10.34* Promissory note, dated as of January 23, 1996, from Benno C.
Schmidt to the Registrant
10.35** Allonge to promissory notes from Benno C. Schmidt, Jr. to
the Registrant
10.36** Amendment to Letter Agreement between the Registrant and H.
Christopher Whittle
10.37** Amendment to Letter Agreement between the Registrant and
Christopher D. Cerf
10.38** Series F Subscription Agreement, dated as of June 4, 1999,
between the Registrant and certain stockholders
10.39 Loan Agreement between the Registrant and WSI Inc.
10.40** Guarantee agreements
11.1 Statement re Computation of Earnings per Share
23.1 Consent of PricewaterhouseCoopers LLP
23.2** Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Superseding exhibit.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE> 133
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Restated Certificate of
the Registrant, the Underwriting Agreement, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Act shall be deemed to be part
of this Registration Statement as of the time it was declared
effective.
(2) For purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in New York, New
York, on this 5th day of October, 1999.
EDISON SCHOOLS INC.
By: /s/ JAMES L. STARR
------------------------------------
James L. Starr
Executive Vice President and Chief
Financial Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of October 5, 1999
- --------------------------------------------------- Directors
Benno C. Schmidt, Jr.
* President, Chief Executive October 5, 1999
- --------------------------------------------------- Officer and Director (Principal
H. Christopher Whittle Executive Officer)
/s/ JAMES L. STARR Executive Vice President and October 5, 1999
- --------------------------------------------------- Chief Financial Officer
James L. Starr (Principal Financial and
Accounting Officer)
* Executive Vice President and October 5, 1999
- --------------------------------------------------- Director
Laura K. Eshbaugh
* Director October 5, 1999
- ---------------------------------------------------
Virginia G. Bonker
* Director October 5, 1999
- ---------------------------------------------------
John W. Childs
* Director October 5, 1999
- ---------------------------------------------------
Charles J. Delaney
* Director October 5, 1999
- ---------------------------------------------------
Robert Finzi
* Director October 5, 1999
- ---------------------------------------------------
John B. Fullerton
* Director October 5, 1999
- ---------------------------------------------------
Janet A. Hickey
</TABLE>
II-7
<PAGE> 135
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director October 5, 1999
- ---------------------------------------------------
Klas Hillstrom
* Director October 5, 1999
- ---------------------------------------------------
Bert Kolde
* Director October 5, 1999
- ---------------------------------------------------
Jeffrey T. Leeds
* Director October 5, 1999
- ---------------------------------------------------
Brian P. Mathis
</TABLE>
By: /s/ JAMES L. STARR
--------------------------------------------------
James L. Starr
Attorney-in-Fact
II-8
<PAGE> 136
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1.1** Form of U.S. Purchase Agreement.............................
1.2** Form of International Purchase Agreement....................
3.1 Form of Sixth Amended and Restated Certificate of
Incorporation of the Registrant, to be filed immediately
after the closing of this offering..........................
3.2 Form of Second Amended and Restated By-Laws of the
Registrant, to be effective upon the closing of this
offering....................................................
4.1 Specimen common stock certificate...........................
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate
of Incorporation and By-Laws of the Registrant defining the
rights of holders of class A common stock of the
Registrant..................................................
5.1** Opinion of Hale and Dorr LLP................................
10.1* 1998 Site Option Plan.......................................
10.2* 1999 Stock Option Plan......................................
10.3* 1999 Key Stock Incentive Plan...............................
10.4 1999 Stock Incentive Plan...................................
10.5* Third Amended and Restated Shareholders' Agreement, dated as
of July 2, 1999, by and among the Registrant and certain
stockholders, as amended....................................
10.6* Subscription Agreement, dated as of November 18, 1996, by
among the Registrant and certain other parties..............
10.7* Warrant Purchase Agreement, dated as of January 15, 1998,
between the Registrant and Phoenix Leasing Incorporated.....
10.8* Warrant, dated as of January 15, 1998, issued to Phoenix
Leasing Incorporated........................................
10.9* Warrant Purchase Agreement, dated as of November 25, 1997,
between the Registrant and BankBoston, N.A. ................
10.10* Warrant, dated as of November 25, 1997, issued to
BankBoston, N.A. ...........................................
10.11* Warrant Agreement, dated as of February 1, 1997, between the
Registrant and Comdisco, Inc. ..............................
10.12* Amended Warrant Purchase Agreement, dated as of June 1,
1998, between the Registrant and the D2F2 Foundation........
10.13* Option Agreement, dated as of March 14, 1995, between the
Registrant and Dillon, Read & Co. Inc. .....................
10.14* Warrant Agreement, dated as of January 1, 1996, between the
Registrant and Comdisco, Inc. ..............................
10.15* Warrant Agreement, dated as of July 5, 1995, between the
Registrant and Comdisco, Inc. ..............................
10.16* Warrant Purchase Agreement, dated as of June 30, 1997,
between the Registrant and Phoenix Leasing Incorporated and
related warrant.............................................
10.17* Warrant Purchase Agreement, dated as of June 30, 1997,
between the Registrant and LINC Capital Management and
related warrant.............................................
10.18* Stock Subscription Warrant, dated as of August 20, 1997,
issued to Transamerica Business Credit Corporation..........
10.19* Stock Subscription Warrant, dated as of October 30, 1997,
issued to Transamerica Business Credit Corporation..........
10.20* Stock Subscription Warrant, dated as of July 17, 1998,
issued to TBCC Trust Funding II.............................
10.21* Series F Subscription Agreement, dated as of July 2, 1999,
between the Registrant and certain stockholders.............
10.22* Series D Subscription Agreement, dated as of December 30,
1997, between the Registrant and certain stockholders.......
</TABLE>
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
10.23* Letter Agreement, dated as of March 1, 1997, between the
Registrant and Benno C. Schmidt, Jr., as amended on December
15, 1997....................................................
10.24* Letter Agreement, dated as of March 1, 1997, between the
Registrant and H. Christopher Whittle, as amended on
December 15, 1997...........................................
10.25* Letter Agreement, dated as of June 16, 1997, between the
Registrant and Christopher D. Cerf..........................
10.26* Letter Agreement, dated as of March 15, 1995, between the
Registrant and John E. Chubb................................
10.27* Letter Agreement, dated as of April 20, 1998, between the
Registrant and James L. Starr.
10.28* Preferred Stock Purchase Agreement, dated as of July 2,
1999, between the Registrant and Apex Online Learning
Inc. .......................................................
10.29* Shareholders Agreement, dated as of July 2, 1999, between
the Registrant and Apex Online Learning Inc. ...............
10.30* Lease Agreement, dated as of April 4, 1995, between the
Registrant and 521 Fifth Avenue Associates, as amended on
June 6, 1996 and December 8, 1997...........................
10.31* Office Lease, dated as of March 19, 1999, between the
Registrant and 529 Fifth Company............................
10.32* Management Agreement, dated as of March 14, 1995, between
the Registrant and WSI Inc., as amended on November 15,
1996, March 1, 1997 and December 31, 1997. .................
10.33* Promissory note, dated as of June 5, 1992 from Benno C.
Schmidt, Jr. to the Registrant..............................
10.34* Promissory note, dated as of January 23, 1996, from Benno C.
Schmidt to the Registrant...................................
10.35** Allonge to promissory notes from Benno C. Schmidt, Jr. to
the Registrant..............................................
10.36** Amendment to Letter Agreement between the Registrant and H.
Christopher Whittle.........................................
10.37** Amendment to Letter Agreement between the Registrant and
Christopher D. Cerf.........................................
10.38** Series F Subscription Agreement, dated as of June 4, 1999,
between the Registrant and certain stockholders.............
10.39 Loan Agreement between the Registrant and WSI Inc...........
10.40** Guarantee agreements........................................
11.1 Statement re Computation of Earnings per Share..............
23.1 Consent of Pricewaterhouse Coopers LLP......................
23.2** Consent of Hale and Dorr LLP (included in Exhibit 5.1)......
24.1* Powers of Attorney..........................................
27.1* Financial Data Schedule.....................................
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
Exhibit 3.1
SIXTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
EDISON SCHOOLS INC.
EDISON SCHOOLS INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify as follows:
1. The Corporation filed its original Certificate of Incorporation with
the Secretary of State of the State of Delaware on October 31, 1996. The
Certificate of Incorporation was amended and restated on November 18, 1996 and
on December 30, 1997, amended on May 27, 1998, amended and restated on June 4,
1999 and on July 2, 1999, amended on July 29, 1999 to change the name of the
Corporation to Edison Schools Inc., and amended and restated on September __,
1999.
2. By action of directors in lieu of a meeting, a resolution of the
Board of Directors of the Corporation was duly adopted, pursuant to Sections
141(f), 242 and 245 of the General Corporation Law of the State of Delaware,
setting forth an Amended and Restated Certificate of Incorporation and declaring
said Amended and Restated Certificate of Incorporation advisable. The
stockholders of the Corporation duly approved said proposed Amended and Restated
Certificate of Incorporation by written consent in accordance with Sections 228,
242 and 245 of the General Corporation Law of the State of Delaware and written
notice of such consent has been given to all stockholders who have not consented
in writing to said restatement. The resolution setting forth the Amended and
Restated Certificate of Incorporation is as follows:
RESOLVED: That the Amended and Restated Certificate of Incorporation of the
Corporation, as amended, be and hereby is amended and restated in its
entirety so that the same shall read as follows:
<PAGE> 2
FIRST. The name of the Corporation is:
Edison Schools Inc.
SECOND. The name of the Corporation's registered agent in the State of
Delaware is Vanguard Corporate Services, Ltd. The address of its registered
office at such address is 15 East North Street, City of Dover, County of Kent,
19901.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 160,000,000 shares, consisting of
(i) 150,000,000 shares of Class A Common Stock, $.01 par value per share ("Class
A Common Stock"), (ii) 5,000,000 shares of Class B Common Stock, $.01 par value
per share ("Class B Common Stock" and, together with the Class A Common Stock,
the "Common Stock"), and (iii) 5,000,000 shares of Preferred Stock, $.01 par
value per share ("Preferred Stock").
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
1. Identical Rights. Except as otherwise set forth in this Section A,
the rights and privileges of the Common Stock shall be identical; provided that
the dividend and liquidation rights of the holders of the Common Stock are
subject to and qualified by the rights of the holders of the Preferred Stock of
any series as may be designated by the Board of Directors upon any issuance of
the Preferred Stock of any series.
2. Voting.
(a) General. Except as otherwise set forth in this Section A.2
and in Article ELEVENTH, the holders of the Common Stock shall vote as a single
class on all matters submitted to a vote of the stockholders to which the
holders of Common Stock are entitled to vote, except as may be required by
Delaware law or as otherwise expressly specified in this Certificate of
Incorporation. Each share of Class A Common Stock shall be entitled to one vote
and each share of Class B Common Stock shall be entitled to ten votes.
(b) Election of Directors. With regard to the election of
directors and
<PAGE> 3
beginning with the election of directors at the first Annual Meeting of
Stockholders of the Corporation to be held after the consummation of the initial
public offering of securities of the Corporation pursuant to a registration
statement filed with and declared effective by Securities and Exchange
Commission (the "Annual Meeting"), (i) holders of Class A Common Stock shall be
entitled, voting separately as a class, to elect seven of the Corporation's 11
directors and (ii) holders of Class B Common Stock shall be entitled, voting
separately as a class, to elect four of the Corporation's 11 directors. If the
number of directors of the Corporation is increased or decreased at any time
this Section A.2(b) is in effect in accordance with Article ELEVENTH, thereafter
the holders of Class B Common Stock shall be entitled, voting as a separate
class, to elect the minimum number of directors as shall constitute at least the
same percentage of the total number of directors of the Corporation as is equal
to the percentage determined by dividing four by 11, with the holders of Class A
Common Stock, voting as separate class, electing the balance. In the event of
any increase or decrease in the authorized number of directors, each director
then serving as such shall nevertheless continue as a director until the
expiration of his current term, or his earlier resignation, removal from office
or death. If at any time there shall not be any Class B Common Stock
outstanding, then this Section A.2(b) shall cease to be of any effect.
(c) Cumulative Voting. The holders of Common Stock shall be
entitled at all elections of directors to as many votes as shall equal the
number of votes which (except for this provision as to cumulative voting) such
holder would be entitled to cast for the election of directors with respect to
such holder's shares of stock multiplied by the number of directors to be
elected, and such holder may cast all of such votes for a single director or may
distribute them among the number to be voted for, or for any two or more of
them, as such holder may see fit.
(d) Authorized Shares. The number of authorized shares of
Common Stock may be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a majority
of the stock of the Corporation entitled to vote, irrespective of the provisions
of Section 242(b)(2) of the General Corporation Law of Delaware.
3. Dividends and Distributions. Dividends and other distributions may
be declared and paid on the Common Stock from funds lawfully available therefor
as and when determined by the Board of Directors and subject to any preferential
dividend rights of any then outstanding Preferred Stock. The Corporation may not
make any dividend or distribution with respect to any class of Common Stock
unless at the same time the Corporation makes a ratable dividend or distribution
with respect to each outstanding share of Common Stock, regardless of class. In
the case of dividends or distributions payable in shares of a class of Common
Stock, including distributions pursuant to stock splits or divisions of Class A
Common Stock or Class B Common Stock, only shares of Class A Common Stock may be
distributed with respect to Class A Common Stock and only shares of Class B
Common Stock may be distributed with respect to Class B Common Stock, and the
number of shares of Common Stock payable per share will be equal for each class.
Whenever a dividend or distribution,
<PAGE> 4
including distributions pursuant to stock splits or divisions of the Common
Stock, is payable in shares of Class A Common Stock or Class B Common Stock, the
number of shares of each class of Common Stock payable per share of such class
of Common Stock shall be equal in number. In the case of dividends or other
distributions consisting of other voting securities of the Corporation or of
voting securities of any corporation that is a wholly owned subsidiary of the
Corporation, the Corporation shall declare and pay such dividends in two
separate classes of such voting securities, identical in all respects, except
that (i) the voting rights of each such security paid to the holders of Class A
Common Stock shall be one-tenth of the voting rights of each such security paid
to the holders of Class B Common Stock, (ii) such security paid to the holders
of Class B Common stock shall convert into the security paid to the holders of
Class A Common Stock upon the same terms and conditions applicable to the
conversion of Class B Common Stock into Class A Common Stock, and (iii) with
respect only to dividends or other distributions of voting securities of any
corporation that is a wholly owned subsidiary of the Company, the respective
voting rights of each such security paid to holders of Class A Common Stock and
Class B Common Stock with respect to the election of directors shall otherwise
be as comparable as is practicable to those of the Class A Common Stock and
Class B Common Stock, respectively. In the case of dividends or other
distributions consisting of securities convertible into, or exchangeable for,
voting securities of the Corporation or voting securities of another corporation
that is a wholly owned subsidiary of the Corporation, the Corporation shall
provide that such convertible or exchangeable securities and the underlying
securities be identical in all respects (including, without limitation, the
conversion or exchange rate), except that (i) the voting rights of each security
underlying the convertible or exchangeable security paid to the holders of Class
A Common Stock shall be one-tenth of the voting rights of each security
underlying the convertible or exchangeable security paid to the holders of the
Class B Common Stock, and (ii) such underlying securities paid to the holders of
Class B Common Stock shall convert into the underlying securities paid to the
holders of Class A Common Stock upon the same terms and conditions applicable to
the conversion of Class B Common Stock into Class A Common Stock and shall have
the same restrictions on transfer and ownership applicable to the transfer and
ownership of the Class B Common Stock.
4. Reclassifications. Neither the shares of Class A Common Stock nor
the shares of Class B Common Stock may be subdivided, consolidated, reclassified
or otherwise changed unless concurrently the shares of the other class of Common
Stock are subdivided, consolidated, reclassified or otherwise changed in the
same proportion and the same manner.
5. Liquidation. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
6. Conversion Rights.
<PAGE> 5
(a) Voluntary Conversion. Each share of Class B Common Stock
is convertible into one share of Class A Common Stock at any time at the option
of the holder. Such right shall be exercised by the surrender of the certificate
or certificates representing the shares of Class B Common Stock to be converted
to the Corporation at any time during normal business hours at the principal
executive offices of the Corporation or at the offices of the Corporation's
transfer agent (the "Transfer Agent"), accompanied by a written notice from the
holder of such shares stating that such holder desires to convert such shares,
or a stated number of the shares represented by such certificate of
certificates, into an equal number of shares of Class A Common Stock, and, if so
required by the Corporation or the Transfer Agent, by instruments of transfer in
form satisfactory to the Corporation and the Transfer Agent, duly executed by
such holder or such holder's duly authorized attorney, and transfer tax stamps
or funds therefor, if required.
(b) Automatic Conversion.
(i) In addition to and notwithstanding the foregoing,
upon any Transfer of shares of Class B Common Stock, such
shares shall be converted automatically into a like number of
shares of Class A Common Stock. Immediately upon the
occurrence of a Transfer, and without any action on the part
of any stockholder whose shares are subject to automatic
conversion hereunder, the Corporation or any other person or
entity, the relevant shares of Class B Common Stock shall be
deemed converted into the same number of shares of Class A
Common Stock. From and after the time of the Transfer, any
such certificates for Class B Common Stock shall no longer
represent shares of Class B Common Stock but instead shall
represent the sum of the number of shares of Class A Common
Stock and the right to have registered in the name of the
transferee of such stock the shares of Class A Common Stock
issuable to such transferee as a result of such conversion.
The Class A Common Stock issuable upon any such conversion
shall be so registered and the certificates with respect to
such stock shall be issued by the Corporation upon the
surrender of the certificates that represent the Class B
Common Stock immediately prior to the Transfer, duly
endorsed to the Corporation or in blank or accompanied by
proper instruments of transfer to the Corporation or in blank
(such endorsements or instruments of transfer to be in form
satisfactory to the Corporation). As used in this section
A.6(b), the following terms have the following meanings:
(1) "Affiliate" shall mean and be limited to the
following Persons: (A) with respect to any
natural person, (i) that natural person's
spouse, siblings, children (including
adopted children), grandchildren or parents
or parents, (ii) a trust of which such
natural person is the trustee for the
benefit of his spouse, siblings, children
(including adopted children), grandchildren
or parents or parents, or (iii) the heirs,
<PAGE> 6
executors, administrators, guardians or
conservators of such natural person; (B)
with respect to any limited partnership, (i)
any Person that, at the Original Issuance
Time, was the general partner of such
limited partnership, or (ii) another limited
partnership which has a general partner, the
control of which general partner is held,
directly or indirectly, by five or fewer
natural persons, provided such natural
persons had control of the general partner
of the subject limited partnership at the
Original Issue Time; (C) with respect to any
corporation or limited liability company,
(i) any Person that is a limited partnership
or limited liability company and that has as
a general partner or a managing member, as
the case may be, such corporation or limited
liability company and (ii) any Person that
is a corporation and that is controlled by,
controls or is under common control with
such corporation or limited liability
company; and (D) with respect to any
Original Shareholder, any Person that is
controlled by, controls or is under common
control with the Original Shareholder.
(2) "Control" of a Person shall mean ownership
of more than 50% of the voting power of the
Person on all matters.
(3) "Original Shareholder" shall mean each
Person to whom the Corporation originally
issued shares of Class B Common Stock at the
Original Issuance Time.
(4) "Original Issuance Time" means the time at
which the Corporation first issued Class B
Common Stock.
(5) "Person" shall mean an individual, a
partnership, a limited liability company, a
corporation, an association, a joint stock
company, a trust, a joint venture, an
unincorporated organization or a
governmental entity or any department,
agency or political subdivision thereof.
(6) "Transfer" shall mean the sale, assignment,
transfer, gift, pledge or hypothecation or
other disposition, whether voluntary or
involuntary, of Class B Common Stock to any
Person other than an Affiliate of the
Original Shareholder that initially held the
shares being transferred. Notwithstanding
the foregoing, the following shall not
constitute a "Transfer": (i) a transfer to
the acquiror in the case of a merger or
similar transaction by the Corporation in
which all the outstanding shares of Common
Stock of the Corporation regardless of class
are purchased by the
<PAGE> 7
acquiror, (ii) the sale, assignment,
transfer, gift, pledge or hypothecation or
other disposition, whether voluntary or
involuntary, of any options or warrants to
purchase shares of Class B Common Stock,
(iii) the sale, transfer, pledge or
hypothecation or other disposition in a bona
fide financing transaction of any derivative
instrument that derives its value from
underlying shares of Class B Common Stock or
options or warrants to purchase shares of
Class B Common Stock, (iv) a transfer to a
Person that is Controlled by H. Christopher
Whittle or his Affiliates and (v) any pledge
of shares of Class B Common Stock pursuant
to the grant of a bona fide pledge of or
security interest in such shares as
collateral security for indebtedness due to
the pledgee, provided that such pledge
expressly provides that the pledged shares
remain subject to the provisions of this
Section A.6(b)(i) and further provided that
the subsequent foreclosure by the pledgee on
such shares or similar action taken by the
pledgee with respect to the pledged shares
shall be a "Transfer" and such pledged
shares of Class B Common Stock shall
thereupon be converted automatically into
shares of Class A Common Stock as provided
in this Section A.6(b)(i), except that, if
within five business days after such
foreclosure or similar event such converted
shares are returned to the pledgor, such
shares shall be converted automatically back
into shares of Class B Common Stock.
(ii) All of the Class B Common Stock held by a stockholder and
its Affiliates shall automatically convert into shares of Class A Common Stock
on a one-for-one basis immediately following any Transfer by such stockholder
after which the stockholder and its Affiliates together have Transferred a
number of shares of Common Stock representing more than 50% of the aggregate
number of shares of Common Stock held by such stockholder and its Affiliates on
October 1, 1999 (excluding for this purpose shares issuable upon the exercise of
options and warrants to purchase shares of Common Stock held on October 1, 1999
and assuming all outstanding shares of the Corporation's preferred stock
converted into Common Stock on October 1, 1999). Immediately upon the occurrence
of a Transfer described in the preceding sentence, and without any action on the
part of any stockholder whose shares are subject to automatic conversion
hereunder, the Corporation or any other person or entity, the relevant shares of
Class B Common Stock shall be deemed converted into the same number of shares of
Class A Common Stock. From and after the time of the Transfer, any such
certificates for Class B Common Stock shall no longer represent shares of Class
B Common Stock but instead shall represent the sum of the number of shares of
Class A Common Stock and the right to have registered in the name of the
registered holder of such stock the shares of Class A Common Stock issuable to
such holder as a result of such conversion. The Class A Common Stock
<PAGE> 8
issuable upon any such conversion shall be so registered and the certificates
with respect to such stock shall be issued by the Corporation upon the surrender
of the certificates that represent the Class B Common Stock immediately prior to
the conversion.
(iii) On the earlier to occur of (A) the twelfth anniversary
of the date of the Original Issuance Time, or (B) a record date for any meeting
of stockholders of the Corporation upon which the number of shares of
outstanding Class B Common Stock in the aggregate is less than 90,025 shares
(adjusted for stock splits, stock dividends, classifications, recapitalizations
and reverse stock splits and similar transactions), each share of Class B Common
Stock then issued or outstanding shall thereupon be converted automatically as
of such date into one fully paid and non-assessable share of Class A Common
Stock. Upon the occurrence of either such event, notice of such automatic
conversion shall be given by the Corporation by means of a press release and
written notice to all holders of Class B Common Stock, and shall be given as
soon as practicable, and the Secretary of the Corporation shall be instructed
to, and shall, promptly request from each holder of Class B Common Stock that
each such holder promptly deliver, and each such holder shall promptly deliver,
the certificate representing each such share of Class B Common Stock to the
Corporation for exchange hereunder. Immediately upon the occurrence of an event
described in clause (A) or (B) of the first sentence of this paragraph, and
without any action on the part of any stockholder, the Corporation or any other
person or entity, all shares of Class B Common Stock shall be deemed converted
into the same number of shares of Class A Common Stock. From and after such
time, any certificates for Class B Common Stock shall no longer represent shares
of Class B Common Stock but instead shall represent the sum of the number of
shares of Class A Common Stock and the right to have registered in the name of
the registered holder of such stock the shares of Class A Common Stock issuable
to such holder as a result of such conversion. The Class A Common Stock issuable
upon any such conversion shall be so registered and the certificates with
respect to such stock shall be issued by the Corporation upon the surrender of
the certificates that represent the Class B Common Stock immediately prior to
the conversion.
7. Unconverted Shares. If less than all of the shares of Class B Common
Stock evidenced by a certificate surrendered to the Corporation (in accordance
with such procedures as the Board of Directors may determine) are converted, the
Corporation shall execute and deliver to or upon the written order of the holder
of such certificate a new certificate evidencing the number of shares of Class B
Common Stock which are not converted without charge to the holder.
8. Reservation. The Corporation hereby reserves, and shall at all times
reserve and keep available, out of its authorized and unissued shares of Class A
Common Stock, for the purposes of effecting conversions, such number of duly
authorized shares of Class A Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Class B Common
Stock. The Corporation covenants that all the shares of Class A Common Stock so
issuable shall,
<PAGE> 9
when so issued, be duly and validly issued, fully paid and nonassessable. The
Corporation shall take all such action as may be necessary to assure that all
such shares of Class A Common Stock may be so issued without violation of any
applicable law or regulation. The Corporation shall not take any action that
results in any adjustment of the conversion ratio if the total number of shares
of Class A Common Stock issued and issuable after such action upon conversion of
the shares of Class B Common Stock would exceed the total number of shares of
Class A Common Stock then authorized by the Corporation's Certificate of
Incorporation.
9. Merger. Upon the merger or consolidation of the Corporation (whether
or not the Corporation is the surviving entity), holders of each class of Common
Stock will be entitled to receive equal per share payments or distributions,
except that in any transaction in which shares of capital stock are distributed
to holders of Common Stock, the shares of capital stock distributed to holders
of Class A Common Stock and Class B Common Stock may differ as to voting and
conversion rights, but only to the extent that the voting and conversion rights
of the Class A Common Stock and the Class B Common Stock differ in this
Certificate of Incorporation.
10. Issuance of Class A Common Stock. Following the Original Issuance
Time, the Corporation shall not issue or sell any shares of Class B Common Stock
or any securities (including, without limitation, any rights, options, warrants
or other securities) convertible, exchangeable or exercisable into shares of
Class B Common Stock to any person. Notwithstanding the foregoing, the Company
may issue and sell shares of Class B Common Stock (1) upon the exercise of any
stock option, warrant or similar right to acquire Class B Common Stock existing
at the Original Issuance Time and (2) in respect of stock splits, stock
dividends, subdivisions, reclassifications or similar transactions with respect
the Class B Common Stock.
11. Amendments to Section. Notwithstanding any other provisions of law,
this Amended and Restated Certificate of Incorporation or the By-Laws of the
Corporation, and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least 80% of the
outstanding shares of Class A Common Stock, voting separately as a single class,
and the affirmative vote of the holders of at least 80% of the outstanding
shares of Class B Common Stock, voting separately as a single class, shall be
required to amend or repeal, or to adopt any provision inconsistent with, this
Section A of this Article FOURTH.
B. PREFERRED STOCK.
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless
<PAGE> 10
expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions, all to the full extent now or hereafter permitted by the General
Corporation Law of Delaware. Without limiting the generality of the foregoing,
the resolutions providing for issuance of any series of Preferred Stock may
provide that such series shall be superior or rank equally or be junior to the
Preferred Stock of any other series to the extent permitted by law. Except as
otherwise provided in this Certificate of Incorporation, no vote of the holders
of the Preferred Stock or Common Stock shall be a prerequisite to the
designation or issuance of any shares of any series of the Preferred Stock
authorized by and complying with the conditions of this Certificate of
Incorporation, the right to have such vote being expressly waived by all present
and future holders of the capital stock of the Corporation.
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot except
as and to the extent provided in the By-Laws of the Corporation.
2. Subject to the provisions of this Amended and Restated
Certificate of Incorporation and the By-Laws of the Corporation, the Board of
Directors is expressly authorized to adopt, amend or repeal the By-Laws of the
Corporation.
SEVENTH. Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as
<PAGE> 11
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
the Corporation, as the case may be, and also on the Corporation.
EIGHTH. Except to the extent that the General Corporation Law of
Delaware prohibits the elimination or limitation of liability of directors for
breaches of fiduciary duty, no director of the Corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for any
breach of fiduciary duty as a director, notwithstanding any provision of law
imposing such liability. No amendment to or repeal of this provision shall apply
to or have any effect on the liability or alleged liability of any director of
the Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
NINTH. 1. Actions, Suits and Proceedings Other than by or in the Right
of the Corporation. The Corporation shall indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 7
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation. Notwithstanding anything to the contrary in this Article, the
Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is
reimbursed from the proceeds of insurance, and in the event the Corporation
makes any indemnification payments to an Indemnitee and such Indemnitee is
subsequently reimbursed from the proceeds of insurance, such Indemnitee shall
promptly refund such indemnification payments to the Corporation to the extent
of such insurance
<PAGE> 12
reimbursement.
2. Actions or Suits by or in the Right of the Corporation. The
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and, to the extent permitted by law,
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware shall deem proper.
3. Indemnification for Expenses of Successful Party. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. Notification and Defense of Claim. As a condition precedent to his
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own
<PAGE> 13
expense, with legal counsel reasonably acceptable to the Indemnitee. After
notice from the Corporation to the Indemnitee of its election so to assume such
defense, the Corporation shall not be liable to the Indemnitee for any legal or
other expenses subsequently incurred by the Indemnitee in connection with such
claim, other than as provided below in this Section 4. The Indemnitee shall have
the right to employ his own counsel in connection with such claim, but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
5. Advance of Expenses. Subject to the provisions of Section 6 below,
in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the Corporation in advance of the final disposition of such matter;
provided, however, that the payment of such expenses incurred by an Indemnitee
in advance of the final disposition of such matter shall be made only upon
receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts
so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Corporation as authorized in
this Article. Such undertaking shall be accepted without reference to the
financial ability of the Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification or
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines within such 60-day period that the Indemnitee did not
meet the applicable standard of conduct set forth in Section 1 or 2, as the case
may be. Such determination shall be made in each instance by (a) a majority vote
of the directors of the Corporation consisting of persons who are not at that
time parties to the action, suit or proceeding in question
<PAGE> 14
("disinterested directors"), whether or not a quorum, (b) a majority vote of a
committee of disinterested directors designated by majority vote of
disinterested directors, whether or not a quorum, (c) a majority vote of a
quorum of the outstanding shares of stock of all classes entitled to vote for
directors, voting as a single class, which quorum shall consist of stockholders
who are not at that time parties to the action, suit or proceeding in question,
(d) independent legal counsel (who may, to the extent permitted by law, be
regular legal counsel to the Corporation) or (e) a court of competent
jurisdiction.
7. Remedies. The right to indemnification or advances as granted by
this Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise required by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the Corporation
to have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
9. Other Rights. The indemnification and advancement of expenses
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.
<PAGE> 15
10. Partial Indemnification. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of Delaware.
12. Merger or Consolidation. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. Savings Clause. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. Definitions. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. Subsequent Legislation. If the General Corporation Law of Delaware
is amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Amended and Restated
<PAGE> 16
Certificate of Incorporation, and all rights conferred upon stockholders herein
are granted subject to this reservation.
ELEVENTH. This Article is inserted for the management of the business
and for the conduct of the affairs of the Corporation.
1. Number of Directors. Prior to the Annual Meeting, the number of
directors of the Corporation shall be determined by the Board of Directors.
Thereafter, so long as any shares of Class B Common Stock are outstanding, the
number of directors of the Corporation shall be fixed at eleven or at such other
number as shall be determined by the affirmative vote both of the holders of at
least 80% of the shares of Class A Common Stock issued and outstanding and
entitled to vote and of the holders of at least 80% of the shares of Class B
Common Stock issued and outstanding and entitled to vote. At such time as no
shares of Class B Common Stock shall be outstanding, the number of directors
shall be determined as provided in the By-Laws of the Corporation.
2. Removal. Directors of the Corporation elected by the holders of
Class A Common Stock, voting separately as a class, may be removed only for
cause and only by the affirmative vote of the holders of at least 80% of the
outstanding shares of Class A Common Stock, voting separately as a class.
Directors of the Corporation elected by the holders of Class B Common Stock,
voting separately as a class, may be removed only for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding shares of
Class B Common Stock, voting separately as a class. Notwithstanding the
foregoing, at such time as no shares of Class B Common Stock are outstanding,
Directors of the Corporation may be removed only for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding shares
entitled to vote.
3. Vacancies. A vacancy in any directorship filled by the holders of
Class A Common Stock, voting separately as a class, or a vacancy resulting from
an enlargement of the board which the holders of Class A Common Stock are
entitled to elect as contemplated by Section A.2(b), shall be filled only by a
majority vote of any remaining director or directors elected by the holders of
Class A Common Stock, voting separately as a class. A vacancy in any
directorship filled by the holders of Class B Common stock, voting separately as
a class, or a vacancy resulting from an enlargement of the board which the
holders of Class B Common Stock are entitled to elect as contemplated by Section
A.2(b), shall be filled only by vote of the holders of Class B Common Stock,
voting separately as a class, or by a majority vote of any remaining director or
directors elected by the holders of Class B Common Stock, voting separately as a
class. Notwithstanding the foregoing, at such time as no shares of Class B
Common Stock are outstanding, any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the board, shall
be filled only by a vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. A director elected to fill
a vacancy shall be elected to hold office until the next election of the class
for which such director shall have been chosen, subject to the election and
qualification of his successor and to his
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earlier death, resignation or removal.
4. Stockholder Nominations and Introduction of Business, Etc. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the By-Laws of the Corporation.
5. Amendments to Articles of Incorporation. Notwithstanding any other
provisions of law, this Amended and Restated Certificate of Incorporation or the
ByLaws of the Corporation, and notwithstanding the fact that a lesser percentage
may be specified by law, the affirmative vote of the holders of at least 80% of
the issued and outstanding Class A Common Stock, voting separately as class, and
the affirmative vote of the holders of at least 80% of the issued and
outstanding Class B Common Stock, voting separately as class, shall be required
to amend, repeal, or to adopt any provision inconsistent with, Section A of
Article FOURTH, this Article ELEVENTH, Article THIRTEENTH or Article FOURTEENTH.
TWELFTH. The holders of the capital stock of the Corporation shall have
no preemptive rights to subscribe for any shares of any class of stock of the
Corporation whether now or hereafter authorized.
THIRTEENTH. Special meetings of stockholders may be called at any time
by only the Chairman of the Board of Directors, the President or the Board of
Directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting.
FOURTEENTH. The holders of Class A Common Stock may not take any action
by written consent in lieu of a meeting.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Sixth Amended and Restated Certificate of Incorporation
to be signed by its Secretary this day of , 1999.
EDISON SCHOOLS INC.
By:
Laura Eshbaugh
Secretary
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
THE EDISON PROJECT INC.
ARTICLE I
OFFICES
Section 1.1. REGISTERED OFFICE. The registered office of the
Corporation in the State of Delaware shall be located at the principal place of
business in such state of the corporation or individual acting as the
Corporation's registered agent in Delaware.
Section 1.2. OTHER OFFICES. In addition to its registered office in the
State of Delaware, the Corporation may have an office or offices in such other
place or places as the Board of Directors may from time to time designate or the
business of the Corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
Section 2.1. TIME AND PLACE. All meetings of the stockholders
of the Corporation shall be held at such date, time and place, either within or
without the State of Delaware, as shall be determined by the Board of Directors
and stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2.2. ANNUAL MEETING. The annual meeting of
stockholders of the Corporation shall be held at such date, time and place,
either within or without the State of Delaware, as shall be determined by the
Board of Directors and stated in the notice of meeting.
Section 2.3. SPECIAL MEETINGS OF STOCKHOLDERS. Special
meetings of stockholders for any purpose or purposes may be called by the Board
of Directors or the
<PAGE> 2
President. The time of any such special meeting shall be fixed by the President
or the Secretary and shall be stated in the notice of such meeting, which notice
shall specify the purpose or purposes thereof. Business transacted at any
special meeting shall be confined to the purposes stated in the notice of
meeting and matters germane thereto.
Section 2.4. NOTICE OF MEETINGS. Notice of the time and place
of every meeting of the stockholders shall be given not less than ten nor more
than sixty days before the date of the meeting to each stockholder entitled to
vote at such meeting, in the manner prescribed by Section 6.1 of these By-Laws,
except that where the matter to be acted upon is a merger or consolidation of
the Corporation, or a sale, lease or exchange of all or substantially all of its
assets, such notice shall be given not less than twenty nor more than sixty days
prior to such meeting.
Section 2.5. QUORUM AND ADJOURNMENT OF MEETINGS. The holders
of a majority of the shares of capital stock issued and outstanding and entitled
to vote thereat, present in person, or represented by proxy, shall be requisite
and shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by the Amended and
Restated Certificate of Incorporation. If a majority shall not be present in
person or represented by proxy at any meeting of the stockholders at which
action is to be taken by the stockholders, the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have power to adjourn
the meeting from time to time without notice other than announcement at the
meeting, until holders of the requisite number of shares of stock entitled to
vote shall be present or represented by proxy. At such adjourned meeting at
which such holders of the requisite number of shares of capital stock shall be
present or represented by proxy, any business may be transacted which might have
been transacted at the meeting as originally called. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of adjourned meeting shall be given to each
stockholder of record entitled to vote thereat.
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<PAGE> 3
Section 2.6. VOTE REQUIRED. Subject to the Corporation's
Shareholders' Agreement dated as of December 23, 1997, as amended from time to
time (the "Shareholders' Agreement"), at any meeting of stockholders all matters
shall be decided by a majority of the votes cast by the stockholders present in
person or represented by proxy and entitled to vote, unless the matter is one
for which, by express provisions of statute, the Amended and Restated
Certificate of Incorporation, the Shareholders' Agreement or these By-Laws, a
different vote is required, in which case such express provision shall govern
and control the determination of such matter.
Section 2.7. REQUIRED VOTES AND ACTIONS. Each stockholder
shall vote its shares of stock of the Corporation and take all other actions as
may be necessary or desirable to cause the Board and its members to be
constituted and to act as set forth in Article 3. In addition, the Shareholders'
Agreement contains certain voting restrictions, requirements and agreements. The
Shareholders' Agreement shall control to the extent that the terms and
provisions thereof conflict with any of the terms or provisions contained
herein.
Section 2.8. VOTING. At any meeting of the stockholders, each
stockholder having the right to vote shall be entitled to vote in person or by
proxy. To determine the stockholders entitled to notice of or to vote at any
meeting of the stockholders or any adjournment thereof, the Board of Directors
may fix, in advance, a record date which shall be not more than sixty days nor
less than ten days before the date of such meeting. Except as otherwise provided
by the Amended and Restated Certificate of Incorporation or by statute, each
stockholder of record shall be entitled to one vote for each outstanding share
of capital stock standing in its, his or her name on the books of the
Corporation as of the record date. A complete list of the stockholders entitled
to vote at any meeting of stockholders arranged in alphabetical order with the
address of each and the number of shares held by each, shall be prepared by the
Secretary. Such list shall be open to the examination of any stockholder for any
purpose germane to the meeting during ordinary business hours for a period of at
least ten days prior to the meeting, at the locations specified by the Delaware
General Corporation Law. The list shall also be
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produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 2.9. PROXIES. Each proxy shall be in writing executed
by the stockholder giving the proxy or his or her or its duly authorized
attorney-in-fact. No proxy shall be valid after the expiration of three years
from its date, unless a longer period is provided for in the proxy. Unless and
until voted, every proxy shall be revocable at the pleasure of the person who
executed it or his or her or its legal representatives or assigns, except in
those cases where an irrevocable proxy permitted by statute has been given.
Section 2.10. CONSENTS. The provision of these By-Laws
covering notices and meetings to the contrary notwithstanding, any action
required or permitted to be taken at any meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing setting forth the action so taken shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
have been necessary to authorize or take such action at a meeting at which all
shares of stock entitled to vote thereon were present and voted, provided, that
if the law of Delaware so requires, directors may be elected only at a meeting
of stockholders or by the unanimous written consent of the stockholders entitled
to vote for directors. Where corporate action is taken by less than unanimous
written consent, prompt written notice of the taking of such action shall be
given to all stockholders who have not consented in writing thereto and who, if
the action had been taken at a meeting, would have been entitled to notice of
the meeting and to vote thereat.
ARTICLE III
DIRECTORS
Section 3.1. BOARD OF DIRECTORS. The business and affairs of
the Corporation shall be managed by a Board of Directors. Subject to the
Shareholders' Agreement, the Board of Directors may exercise all such powers of
the Corporation and do all such lawful acts and things
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<PAGE> 5
on its behalf as are not by statute or by the Amended and Restated Certificate
of Incorporation or by these By-Laws directed or required to be exercised or
done by the stockholders.
Section 3.2. NUMBER; ELECTION AND TENURE. Subject to the
Amended and Restated Certificate of Incorporation and the Shareholders'
Agreement, the number of directors constituting the entire Board shall be
fourteen. Except as provided by law, the Amended and Restated Certificate of
Incorporation or these By-Laws, directors shall be elected each year at the
annual meeting of stockholders, at a meeting of stockholders entitled to vote
therefor (whether, by class, series or otherwise) or by unanimous written
consent of the stockholders entitled to vote therefor.
Section 3.3. ELECTION OF DIRECTORS. The Board of Directors
shall be elected by the Common Stock of the Corporation as provided in the
Amended and Restated Certificate of Incorporation.
Section 3.4. RESIGNATION AND REMOVAL. Any member of the Board
may resign at any time by giving written notice to the Corporation pursuant to
Section 6.1. Any such resignation shall take effect upon receipt thereof by the
Corporation, unless otherwise specified therein. Subject to the Shareholders'
Agreement, any member may be removed for cause by action of a majority of the
votes held by the members of the Board.
Section 3.5. VACANCIES. Subject to the Shareholders'
Agreement, any vacancy created by the death, resignation, retirement or removal
of a member of the Board shall be filled by the stockholders entitled to elect
the member whose absence created such vacancy. Except as provided above, a
vacancy occurring for any reason and newly created directorships resulting from
an increase in the authorized number of directors may be filled by the vote of a
majority of the directors then in office, although less than a quorum, or by the
sole remaining director, and any directors so chosen shall hold office until the
next election of the series or class for which such directors shall have been
chosen and until their successors shall be elected and qualified.
Section 3.6. COMPENSATION AND REIMBURSEMENT. Each director
shall receive for services rendered as a director of the Corporation such
compensation as may be fixed by the
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Board of Directors. Nothing herein contained shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Each director shall be reimbursed for expenses incurred
as a director of the Corporation.
ARTICLE IV
MEETINGS OF THE BOARD
Section 4.1. TIME AND PLACE. Meetings of the Board of
Directors shall be held at such places, within or without the State of Delaware,
and within or without the United States of America, as shall be determined in
accordance with these By-Laws.
Section 4.2. ANNUAL MEETING. Immediately after and at the
place of the annual meeting of the stockholders, or at such other place as the
Board of Directors may designate, a meeting of the newly elected Board of
Directors for the purpose of organization and the election of officers and
otherwise may be held. Such meeting may be held upon notice of at least five
business days.
Section 4.3. REGULAR MEETINGS. Regular meetings of the Board
of Directors shall be held bimonthly, upon notice of at least five business
days, at such time and place as shall, from time to time, be determined by the
Board of Directors.
Section 4.4. SPECIAL MEETINGS. Special meetings of the Board
of Directors may be held at any time and place as shall be determined by the
Board of Directors upon the call of the Board of Directors, the President, or
the Secretary, on two days' notice to each director by mail or on one day's
notice personally or by telecopy, telephone or telegraph. Meetings of the Board
of Directors may be held at any time without notice if all the directors are
present, or if those not present waive notice of the meeting in writing, either
before or after the meeting.
Section 4.5. QUORUM AND VOTING. A majority of the entire
number of votes to which the members of the entire Board are entitled shall
constitute a quorum at any meeting of the Board. If at any meeting of the Board
there shall not be a quorum present, the members
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<PAGE> 7
present thereat shall adjourn the meeting until a quorum shall have been
obtained. Unless otherwise provided herein or in the Shareholders' Agreement,
the vote of a majority of the entire number of votes which the members of the
entire Board are entitled to cast shall be the vote of the Board.
Section 4.6. CONSENTS. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent to such action in writing, and
such writing or writings are filed with the minutes of the proceedings of the
Board of Directors.
Section 4.7. TELEPHONIC MEETINGS OF DIRECTORS. The Board of
Directors may participate in a meeting by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other. Participation by such means shall constitute
presence in person at such meeting.
ARTICLE V
COMMITTEES
Section 5.1. DESIGNATION AND POWERS. The Board of Directors
shall designate a Compensation Committee and an Audit Committee and may in its
discretion designate one or more additional committees. Such committee or
committees shall have duties and powers not inconsistent with the laws of the
State of Delaware, the Amended and Restated Certificate of Incorporation, these
By-Laws, and the Shareholders' Agreement as are specified in the respective
resolution or resolutions of the Board of Directors designating such committees.
ARTICLE VI
NOTICES
Section 6.1. DELIVERY OF NOTICES. Unless otherwise provided in
the Amended and Restated Certificate of Incorporation, notices to directors and
stockholders shall be in writing
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<PAGE> 8
and may be delivered personally or by mail. Notice by mail shall be deemed to be
given when deposited in the United States mail, postage prepaid, and addressed
to directors or stockholders at their respective addresses appearing on the
books of the Corporation, unless any such director or stockholder shall have
filed with the Secretary of the Corporation a written request that notices
intended for him or her be mailed or delivered to some other address, in which
case the notice shall be mailed to or delivered at the address designated in
such request. Notice to directors may also be given by telecopy, to the
facsimile number so designated, and notice so given shall be deemed effective
upon dispatch.
Section 6.2. WAIVER OF NOTICE. Whenever notice is required to
be given by statute, the Amended and Restated Certificate of Incorporation or
these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice. Attendance of a person at a
meeting of stockholders, directors or any committee of directors, as the case
may be, shall constitute a waiver of notice of such meeting, except where the
person is attending for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of stockholders, directors or
committee of directors need be specified in any written waiver of notice.
ARTICLE VII
OFFICERS
Section 7.1. EXECUTIVE OFFICERS. Subject to the Shareholders'
Agreement, the Board of Directors shall elect a President and Secretary and may
elect one or more Vice Presidents, Assistant Secretaries or Assistant Treasurers
and such other officers as the Board of Directors may from time to time
designate or the business of the Corporation may require. No
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<PAGE> 9
executive officer need be a member of the Board. Any number of offices may be
held by the same person.
Section 7.2. OTHER OFFICERS AND AGENTS. Subject to the
Shareholders' Agreement, the Board of Directors may also elect such other
officers and agents as the Board of Directors may at any time or from time to
time determine to be advisable, such officers and such agents to serve for such
terms and to exercise such powers and perform such duties as shall be specified
at any time or from time to time by the Board of Directors.
Section 7.3. TENURE; RESIGNATION; REMOVAL; VACANCIES. Each
officer of the Corporation shall hold office until his or her successor is
elected and qualified or until his or her earlier resignation or removal in
accordance with these By-Laws; provided, that if the term of office of any
officer elected or appointed pursuant to Section 7.2 of these By-Laws shall have
been fixed by the Board of Directors, he or she shall cease to hold such office
no later than the date of expiration of such term regardless of whether any
other person shall have been elected or appointed to succeed him or her. Subject
to the Shareholders' Agreement, any officer elected by the Board of Directors
may be removed at any time, with or without cause, by the Board of Directors;
provided, that any such removal shall be without prejudice to the rights, if
any, of any officer so removed under his or her employment or other agreement
with the Corporation. An officer may resign at any time upon written notice to
the Board of Directors. If the office of any officer becomes vacant by reason of
death, resignation, retirement, disqualification, removal from office or
otherwise, the Board of Directors, subject to the Shareholders' Agreement, may
choose a successor or successors to hold office for such term as may be
specified by the Board of Directors.
Section 7.4. COMPENSATION. Subject to the Shareholders'
Agreement, the salaries of all officers and agents of the Corporation appointed
by the Board of Directors shall be fixed by the Board of Directors.
Section 7.5. AUTHORITY AND DUTIES. All officers as between
themselves and the Corporation shall have such authority and perform such duties
in the management of the
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Corporation as the Board of Directors shall determine. The Board of Directors
may, from time to time, impose or confer upon any of the officers such
additional duties and powers as the Board of Directors may see fit.
ARTICLE VIII
CERTIFICATES OF STOCK
Section 8.1. FORM AND SIGNATURE. The certificates of stock of
the Corporation shall be in such form or forms not inconsistent with the Amended
and Restated Certificate of Incorporation as the Board of Directors shall
approve. The certificates shall be numbered, the certificates for the shares of
stock of each class or series shall be numbered consecutively, and shall be
entered in the books of the Corporation as they are issued. The certificates
shall exhibit the holder's name and the number of shares evidenced thereby and
shall be signed by the President or a Vice President and the Treasurer (or any
Assistant Treasurer) or the Secretary (or any Assistant Secretary); provided,
however, that where any such certificate is signed by a transfer agent or an
assistant transfer agent, or by a transfer clerk acting on behalf of the
Corporation, and registered by a registrar, the signature of any such President,
Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant
Secretary, may be a facsimile. In case any officer or officers who shall have
signed, or whose facsimile signature or signatures shall have been used on any
such certificate or certificates, shall cease to be such officer or officers of
the Corporation, whether because of death, resignation, removal or otherwise,
before such certificate or certificates shall have been delivered by the
Corporation, such certificate or certificates may nevertheless be issued and
delivered as though the person or persons who signed such certificate or
certificates, or whose facsimile signature or signatures shall have been used
thereon, had not ceased to be such officer or officers of the Corporation.
Section 8.2. LOST OR DESTROYED CERTIFICATES. The Board of
Directors may direct a new certificate or certificates to be issued in place of
any certificate or certificates
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theretofore issued by the Corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate or stock to be lost or destroyed. When authorizing such issue of a
new certificate or certificates, the Board of Directors may in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his or her legal
representatives, to advertise the same in such manner as it shall require, and
to give a bond in such sum as the Board of Directors may direct, indemnifying
the Corporation, any transfer agent and any registrar against any claim that may
be made against them or any of them with respect to the certificate alleged to
have been lost or destroyed.
Section 8.3. REGISTRATION OF TRANSFER. Upon surrender to the
Corporation of a certificate for shares, duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, the Corporation
shall issue a new certificate to the person entitled thereto, cancel the old
certificate, and record the transaction on its books.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1. RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directions may fix,
in advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action.
Section 9.2. REGISTERED STOCKHOLDERS. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and
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accordingly shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
the State of Delaware.
Section 9.3. DIVIDENDS. Dividends upon the capital stock of
the Corporation shall in the discretion of the Board of Directors from time to
time be declared by the Board of Directors out of funds legally available
therefor after setting aside of proper reserves.
Section 9.4. CHECKS AND NOTES. All checks and drafts on the
bank accounts of the Corporation, all bills of exchange and promissory notes of
the Corporation, and all acceptances, obligations and other instruments for the
payment of money drawn, signed or accepted by the Corporation, shall be signed
or accepted, as the case may be, by such officer or officers, agent or agents as
shall be thereunto authorized from time to time by the Board of Directors or by
officers of the Corporation designated by the Board of Directors to make such
authorization.
Section 9.5. FISCAL YEAR. The fiscal year of the Corporation
will begin on July 1st and end on June 30th except as otherwise determined by
the Board of Directors.
Section 9.6. VOTING OF SECURITIES OF OTHER CORPORATIONS. In
the event that the Corporation shall at any time own and have power to vote any
securities (including but not limited to shares of stock) of any other issuer,
such securities shall be voted by the President or such person or persons, to
such extent and in such manner, as may be determined from time to time by the
Board of Directors.
Section 9.7. TRANSFER AGENT. The Board of Directors may make
such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of stock. It may appoint one or more transfer agents
and one or more registrars and may require all stock certificates to bear the
signature of either or both.
Section 9.8. CORPORATE SEAL. The Board may approve and adopt a
corporate seal, which shall be in the form of a circle and shall bear the full
name of the Corporation, the year of its incorporation and the words "Corporate
Seal Delaware".
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<PAGE> 13
ARTICLE X
INDEMNIFICATION
Section 10.1. INDEMNIFICATION.
(a) ACTIONS, SUITS OR PROCEEDINGS OTHER THAN BY OR IN THE
RIGHT OF THE CORPORATION. The Corporation shall indemnify any current or former
director or officer of the Corporation and may, at the discretion of the Board
of Directors, indemnify any current or former employee or agent of the
Corporation who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, partner, manager,
employee or agent (including trustee) of another corporation, partnership, joint
venture, limited liability company, trust or other enterprise (including
employee benefit plans) (funds paid or required to be paid to any person as a
result of the provisions of this Section 10.1 shall be returned to the
Corporation or reduced, as the case may be, to the extent that such person
receives funds pursuant to an indemnification from any such other corporation,
partnership, joint venture, trust or enterprise) to the fullest extent
permissible under Delaware law, as then in effect, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, if he or she (a) in the case of a director, did not breach his or
her fiduciary duty as a director, or (b) (i) acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Corporation, and (ii) with respect to any criminal action or proceeding, had
no reasonable cause to believe that his or her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person seeking indemnification did not act
in good faith and in a manner which he or she reasonably believed to
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<PAGE> 14
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe that
his or her conduct was unlawful.
(b) ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any current or former director or officer of the
Corporation and may, at the discretion of the Board of Directors, indemnify any
current or former employee or agent of the Corporation who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit, by or in the right of the Corporation to procure a judgment in its
favor by reason of the fact that such person is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, partner, manager, employee or agent
(including trustee) of another corporation, partnership, joint venture, limited
liability company, trust or other enterprise (including employee benefit plans)
(funds paid or required to be paid to any person as a result of the provisions
of this Section 10.1 shall be returned to the Corporation or reduced, as the
case may be, to the extent that such person receives funds pursuant to an
indemnification from any such other corporation, partnership, joint venture,
trust or enterprise) to the fullest extent permitted under Delaware law, as then
in effect, against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit, if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
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<PAGE> 15
(c) INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. To the
extent that a director, officer, employee or agent of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraph (a) or (b) of this Section 10.1, or in
defense of any claim, issue or matter therein, such person shall be indemnified
by the Corporation against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
(d) DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification
under paragraph (a) or (b) of this Section 10.1 (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because such person has met the applicable
standard of conduct set forth in paragraphs (a) and (b) of this Section 10.1.
Such determination shall be made (1) by the Board of Directors by a majority
vote of the directors who are not parties to such action, suit or proceeding,
even though less than a quorum or (2) if there are no such directors, or if such
directors so direct, by independent disinterested legal counsel in a written
opinion, or (3) by the holders of a majority of the shares of capital stock of
the Corporation entitled to vote thereon.
(e) ADVANCEMENT OF EXPENSES. Expenses (including attorneys' fees)
incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the Corporation as authorized in
this Section 10.1. Such expenses (including attorneys' fees) incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board of Directors deems appropriate.
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<PAGE> 16
(f) OTHER RIGHTS. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Section 10.1 shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
(g) INSURANCE. By action of the Board of Directors,
notwithstanding the interest of the directors in the action, the Corporation may
purchase and maintain insurance, in such amounts as the Board of Directors deems
appropriate, on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent (including trustee) of
another corporation, partnership, joint venture, trust or other enterprise
(including employee benefit plans), against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation shall have the power to
indemnify such person against such liability under the provisions of this
Section 10.l.
(h) CONTINUATION OF RIGHTS TO INDEMNIFICATION. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Section 10.1 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
(i) PROTECTION OF RIGHTS EXISTING AT TIME OF REPEAL OR
MODIFICATION. Any repeal or modification of this Section 10.1 shall not
adversely affect any right or protection of any person based on facts and
circumstances which occurred prior to such repeal or modification.
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<PAGE> 17
ARTICLE XI
AMENDMENTS
Section 11.1. BY THE STOCKHOLDERS. Subject to the
Shareholders' Agreement, these By-Laws may be altered, amended or repealed in
whole or in part, and new By-Laws may be adopted, by the affirmative votes of
the holder or holders of 66 2/3% or more of the shares of capital stock issued
and outstanding and entitled to vote at any annual or special meeting of the
stockholders, if notice thereof shall be contained in the notice of the meeting.
Section 11.2. BY THE BOARD OF DIRECTORS. These By-Laws may be
altered, amended or repealed by the Board of Directors at any regular or special
meeting of the Board of Directors (i) prior to the occurrence of a Qualified
Public Offering, with the affirmative votes of each member of the Board of
Directors elected by the respective holders of Series B Common Stock, Series C
Common Stock, Series D Common Stock and Series G Common Stock, and (ii) after
the occurrence of a Qualified Public Offering, with the affirmative vote of a
majority of the members of the Board of Directors. For the purposes hereof,
"Qualified Public Offering" means the closing of the sale by the Corporation
and/or its stockholders of equity securities of the Corporation to the public in
a bona fide, firm commitment underwriting pursuant to a registration statement
on Form S-1 (or a successor form) under the Securities Act of 1933, as amended
(or any successor statute), which has been declared effective by the Securities
and Exchange Commission (or any successor entity) with aggregate gross proceeds
to the Corporation and or its stockholders of at least $50,000,000 at a per
share price of at least $7.00 (as adjusted for any stock splits, stock dividends
[other than P.I.K. dividends (as defined below)] and stock combinations) to the
Corporation and/or its stockholders.
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<PAGE> 18
REMOVED FROM SECTION 3.3
Notwithstanding anything to the contrary: (i) the holder of Series B Common
Stock, par value $.01 per share ("Series B Common Stock"), shall be entitled to
elect up to three members of the Board of Directors, each such member entitled
to cast one vote on all matters to be brought before the Board of Directors,
provided, that if such holder does not elect three members, such lesser number
of members elected by such holder shall be entitled to cast three votes on any
such matters as follows: (A) if such holder elects two members, such holder
shall designate one such member who shall be entitled to cast two votes and the
other such member who shall be entitled to cast one vote, and (B) if such holder
elects one member, such member shall be entitled to cast three votes; (ii) the
holder of Series C Common Stock, par value $.01 per share ("Series C Common
Stock"), shall be entitled to elect up to two members of the Board of Directors,
each such member entitled to cast one vote on all matters to be brought before
the Board of Directors, provided, that if such holders elect only one member,
such one member shall be entitled to cast two votes on any such matter; (iii)
the holder of Series D Common Stock, par value $.01 per share ("Series D Common
Stock"), shall be entitled to elect up to two members of the Board of Directors,
each such member entitled to cast one vote on all matters to be brought before
the Board of Directors, provided, that if such holder elects only one member,
such one member shall be entitled to cast two votes on any such matter; (iv) the
holder of Series E Common Stock, par value $.01 per share ("Series E Common
Stock"), shall be entitled to elect one member of the Board of Directors, such
member entitled to cast one vote on all matters to be brought before the Board
of Directors; and (v) the holder of Series F Common Stock, par value $.01 per
share ("Series F Common Stock"), shall be entitled to elect one member of the
Board of Directors, such member entitled to cast one vote on all matters to be
brought before the Board of Directors; and (vi) the holders of Series A Common
Stock, par value $.01 per share ("Series A Common Stock"), and the holders of
any other voting class or series of capital stock of the Corporation entitled to
vote for directors other than those listed above shall be entitled, voting
together as one class, to elect such remaining number of members of the Board of
Directors as may be authorized pursuant to these By-Laws of the Corporation,
provided, that such remaining number shall not include such number of members as
the respective holders of Series B Common Stock, Series C Common Stock, Series D
Common Stock, Series E Common Stock and Series F Common Stock are entitled to
elect pursuant to clauses (i) through (v) of this Section 3.3 whether or not
such members are so elected.
REMOVED FROM SECTION 3.4
provided if the member so removed was elected or appointed by a holder of
Series B Common Stock, Series C Common Stock, Series D Common Stock, Series E
Common Stock or Series F Common Stock, then no action taken by the Board of
Directors after such removal and prior to the election or appointment of a
replacement director for such removed director shall take effect unless both (i)
the stockholder entitled to elect or appoint such removed director has been
given notice in writing of the action and (ii) within ten (10) days after
receipt of such notice any one of the following three events or actions shall
not have occurred or been taken: (A) such stockholder shall have elected or
appointed a replacement director for such removed director; (B) such replacement
director shall have indicated in writing to the Company that he or she would
have voted against such action; and, (C) treating such written indication as a
vote against such action
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<PAGE> 19
by such replacement director as if he or she had been duly elected to the Board
prior to such action, such action would not have been approved by the Board.
Cause for removal shall exist only if the member whose removal is proposed shall
have been convicted of a felony by a court of competent jurisdiction or shall
have been adjudged by a court of competent jurisdiction to be liable for gross
negligence or willful misconduct in the performance of his or her duties to the
Corporation in a matter of substantial importance to the Corporation. A member
of the Board may be removed at any time without cause by the stockholder
entitled to elect such director.
REMOVED FROM SECTION 3.5
In the event a vacancy is created by the death, resignation, retirement or
removal of the Partnership CEO, the Board shall cause the Corporation, as sole
general partner of The Edison Project, L.P. (the "Partnership"), to appoint a
replacement Partnership CEO in accordance with Section 4.5 below and the vacancy
created with respect to that Board membership thereafter shall be filled by the
newly appointed Partnership CEO.
REMOVED FROM SECTION 4.5
The affirmative votes of each of (i) the president of WSI (the "Special Series B
Director") and (ii) the members of the Board appointed by the holders of Series
C Common Stock and Series D Common Stock, shall be required to authorize: (i)
any indebtedness (including funded debt, capitalized leases and operating
leases) of the Corporation or any subsidiaries of the Corporation (which shall
include, but not be limited to, the Partnership) (together, the "Edison
Companies" and each an "Edison Company"), other than trade debt and accounts
payable containing customary payment terms and incurred in the ordinary course
of business, (ii) the authorization or issuance of any shares of capital stock
of any class or series or other equity securities of the Corporation or the
Partnership or the limited partner of the Partnership or securities exchangeable
for or convertible into equity securities of the Corporation or the Partnership
or the limited partner of the Partnership (or any change or amendment to the
attributes or preferences of any such securities, whether or not issued),
admission of additional general or limited partners to the Partnership, granting
or redemption of stock options, approval of performance standards for vesting of
options of the employee equity and option program implemented by the Corporation
or the Partnership or the limited partner of the Partnership including options
issued to current and former Partnership management, any options issued to other
Partnership employees pursuant to "The Edison Project's Employee Option Plan"
and any options issued to employees of the Corporation or the Partnership or the
limited partner of the Partnership, or sale or issuance of any securities by the
Corporation (provided, however, that after January 1, 1999, (a) such votes shall
not be required to authorize the issuance of securities of the Corporation in an
initial public offering, and (b) any one of (I) the director(s), acting
together, appointed by the holder of Series B Common Stock (II) the director(s),
acting together, appointed by the holder of Series C Common Stock or (III) the
director(s), acting together, appointed by the holder of Series D Common Stock,
may require that the Corporation undertake an initial public offering), (iii)
the appointment, removal, replacement or reduction in compensation or
responsibilities of any of the Chairman of the Board, the President, the Chief
Executive Officer, the Partnership CEO, the Chief Operating Officer, the Chief
Financial Officer, or any other officer (or other similar
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<PAGE> 20
position) of an Edison Company, with authority, responsibilities and duties
equivalent to such officers and (iv) any merger, consolidation,
recapitalization, reorganization, sale of all or substantially all of the
assets, recapitalization, dissolution or winding up of an Edison Company. No
matter requiring the vote of any Board member as stated above shall be
determined at a meeting from which such Board member is absent.
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<PAGE> 1
Exhibit 4.1
Number SHARES
EDSN
[LOGO]
EDISON SCHOOLS INC
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 281033 10 0
THIS IS TO CERTIFY THAT _____________________________________________________ IS
THE OWNER OF ___________________________________________________________________
FULLY-PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER
SHARE, OF
EDISON SCHOOLS INC.
(Hereinafter called the "Corporation"), transferrable on the books of the
Corporation by the holder in person or by duly authorized attorney upon
surrender of this certificate properly endorsed or assigned. This certificate
and the shares of Class A Common Stock represented hereby are subject to all the
laws of the State of Delaware and all of the provisions of the Certificate of
Incorporation and By-Laws of the Corporation, as now in effect or hereafter
amended, to all of which the holder by acceptance hereof assents. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:_________________
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Laura K. Eshbaugh [CORPORATE /s/ H. Christopher Whittle
SECRETARY SEAL] PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER &
TRUST
(Jersey City, N.J.) TRANSFER AGENT
AND REGISTRAR
BY___________________________
AUTHORIZED SIGNATURE
</TABLE>
<PAGE> 2
The Corporation has authority to issue stock of more than one class.
The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof of the
Corporation, and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or the
transfer agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _________ Custodian______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act__________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, __________________________________, hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________ ____________________________________
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT,
OR ANY CHANGE WHATEVER.
Signature(s)
Guaranteed:________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C.
RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.4
EDISON SCHOOLS INC.
1999 STOCK INCENTIVE PLAN
1. Purpose
The purpose of this 1999 Stock Incentive Plan (the "Plan") of Edison
Schools Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any of the Company's present or future subsidiary corporations as defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder (the "Code") and any other business venture
(including, without limitation, joint venture or limited liability company) in
which the Company has a significant interest, as determined by the Board of
Directors of the Company (the "Board").
2. Eligibility
All of the Company's employees, officers, directors, consultants and
advisors (and any individuals who have accepted an offer for employment) are
eligible to be granted options, restricted stock awards or other stock-based
awards (each, an "Award") under the Plan. Each person who has been granted an
Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
(a) Administration by Board of Directors. The Plan will be administered
by the Board. The Board shall have authority to grant Awards and to adopt, amend
and repeal such administrative rules, guidelines and practices relating to the
Plan as it shall deem advisable. The Board may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Award in the manner
and to the extent it shall deem expedient to carry the Plan into effect and it
shall be the sole and final judge of such expediency. All decisions by the Board
shall be made in the Board's sole discretion and shall be final and binding on
all persons having or claiming any interest in the Plan or in any Award. No
director or person acting pursuant to the authority delegated by the Board shall
be liable for any action or determination relating to or under the Plan made in
good faith.
<PAGE> 2
(b) Delegation to Executive Officers. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable
law, the Board may delegate any or all of its powers under the Plan to one or
more committees or subcommittees of the Board (a "Committee"). If and when the
Class A Common Stock, $.01 par value per share, of the Company (the "Common
Stock") is registered under the Securities Exchange Act of 1934 (the "Exchange
Act"), the Board shall appoint one such Committee of not less than two members,
each member of which shall be an "outside director" within the meaning of
Section 162(m) of the Code ("Section 162(m)") and a "non-employee director" as
defined in Rule 16b-3 promulgated under the Exchange Act. All references in the
Plan to the "Board" shall mean the Board or a Committee of the Board or the
executive officer referred to in Section 3(b) to the extent that the Board's
powers or authority under the Plan have been delegated to such Committee or
executive officer.
4. Stock Available for Awards
(a) Subject to adjustment under Section 8, Awards may be made under the
Plan for up to 2,500,000 shares of Common Stock. If any Award expires or is
terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered by such Award shall again be available for the
grant of Awards under the Plan, subject, however, in the case of Incentive Stock
Options (as hereinafter defined), to any limitation required under the Code.
Shares issued under the Plan may consist in whole or in part of authorized but
unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 8, for
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares of Common Stock with respect to which an Award may be
granted to any Participant under the Plan shall be 1,000,000 per calendar year.
The per-Participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m).
5. Stock Options
(a) General. The Board may grant options to purchase Common Stock
(each, an "Option") and determine the number of shares of Common Stock to be
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<PAGE> 3
covered by each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option shall be designated a "Nonstatutory Stock Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement. No option will be granted for a term in excess of
10 years.
(e) Exercise of Option. Options may be exercised by delivery to the
Company of a written notice of exercise signed by the proper person or by any
other form of notice (including electronic notice) approved by the Board
together with payment in full as specified in Section 5(f) for the number of
shares for which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of
an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise
provide in an option agreement, by (i) delivery of an irrevocable and
unconditional undertaking by a creditworthy broker to deliver promptly to the
Company sufficient funds to pay the exercise price or (ii) delivery by the
Participant to the Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to the Company cash or
a check sufficient to pay the exercise price;
(3) when the Common Stock is registered under the Exchange
Act, by delivery of shares of Common Stock owned by the Participant valued at
their fair market value as determined by (or in a manner approved by) the Board
in good faith ("Fair Market Value"), provided (i) such method of payment is then
permitted under
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<PAGE> 4
applicable law and (ii) such Common Stock was owned by the
Participant at least six months prior to such delivery;
(4) to the extent permitted by the Board, in its sole
discretion, by (i) delivery of a promissory note of the Participant to the
Company on terms determined by the Board or (ii) payment of such other lawful
consideration as the Board may determine; or
(5) by any combination of the above permitted forms of
payment.
6. Restricted Stock
(a) Grants. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price from
the recipient in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each, a
"Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or, if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. Other Stock-Based Awards
The Board shall have the right to grant other Awards based upon the
Common Stock having such terms and conditions as the Board may determine,
including the grant of shares based upon certain conditions, the grant of
securities convertible into Common Stock and the grant of stock appreciation
rights.
-4-
<PAGE> 5
8. Adjustments for Changes in Common Stock and Certain Other Events
(a) Changes in Capitalization. In the event of any stock split, reverse
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the per-Participant limit set forth in Section 4(b), (iii) the number and
class of securities and exercise price per share subject to each outstanding
Option, (iv) the repurchase price per share subject to each outstanding
Restricted Stock Award and (v) the terms of each other outstanding Award shall
be appropriately adjusted by the Company (or substituted Awards may be made, if
applicable) to the extent the Board shall determine, in good faith, that such an
adjustment (or substitution) is necessary and appropriate. If this Section 8(a)
applies and Section 8(c) also applies to any event, Section 8(c) shall be
applicable to such event, and this Section 8(a) shall not be applicable.
(b) Liquidation or Dissolution. In the event of a proposed liquidation
or dissolution of the Company, the Board shall upon written notice to the
Participants provide that all then unexercised Options will (i) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (ii) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date. The Board may specify the effect of a liquidation or
dissolution on any Restricted Stock Award or other Award granted under the Plan
at the time of the grant of such Award.
(c) Acquisition Events
(1) Definition. An "Acquisition Event" shall mean: (a) any
merger or consolidation of the Company with or into another entity as a result
of which the Common Stock is converted into or exchanged for the right to
receive cash, securities or other property or (b) any exchange of shares of the
Company for cash, securities or other property pursuant to a statutory share
exchange transaction.
(2) Consequences of an Acquisition Event on Options. Upon the
occurrence of an Acquisition Event, or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall provide that all
outstanding Options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof). For purposes hereof, an Option shall be considered to be assumed if,
following consummation of the Acquisition Event, the Option confers the right to
purchase, for each share of Common Stock subject to the Option immediately prior
to the consummation of the Acquisition Event, the consideration (whether cash,
securities or other property) received as a result of the Acquisition Event by
holders of Common Stock for each share of Common Stock held immediately prior to
the consummation of the
- 5 -
<PAGE> 6
Acquisition Event (and if holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
shares of Common Stock); provided, however, that if the consideration received
as a result of the Acquisition Event is not solely common stock of the acquiring
or succeeding corporation (or an affiliate thereof), the Company may, with the
consent of the acquiring or succeeding corporation, provide for the
consideration to be received upon the exercise of Options to consist solely of
common stock of the acquiring or succeeding corporation (or an affiliate
thereof) equivalent in fair market value to the per share consideration received
by holders of outstanding shares of Common Stock as a result of the Acquisition
Event.
Notwithstanding the foregoing, if the acquiring or succeeding
corporation (or an affiliate thereof) does not agree to assume, or substitute
for, such Options, then the Board shall, upon written notice to the
Participants, provide that all then unexercised Options will become exercisable
in full as of a specified time prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants before the consummation of such Acquisition
Event; provided, however, that in the event of an Acquisition Event under the
terms of which holders of Common Stock will receive upon consummation thereof a
cash payment for each share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), then the Board may instead provide
that all outstanding Options shall terminate upon consummation of such
Acquisition Event and that each Participant shall receive, in exchange therefor,
a cash payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable) exceeds (B) the aggregate exercise
price of such Options.
(3) Consequences of an Acquisition Event on Restricted Stock
Awards. Upon the occurrence of an Acquisition Event, the repurchase and other
rights of the Company under each outstanding Restricted Stock Award shall inure
to the benefit of the Company's successor and shall apply to the cash,
securities or other property which the Common Stock was converted into or
exchanged for pursuant to such Acquisition Event in the same manner and to the
same extent as they applied to the Common Stock subject to such Restricted Stock
Award.
(4) Consequences of an Acquisition Event on Other Awards. The
Board shall specify the effect of an Acquisition Event on any other Award
granted under the Plan at the time of the grant of such Award.
9. General Provisions Applicable to Awards
(a) Transferability of Awards. Except as the Board may otherwise determine
or provide in an Award, Awards shall not be sold, assigned, transferred,
- 6 -
<PAGE> 7
pledged or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award shall be evidenced by a written instrument in
such form as the Board shall determine. Each Award may contain terms and
conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Award
may be made alone or in addition or in relation to any other Award. The terms of
each Award need not be identical, and the Board need not treat Participants
uniformly.
(d) Termination of Status. The Board shall determine the effect on an Award
of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, when the Common Stock is registered under the Exchange Act,
Participants may, to the extent then permitted under applicable law, satisfy
such tax obligations in whole or in part by delivery of shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award
- 7 -
<PAGE> 8
have been met or removed to the satisfaction of the Company, (ii) in the opinion
of the Company's counsel, all other legal matters in connection with the
issuance and delivery of such shares have been satisfied, including any
applicable securities laws and any applicable stock exchange or stock market
rules and regulations, and (iii) the Participant has executed and delivered to
the Company such representations or agreements as the Company may consider
appropriate to satisfy the requirements of any applicable laws, rules or
regulations.
(h) Acceleration. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of restrictions in full or in part or that any other Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
10. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the record date and
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the stock dividend with respect to the shares of Common
Stock acquired upon such Option exercise, notwithstanding the fact that such
shares were not outstanding as of the close of business on the record date for
such stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on the
date on which it is adopted by the Board, but no Award granted to a Participant
that is intended to comply with Section 162(m) shall become exercisable, vested
or realizable, as applicable to such Award, unless and until the Plan has been
approved by the Company's stockholders to the extent stockholder approval is
required by
- 8 -
<PAGE> 9
Section 162(m) in the manner required under Section 162(m) (including the vote
required under Section 162(m)). No Awards shall be granted under the Plan after
the completion of ten years from the earlier of (i) the date on which the Plan
was adopted by the Board or (ii) the date the Plan was approved by the Company's
stockholders, but Awards previously granted may extend beyond that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time, provided that to the extent required by
Section 162(m), no Award granted to a Participant that is intended to comply
with Section 162(m) after the date of such amendment shall become exercisable,
realizable or vested, as applicable to such Award, unless and until such
amendment shall have been approved by the Company's stockholders as required by
Section 162(m) (including the vote required under Section 162(m)).
(e) Governing Law. The provisions of the Plan and all Awards made hereunder
shall be governed by and interpreted in accordance with the laws of the State of
Delaware, without regard to any applicable conflicts of law.
Adopted by the Board of Directors
on ________, 1999
Approved by the Stockholders
on ________, 1999
- 9 -
<PAGE> 1
Exhibit 10.39
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is entered into as of this ____
day of October, 1999 between Edison Schools Inc., a Delaware corporation (the
"Company"), and WSI Inc., a Delaware corporation ("WSI").
WHEREAS, upon the terms and subject to the conditions set forth in this
Agreement, the Company proposes to loan to WSI the amount required to permit WSI
to exercise the option to purchase 600,000 shares of Series A Common Stock, $.01
par value per share, of the Company ("Series A Common Stock") pursuant to the
option agreement attached hereto as Exhibit A and the option to purchase 850,000
shares of Series A Common Stock pursuant to the option agreement attached hereto
as Exhibit B (the shares of Series A Common Stock acquired upon the exercise of
such options shall be referred to herein as the "Shares"), and to pay related
taxes; and
WHEREAS, upon the terms and subject to the conditions set forth in this
Agreement, WSI desires to issue a secured promissory note to the Company to
evidence such loan.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereby agree as follows:
1. Loan. The Company agrees to make the following loans to WSI:
(a) The Company shall loan an aggregate of $____________ to
WSI (the "Loan"), which loan amount shall include the amount of any applicable
tax withholding obligation of the Company, in exchange for the secured
promissory note of WSI, in the principal amount of the Loan, in the form
attached hereto as Exhibit C (the "Note"). The Loan shall be used by WSI solely
to purchase the Shares and to pay federal, state and local taxes incurred by WSI
or H. Christopher Whittle ("Whittle") in connection with the purchase of the
Shares.
(b) On or about April 13, 2000, the Company shall loan to WSI
(the "Tax Loan") such amount, to be mutually agreed upon by WSI and the Company,
as is necessary for WSI or Whittle to pay any additional federal, state and
local taxes incurred by WSI or Whittle in connection with the purchase of the
Shares, which loan amount shall include the amount of any applicable tax
withholding obligation of the Company, in exchange for the secured promissory
note of WSI, in the principal amount of the Tax Loan, substantially in the form
attached hereto as Exhibit D (the "Second Note").
<PAGE> 2
(c) At any time and from time to time prior to the payment in
full of the Note, the Company shall loan to WSI (the "Second Tax Loan") such
amount, to be mutually agreed upon by WSI and the Company, as is necessary for
WSI or Whittle to pay any additional federal, state and local taxes or any tax
penalties incurred by WSI or Whittle in connection with the purchase of the
Shares, which loan amount shall include the amount of any applicable tax
withholding obligation of the Company, in exchange for the secured promissory
note of WSI, in the principal amount of the Second Tax Loan, substantially in
the form attached hereto as Exhibit D (the "Third Note"); provided (i) that such
additional federal, state and local taxes or tax penalties shall be assessed by
the Internal Revenue Service or the tax collection authority of any state or
local jurisdiction as the result of an audit, or shall be determined by any
federal, state or local court, and (ii) that WSI or Whittle shall have a legal
obligation to pay such additional federal, state and local taxes or tax
penalties.
(d) WSI's obligations under the Note, the Second Note, the
Third Note and this Agreement shall be recourse solely to WSI's interest in the
Collateral (as defined in the Pledge Agreement).
2. Security Interest. As set forth in the Pledge Agreement attached
hereto as Exhibit E (the "Pledge Agreement"), WSI hereby grants to the Company a
security interest in the Shares to secure the payment and performance of the
Note and, if and when issued by WSI, the Second Note and the Third Note.
3. Investment Representations. WSI represents, warrants and covenants
as follows:
(a) WSI is purchasing the Shares for its own account for
investment only, and not with a view to, or for sale in connection with, any
distribution of the Shares in violation of the Securities Act of 1933, as
amended (the "Securities Act"), or any rule or regulation under the Securities
Act.
(b) WSI has had such opportunity as it has deemed adequate to
obtain from representatives of the Company such information as is necessary to
permit it to evaluate the merits and risks of its investment in the Company.
(c) WSI has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the purchase of
the Shares and to make an informed investment decision with respect to such
purchase.
(d) WSI can afford a complete loss of the value of the Shares
and is able to bear the economic risk of holding such Shares for an indefinite
period.
2
<PAGE> 3
(e) WSI understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act ("Rule 144"); (ii) the Shares
cannot be sold, transferred or otherwise disposed of unless they are
subsequently registered under the Securities Act or an exemption from
registration is then available; and (iii) in any event, the exemption from
registration under Rule 144 will not be available for at least one year and even
then will not be available unless a public market then exists for the Series A
Common Stock, adequate information concerning the Company is then available to
the public and other terms and conditions of Rule 144 are complied with.
(f) A legend substantially in the following form will be
placed on the certificate(s) representing the Shares:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be sold, transferred or otherwise disposed of in the
absence of an effective registration statement under such Act
or an opinion of counsel satisfactory to the corporation to
the effect that such registration is not required."
4. Certain Requirements under Rule 144. WSI acknowledges that, as set
forth in paragraph (d) of Rule 144, certain holding period requirements relating
to the Note and, if issued by WSI, the Second Note and the Third Note must be
satisfied prior to the sale of the Shares by WSI pursuant to Rule 144.
5. Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, courier service, personal
delivery or facsimile (provided that "answer back" confirmation is received by
the sender of the facsimile):
(a) if to the Company:
Edison Schools Inc.
521 Fifth Avenue, 15th Floor
New York, NY 10175
Facsimile: (212) 419-1604
Attn: General Counsel
with a copy to:
Hale and Dorr LLP
1455 Pennsylvania Ave., N.W.
Washington, DC 20004-1008
Facsimile: (202) 942-8484
3
<PAGE> 4
Attn: David Sylvester, Esq.
4
<PAGE> 5
(b) if to WSI:
WSI Inc.
First Tennessee Plaza
800 South Gay Street, Suite 1230
Knoxville, TN 37929
Facsimile: (423) 546-1090
Attn: President
with a copy to:
Hale and Dorr LLP
1455 Pennsylvania Ave., N.W.
Washington, DC 20004-1008
Facsimile: (202) 942-8484
Attn: David Sylvester, Esq.
All such notices and communications shall be deemed to have been duly
given (a) when delivered by hand, if personally delivered, (b) when delivered by
courier, if delivered by commercial overnight courier service, (c) when mailed,
five business days after being deposited in the mail, postage prepaid, or (d)
when transmitted, if sent by facsimile. Any party may, from time to time, change
its address by sending a notice with the new address in accordance with the
provisions of this Section 5.
6. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of the parties hereto.
WSI may not assign any of its rights under this Agreement without the written
consent of the Company. The Company may assign any of its rights under this
Agreement without the written consent of WSI. No person or entity other than the
parties hereto and their successors and permitted assigns is intended to be a
beneficiary of this Agreement.
7. Amendment and Waiver.
(a) No failure or delay on the part of WSI or the Company in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement and
any consent to any departure by any party from the terms of any provision of
this Agreement shall be effective (i) only if it is made or given in writing and
signed by WSI and the Company and (ii) only in
5
<PAGE> 6
the specific instance and for the specific purpose for which made or given.
Except where notice is specifically required by this Agreement, no notice to or
demand on any party in any case shall entitle any party hereto to any other or
further notice or demand in similar or other circumstances.
8. Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed shall be deemed to be
an original and both of which taken together shall constitute one and the same
agreement.
9. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the
principles of conflicts of law of such state.
11. Jurisdiction. Each party to this Agreement hereby irrevocably
agrees that any legal action or proceeding arising out of or relating to this
Agreement or any agreements or transactions contemplated hereby shall be brought
in the courts of the State of New York or of the United States of America for
the Southern District of New York and hereby expressly submits to the personal
jurisdiction and venue of such courts for the purposes thereof and expressly
waives any claim of improper venue and any claim that such courts are an
inconvenient forum. Each party hereby irrevocably consents to the service of
process of any of the aforementioned courts in any such suit, action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to the address set forth in Section 5, such service to become
effective 10 days after such mailing.
12. Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired.
13. Entire Agreement. This Agreement, together with the Exhibits
hereto, is intended by the parties as a final expression of their agreement and
is intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and therein. There are no restrictions, promises, warranties or
undertakings, other than those set forth herein or therein. This Agreement,
together with the Exhibits hereto, supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
14. Further Assurances. Each of the parties shall execute such
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations, or other actions by, or
giving any notices to, or making any filings with, any
6
<PAGE> 7
governmental authority or any other person or entity) as may be reasonably
required to carry out or to perform the provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement or caused this Agreement to be executed and delivered by their
authorized representatives as of the date first above written.
EDISON SCHOOLS INC.
By: ______________________________
Name:
Title:
WSI INC.
By: ______________________________
Name:
Title:
7
<PAGE> 1
Exhibit 11.1
EDISON SCHOOLS, INC.
COMPUTATION OF PRO FORMA EARNINGS (LOSS) PER SHARE
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the year ended June 30, 1999
<S> <C>
Net (loss) $(50,317)
----------
Common stock outstanding at:
July 1, 1997
July 1, 1998 6,214,711
Convertible preferred stock outstanding at:
July 1, 1997
July 1, 1998 43,448,289
Add:
Series D Convertible Preferred Stock 5,732,766
Series F Convertible Preferred Stock 271,060
Series G Convertible Preferred Stock 54,795
----------
Pro forma weighted average number of shares
outstanding, assuming conversion of
convertible preferred 55,721,620
----------
Pro forma net loss per share $(0.90)
----------
HISTORICAL LOSS PER SHARE
Net (loss) $(50,317)
----------
</TABLE>
COMPUTATIONS OF PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
FROM JULY 1, 1998 TO JUNE 30, 1999
<TABLE>
<CAPTION>
Common
Stock Common
Date # of Days Equivalents Stock
No. of Shares Issued Issued Outstanding % Equivalents
- -------------------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Common shares
6,214,711 outstanding @ July 1, 1997 365 100% 6,214,711
Preferred shares
43,448,289 outstanding @ July 1, 1997 365 100% 43,448,289
4,271,352 8/27/98 307 84.1% 3,592,617
3,945,224 12/14/98 198 54.2% 2,140,149
3,957,476 6/5/99 25 6.8% 271,060
800,000 6/5/99 25 6.8% 54,795
- ---------- ----------
62,637,052 57,823,893
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in Amendment No. 3 to this Registration
Statement on Form S-1 of our report dated August 13, 1999, except for Note 15
which is dated as of October 5, 1999, relating to the financial statements of
Edison Schools Inc. as of June 30, 1998 and 1999 and for each of the years in
the three-year period ended June 30, 1999, which appear in such Registration
Statement. We also consent to the references to us under the headings
"Experts".
New York, New York
October 5, 1999 PRICEWATERHOUSECOOPERS LLP
/s/ PRICEWATERHOUSECOOPERS LLP
