<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999
REGISTRATION NO. 333-84177
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
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. [ ]
------------------------
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 29, 1999
PROSPECTUS
6,800,000 SHARES
[EDISON SCHOOLS LOGO]
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 10 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................................................ 10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 21
OUR ADDRESS................................................. 21
USE OF PROCEEDS............................................. 22
DIVIDEND POLICY............................................. 22
CAPITALIZATION.............................................. 23
DILUTION.................................................... 25
SELECTED FINANCIAL AND OTHER DATA........................... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 28
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. We
opened our first four schools in August 1995, and are currently serving
approximately 38,000 students in 79 schools located in 16 states across the
country and the District of Columbia, an increase of 14,000 students from the
1998-1999 school year. Approximately 26,700 students are enrolled in our schools
in grades K-5, approximately 9,700 in grades 6-8 and approximately 1,600 in
grades 9-12.
Our model offers public school authorities, who face concern about student
achievement, the benefits of a large private sector company with national
support systems. 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 longer school day and year and a
strong emphasis on technology.
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 that may inhibit many
districts from implementing a systemic program of improvement. These constraints
may include a lack of consistency in leadership due to the relatively brief
tenure of superintendents and school boards, the inability to exploit the
advantages of scale because school districts tend to be small and independent
operations and the inability to invest for the future due to school districts'
annual budget cycles. We believe our school design addresses these issues
through system-wide accountability and incentives, economies of scale and an
investment in research and development.
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.
We are retained by public school authorities to implement our school design
and curriculum in one of two ways. In most instances, an elected school board
votes to enter into a contract with us to manage one or more schools in the
district. In other cases, we manage 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. 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 we do not provide the facility and
therefore the economics of these arrangements closely resemble those of a
contract school.
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 $78.9 million. Our net loss per student was
$1,597 in fiscal 1997, $1,739 in fiscal 1998 and $2,068 in fiscal 1999. Net loss
per student includes noncash stock-based compensation and non-recurring
design-team compensation charges per student of $6, $263 and $937 for these
periods.
4
<PAGE> 7
RISK FACTORS
The success of our business is 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;
- our reliance upon public funding and our continued qualification to
receive funding from special government education programs; and
- the possibility that we might not be repaid amounts we have advanced to
charter schools or that we could continue to have financial obligations
for charter schools past the time when we have ceased to operate the
school. As of June 30, 1999, we had advanced or lent charter boards $13.9
million to finance the purchase or renovation of school facilities we
manage, we had aggregate future lease obligations totalling $24.9
million, with varying maturities over the next 18 years, and we had
guaranteed loans totalling $4.9 million.
For a more complete discussion of these risks and others that are material
to your investment, please see "Risk Factors."
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...... 38,693,519 shares
Class B common stock..... 3,543,800 shares
Total.................. 42,237,319 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
5
<PAGE> 8
The number of shares to be outstanding after the offering is based on
shares outstanding at October 18, 1999, after giving effect to the expected
exercise of stock options prior to the completion of this offering. The number
of outstanding shares excludes:
- 7,192,935 shares of class A common stock and 799,248 shares of class B
common stock that may be issued upon the exercise of outstanding options
with a weighted average exercise price of $21.22 per share;
- 3,624,300 shares of class A common stock and 402,749 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
- 2,751,304 additional shares of common stock reserved for issuance under
our stock option plans.
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;
- gives effect to the expected exercise of stock options to purchase
652,500 shares of class A common stock and 72,500 shares of class B
common stock prior to 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.
6
<PAGE> 9
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, 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, and the expected exercise of stock options prior to
completion of this offering and the loan by us to the holder of these
options of the amounts necessary to exercise the options and to pay taxes
due in connection with this exercise.
- 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.
- 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. However, we believe EBITDA, net of
other charges, serves as an important operating measurement when
evaluating our financial performance. In particular, we use this metric to
evaluate the degree to which our aggregate gross site contribution equals,
exceeds or falls below our administration, curriculum and development
expenses. We have excluded from this measurement stock-based compensation
and non-recurring design team compensation because they are not directly
related to operating performance.
- 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.
7
<PAGE> 10
<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) (37) (1,046) (131)
--------- --------- ---------- ---------- ----------
Net loss................................. (14,125) (10,103) (11,422) (21,915) (49,433)
Dividends on preferred stock............. -- -- -- (4,290) --
Preferred stock accretion................ -- -- -- (278) (1,027)
--------- --------- ---------- ---------- ----------
Net loss attributable to common
stockholders........................... $ (14,125) $ (10,103) $ (11,422) $ (26,483) $ (50,460)
========= ========= ========== ========== ==========
Basic and diluted net loss per share
attributable to common stockholders.... $ (1.84) $ (4.26) $ (8.12)
========== ========== ==========
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.................................. $ (1.77)
==========
Pro forma weighted average number of
shares outstanding used in computing
pro forma basic and diluted net loss
per share.............................. 27,858,515
==========
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) $ (1,597) $ (1,739) $ (2,068)
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 $ 6,457 $ 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%
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)
8
<PAGE> 11
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 27,923 $ 60,277 $197,177
Working capital............................................. 22,634 54,988 191,888
Total assets................................................ 106,870 148,612 285,512
Total debt, including current portion....................... 21,535 21,535 21,535
Accumulated deficit......................................... (78,929) (78,929) (78,929)
Total stockholders' equity.................................. 63,042 104,784 241,684
</TABLE>
9
<PAGE> 12
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, HAVING OPENED OUR FIRST SCHOOLS IN FISCAL 1996; THIS
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 four years of 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
$49.4 million. As of June 30, 1999, our accumulated deficit since November 1996,
when we converted from a partnership to a corporation, was approximately $78.9
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
an important factor in our ability to achieve 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 $13.9 million
to finance the purchase or renovation of school facilities we manage. We
generally have not charged interest on these loans and advances. Approximately
$7.6 million of these loans, representing six schools, are unsecured or
subordinated to a senior lender. Loans of $6.3 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 SEASONAL PATTERNS AND OTHER FLUCTUATIONS
FROM QUARTER TO QUARTER
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. Subsequent to the first quarter,
student enrollment is expected to remain relatively stable throughout a
school year, and, accordingly, 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, including unexpected enrollment changes, greater than
expected costs of opening schools or delays in opening new schools.
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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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
30,824,113 shares of class A common stock and 3,424,967 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 six of the seven class
A directors; approximately 90.1% 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, 2,299,951 shares of class A common stock and
255,569 shares of class B common stock are subject to options exercisable within
60 days of October 1, 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 10,064,329 shares of class A common stock and 1,333,051
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
two of the seven class A directors; approximately 36.6% of the voting power of
the class B common stock, including the ability to elect one 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, 926,752 shares of class A common stock and 102,979 shares of
class B common stock are subject to options exercisable within 60 days of
October 1, 1999. Mr. Whittle and his affiliates also own options not exercisable
within 60 days of October 1, 1999 covering 3,448,201 shares of class A common
stock and 382,848 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
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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
2,967,121 shares of class A common stock and 544,510 shares of class B common
stock, including 852,429 shares of class A common stock and 94,715 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 October 1, 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
6,067,992 shares of class A common stock, including shares subject to options
exercisable within 60 days of October 1, 1999. The holdings of Morgan and its
affiliates would then represent 15.4% of the voting power of the class A common
stock, 9.5% of the voting power of the class B common stock and 12.0% 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.
19
<PAGE> 22
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 38,693,519 shares of class A
common stock and 3,543,800 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 31,893,519 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 144(k), 100,000 shares of common stock not subject to lock-up agreements
with the underwriters are currently eligible for resale. Pursuant to Rule 701,
90 days after the date of this prospectus, 250,000 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, 30,216,548 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. Warrants to
purchase 516,067 shares of common stock are not subject to lock-up agreements
with the underwriters. In addition, certain purchasers of reserved shares who
are affiliated or associated with NASD members or who hold senior positions at
financial institutions or members of their immediate families specified by the
NASD in its conduct rules will be subject to three month lock-up agreements.
This three month lock-up is not related to the 180-day lock-up described above.
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 $16.31
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
20
<PAGE> 23
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.
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.
21
<PAGE> 24
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 future operating losses and
capital expenditures related to our growth, 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.
22
<PAGE> 25
CAPITALIZATION
The following table describes our cash and cash equivalents, stockholder
notes receivable, 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, 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, the expected
exercise of stock options prior to the completion of this offering and an
$11.6 million loan from us to the holder of these options, which
represents $2.2 million to pay the exercise price of the options and $9.4
million to pay taxes due in connection with this exercise, with the taxes
calculated based on an assumed initial public offering price of $22.00
per share; 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
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 27,923 $ 60,277 $197,177
======== ======== ========
Stockholder notes receivable................................ $ 2,478 $ 11,866 $ 11,866
======== ======== ========
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);
31,893,519 shares issued and outstanding (pro forma);
38,693,519 shares issued and outstanding (pro forma as
adjusted)............................................... -- 319 387
Class B common stock, $.01 par value per share; no shares
authorized, issued or outstanding (actual); 5,000,000
shares authorized, 3,543,800 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................................ 145,877 191,370 328,202
Unearned stock-based compensation......................... (5,836) (5,836) (5,836)
Accumulated deficit....................................... (78,929) (78,929) (78,929)
Stockholder note receivable............................... -- (2,175) (2,175)
-------- -------- --------
Total stockholders' equity............................ 63,042 104,784 241,684
-------- -------- --------
Total capitalization........................................ $ 77,917 $119,659 $256,559
======== ======== ========
</TABLE>
23
<PAGE> 26
The number of shares of class A and class B common stock outstanding as of
June 30, 1999 does not reflect:
- 6,489,490 shares of class A common stock and 721,077 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 $22.19 per
share, of which options to purchase 1,697,422 shares of class A common
stock and 188,649 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;
- 703,445 shares of class A common stock and 78,171 shares of class B
common stock issuable under options issued after June 30, 1999 at an
exercise price of $12.30 per share; and
- 13,500 shares of class A common stock and 1,500 shares of class B common
stock issuable under warrants issued after June 30, 1999 at an exercise
price of $12.30 per share.
As of October 18, 1999, there were 251,304 additional shares of common stock
reserved for issuance under our stock option plans. Following this offering, we
will have 2,500,000 shares reserved for issuance under our 1999 Stock Incentive
Plan.
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, and 9,827,026 shares of
non-voting common stock authorized and no shares issued and outstanding.
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
convertible 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 convertible preferred stock, respectively, issued and outstanding
at June 30, 1999 and no shares of series E convertible 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, an additional 600,000 shares
of non-voting common stock, an additional 7,000,000 shares of series F
convertible preferred stock and an additional 600,000 shares of non-voting
series G convertible 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
convertible preferred stock.
There were no shares of series A, B, C, D, E, F and G convertible 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
non-voting 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.
24
<PAGE> 27
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$103.6 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, 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, and the expected exercise of stock options prior to the completion
of this offering. 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 $240.5 million, or $5.69 per share. This represents an
immediate increase in pro forma net tangible book value to existing stockholders
of $2.77 per share and an immediate dilution to new investors of $16.31 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.......................... 2.77
-----
Pro forma net tangible book value per share after this
offering.................................................. $ 5.69
------
Dilution per share to new investors......................... 16.31
======
</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............ 35,437,319 83.9% $232,297,667 60.8% $ 6.56
New investors.................... 6,800,000 16.1 149,600,000 39.2 $22.00
----------- ----- ------------ ------
Total....................... 42,237,319 100.0% $381,897,667 100.0%
=========== ===== ============ ======
</TABLE>
If the underwriters exercise their over-allotment option in full, the
percentage of shares held by existing stockholders will decrease to 81.9% of the
total shares outstanding, and the number of shares held by new investors will
increase to 7,820,000, or 18.1% of the total shares outstanding.
The above computations exclude 6,489,490 shares of class A common stock and
721,077 shares of class B common stock issuable upon the exercise of options
with a weighted average exercise price of $22.19 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 703,445 shares of class A common stock and
78,171 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 and 13,500 shares of class A common stock and 1,500 shares of class B
common stock issuable under warrants issued after June 30, 1999 at an 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. It
also excludes 2,751,304 additional shares of common stock reserved for issuances
under our stock option plans.
25
<PAGE> 28
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." Please see
note 2 in the notes to our financial statements for information concerning the
calculation of pro forma basic and diluted net loss per share.
<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) (37) (1,046) (131)
--------- --------- ---------- ---------- ----------
Net loss.......................................... (14,125) (10,103) (11,422) (21,915) (49,433)
Dividends on preferred stock...................... -- -- -- (4,290) --
Preferred stock accretion......................... -- -- -- (278) (1,027)
--------- --------- ---------- ---------- ----------
Net loss attributable to common
stockholders.................................... $(14,125) $(10,103) $(11,422) $(26,483) $(50,460)
========= ========= ========== ========== ==========
Basic and diluted net loss per share attributable
to common
stockholders.................................... $ (1.84) $ (4.26) $ (8.12)
========== ========== ==========
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.... $ (1.77)
==========
Pro forma weighted average number of shares
outstanding used in computing pro forma basic
and diluted net loss per share.................. 27,858,515
==========
</TABLE>
(continued on the following page)
26
<PAGE> 29
<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) $ (1,597) $ (1,739) $ (2,068)
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 $ 6,457 $ 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%
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>
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(DOLLARS 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 7,960 19,843 2,684 22,634
Total assets...................................... 8,271 19,603 48,472 58,294 106,870
Total debt, including current portion............. -- 2,825 9,395 17,151 21,535
Accumulated deficit............................... (47,845) (57,948) (7,581) (29,496) (78,929)
Total stockholders' equity........................ 7,386 13,929 33,814 29,190 63,042
</TABLE>
27
<PAGE> 30
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 38,000 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 $78.9 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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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> 32
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 49 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. As discussed below under "--Financial Performance,"
we do not believe that achieving 100% of assumed enrollment at each school is
necessary to achieve positive cash flow.
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 $49.4 million. As of June 30, 1999,
our accumulated deficit since November 1996, when we converted from a
partnership to a corporation, was approximately $78.9 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...................................... 83.3 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................. 129.5 130.0 137.1
----- ----- -----
Loss from operations........................................ (29.5) (30.0) (37.1)
----- ----- -----
Other income (expense), net................................. (0.1) (1.5) (0.1)
----- ----- -----
Net loss.................................................... (29.6)% (31.5)% (37.2)%
===== ===== =====
</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.
In general, we believe that reaching positive cash flow, like achieving
profitability, will be dependent on increasing our aggregate gross site
contribution without a proportionate increase in central expenses. Because gross
site contribution is the difference between site revenues and site expenditures,
positive gross site contribution can be achieved at a range of enrollment
levels. While higher enrollment tends to have a positive effect on gross site
contribution, our financial success does not depend on 100% enrollment at each
site. In particular, we believe achieving positive cash flow and profitability
is not dependent on closing the
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<PAGE> 33
gap between 97.5% and 100% aggregate assumed enrollment, but rather is a
function of the aggregate gross site contribution from all of our sites and our
central expenses.
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 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 we do not provide the
facilities and therefore 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.
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<PAGE> 34
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."
QUARTERLY RESULTS OF OPERATIONS
The following table presents statement of operations data for the last four
quarters, expressed both in dollars and as a percentage of total revenue for
those periods. This data has been derived from our unaudited financial
statements, which have been prepared on the same basis as the audited financial
statements and, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1999 1999
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue from educational services...................... $24,004 $35,576 $36,391 $ 36,791
------- ------- ------- --------
Education and operating expenses:
Direct site expenses................................. 21,635 30,449 29,827 32,186
Administration, curriculum and development
expenses.......................................... 5,891 7,853 8,647 27,593
Depreciation and amortization........................ 2,391 3,508 3,366 3,261
Pre-opening expenses................................. 2,727 372 352 2,006
------- ------- ------- --------
Total education and operating expenses............ 32,644 42,182 42,192 65,046
------- ------- ------- --------
Loss from operations................................... (8,640) (6,606) (5,801) (28,255)
------- ------- ------- --------
Other income (expense), net............................ 409 727 (250) (1,017)
------- ------- ------- --------
Net loss............................................... $(8,231) $(5,879) $(6,051) $(29,272)
======= ======= ======= ========
(AS A PERCENTAGE OF TOTAL REVENUE)
Revenue from educational services...................... 100.0% 100.0% 100.0% 100.0%
------- ------- ------- --------
Education and operating expenses:
Direct site expenses................................. 90.1 85.6 82.0 87.5
Administration, curriculum and development
expenses.......................................... 24.5 22.1 23.7 75.0
Depreciation and amortization........................ 10.0 9.9 9.2 8.9
Preopening expenses.................................. 11.4 1.0 1.0 5.4
------- ------- ------- --------
Total education and operating expenses............ 136.0 118.6 115.9 176.8
------- ------- ------- --------
Loss from operations................................... (36.0) (18.6) (15.9) (76.8)
------- ------- ------- --------
Other income (expense), net............................ 1.7 2.0 (0.7) (2.8)
------- ------- ------- --------
Net loss............................................... (34.3)% (16.6)% (16.6)% (79.6)%
======= ======= ======= ========
</TABLE>
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
89.7% increase in student enrollment. The largest element of direct site
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<PAGE> 35
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 52.1% 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 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 $820 to
$603 for the same periods.
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<PAGE> 36
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
$28.4 million of additional loss primarily reflects the growth in
administration, curriculum and development expenses.
OTHER INCOME AND EXPENSE. We recognized $131,000 of other expenses, net,
for fiscal 1999, compared to $1.0 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 $49.4 million for fiscal 1999 from $21.9 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 $50.5 million and $26.5 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 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 $15.6 million, including $8.8 million for
computers and equipment, $1.4 million for curriculum materials and $5.4 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.
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<PAGE> 37
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 129.5% 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 129.5% 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 2.5% 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 $1.0 million in
fiscal 1998 from $37,000 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 $21.9 million for fiscal 1998 from $11.4 million for fiscal 1997,
an increase of 92.1%. 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 $26.5 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. During the same period we used $92.0 million of cash for
operating activities and $72.8 million of cash for investing activities. 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 our cash on hand, together with borrowings under financing
arrangements to finance technology and facilities-related expenditures and
expected reimbursements of advances we have made to charter boards, will be
sufficient to meet our working capital needs to operate our existing schools
over the next twelve months. If, however, we are to open new schools in the
2000-2001 school year, we would require additional funding, such as the proceeds
of this offering.
Our longer term requirements are for capital to fund operating losses,
capital expenditures related to growth and for anticipated working capital needs
and general corporate purposes. We expect to fund such expenditures and other
longer term liquidity needs with cash generated from operations, the proceeds
from this offering and expanded financing arrangements. Depending on the terms
of any financing arrangements, such funding may be dilutive to existing
shareholders, and we cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all.
In general, our ability to achieve positive cash flow will be dependent on
the volume of schools with positive gross site contribution to offset central
office and overhead expenses. Because gross site contribution is the difference
between site revenues and site expenditures, positive gross site contribution
can be achieved at a range of enrollment levels. While higher enrollment tends
to have a positive effect on gross site contribution, the Company's growth and
cash flow do not depend on 100% enrollment.
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<PAGE> 38
CASH USED IN OPERATING ACTIVITIES
For fiscal 1999, we used approximately $16.1 million for operating
activities. This use primarily resulted from $49.4 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 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,
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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; $5.7 million of this amount has been used to date in
schools operated by us and $3.9 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 $11.2 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.
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. 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. 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, loans or cash advances. As of June 30, 1999, the amount of loans we
had guaranteed totaled $4.9 million. 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. We also have an obligation to set aside
restricted cash as collateral for the loans we guarantee. The amount of
restricted cash required currently is approximately $1.5 million and escalates
to specified amounts up to $2.7 million at various times through August 2001. As
of June 30, 1999, we had advanced or lent charter boards $13.9 million to
finance the purchase or renovation of school facilities we manage. We generally
have not charged interest on these loans and advances. Approximately $7.6
million of these loans, representing six
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schools, are unsecured or subordinated to a senior lender. Loans of $6.3
million, representing two schools, may be accelerated upon termination of the
corresponding management agreement with the charter school.
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
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 $27.9 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;
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- 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.
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 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 38,000 students in 79 schools located in 16
states across the country and the District of Columbia. This represents an
increase of 14,000 students and four new states from the 1998-1999 school year.
Approximately 26,700 students are enrolled in our schools in grades K-5,
approximately 9,700 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. Eleven of our first 13 clients have
chosen to expand their relationship with us by adding one or more additional
schools.
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; 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
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, only
approximately 23% of students in grades 4 and 8 met grade level standards in
mathematics in 1996, the last date for which results are available. In reading,
only approximately 32% of students in grades 4 and 8 met grade level standards
in 1998, and only approximately 25% of students in grades 4 and 8 met grade
level standards in writing in 1998. The National Assessment of Educational
Progress, a testing program conducted by the U.S. Department of Education since
1970, uses tests specially designed to measure how well students meet grade
level standards established by a national panel of education experts. The tests
are administered to random national samples of students at three grade levels
every other year, or every fourth year, in major subjects.
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. 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.
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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 27,000 students and 24 charter
schools with a total enrollment of 11,000 students. Of these contract schools,
15 are operated under charters granted by school districts, which provide the
facilities, and we categorize these schools as contract schools because we do
not provide the facilities and therefore 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
- 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.
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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 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
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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.
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
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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.
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
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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.
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
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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.
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
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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 approximately 38,000. This
represents an increase of approximately 14,000 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 we do not provide the facilities and
therefore 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
Westport Allen-Edison
Village Educational
School Kansas City, Missouri 2 1999 K-8 Charter 5 yrs June 2004
</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>
Granville Public Charter
School Trenton, New Jersey 2 1998 K-8 Charter 2 yrs June 2000
Wayne County Public
Schools Goldsboro, North Carolina 1 1998 K-5 Contract 5 yrs June 2003
Nash-Rocky Mount 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.
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. Eleven of our first 13 clients have added one or more
additional schools. We are operating 79 schools across the country for the
1999-2000 school year, which brings the total number of students served to
approximately 38,000.
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.
- 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
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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 11 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 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
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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 35% of our
schools operate under collective bargaining agreements as modified 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 professionals. We believe that our approach, unlike many
other reform initiatives, is consistent with these objectives;
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- 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 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
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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.
- TITLE IX OF THE EDUCATION AMENDMENTS OF 1972. Title IX prohibits
discrimination on the basis of gender by recipients of federal financial
assistance.
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- 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.
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
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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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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of October 1, 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......................... 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........................... 54 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
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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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 became 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., doing
business as Click2Learn.com, 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 became 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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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 401(k) 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(4)............ 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) Each of the indicated options vests over ten years, subject to acceleration.
(5) This option is fully vested.
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<PAGE> 65
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 June 30, 2004, with an annual base salary of $320,366
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 or if Mr. Whittle terminates his employment for "good
reason," 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. In addition, if Mr. Whittle terminates his employment
without good reason prior to July 1, 2002 and he or WSI Inc., a company solely
owned and controlled by Mr. Whittle, receives a loan from us to exercise stock
options, the loan will become due and Mr. Whittle will be required to pay to us
a penalty of $1.0 million. 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 and not
to solicit the employment or other services of any of our executive employees
for one year after his termination. For more information on expected loans to
Mr. Whittle in connection with his exercise of stock options, see "Related Party
Transactions -- Option Amendments."
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
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<PAGE> 66
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. If we
terminate Mr. Schmidt's employment without cause, Mr. Schmidt will receive as
severance pay his then current base salary and the bonus he earned from the
prior fiscal year for one year following the effective date of termination. The
provisions in Mr. Schmidt's employment contract concerning termination of Mr.
Schmidt's employment by Edison for cause and Mr. Schmidt's termination of his
own employment without "good reason" 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
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<PAGE> 67
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
56,806 shares of class A common stock and 6,324 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 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 178,650 shares of class A common stock and 19,850 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 409,950 shares of class A common
stock and 45,550 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.
Upon the occurrence of specified changes in control, options granted
pursuant to our stock option plans will be assumed, or equivalent options will
be substituted, by the acquiring corporation. If the acquiring corporation does
not agree to assume, or substitute for, such options, then all unexercised
options will become exercisable in full. In addition, if our stockholders
receive cash consideration for their stock in the change of control, we may
provide that all such options instead receive a cash payment based on the
difference between the cash consideration paid for shares of our stock and the
exercise prices of the options.
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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<PAGE> 68
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 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 $678,056, respectively, as of June 30,
1999. Mr. Schmidt is our Chairman of the Board of Directors.
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. Mr. Whittle has indicated that he intends to fully exercise his
March 1997 option and his December 1997 option prior to completion of this
offering.
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 $13,716,663;
- 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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<PAGE> 73
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 October 1, 1999 (after the expected exercise of stock
options prior to the completion of this offering) 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 October 1, 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 5.1% 5.1% 4.2% 5.1%
268 Bush Street, PMB No. 4209,
San Francisco, CA 94104
Entities associated with the Sprout 4,125,532 458,396 12.9 12.9 10.7 12.9
Group(3)...............................
277 Park Avenue, New York, NY 10172
Investor Investments AB(4)............... 2,813,196 312,583 8.8 8.8 7.3 8.8
320 Park Avenue, New York, NY 10022
J.P. Morgan Investment Corporation(5).... 2,556,361 284,049 8.0 8.0 6.6 8.0
60 Wall Street, New York, NY 10260
J.W. Childs Investments, L.L.C. ......... 2,920,334 324,484 9.2 9.2 7.5 9.2
1 Federal Street, Boston, MA 02110
Richmont Leeds Education Company LLC(6).. 1,946,783 1,550 6.1 * 5.0 *
660 Madison Avenue
New York, NY 10021
WSI Inc.(7).............................. 9,312,779 1,249,545 28.5 34.4 23.6 34.4
800 South Gay St., Knoxville, TN 37929
UBS Capital L.L.C.(8) ................... 1,737,809 193,091 5.4 5.4 4.5 5.4
299 Park Avenue, New York, NY 10171
Vulcan Ventures Incorporated............. 2,195,123 243,904 6.9 6.9 5.7 6.9
110 110th Avenue N.E.
Bellevue, WA 98004
Benno C. Schmidt, Jr.(9)................. 836,129 92,906 2.6 2.6 2.1 2.6
H. Christopher Whittle(10)............... 10,064,329 1,333,051 30.7 36.6 25.4 36.6
John E. Chubb(11)........................ 137,201 15,245 * * * *
Christopher D. Cerf(12).................. 146,250 16,250 * * * *
James L. Starr(13)....................... 96,372 10,708 * * * *
Laura K. Eshbaugh(14).................... 68,751 7,639 * * * *
Virginia G. Bonker(15)................... 466,667 51,854 1.5 1.5 1.2 1.5
John W. Childs(16)....................... 3,349,880 372,213 10.5 10.5 8.7 10.5
Ramon C. Cortines(17).................... 375 42 * * * *
Charles J. Delaney(18)................... 1,737,809 193,091 5.4 5.4 4.5 5.4
Robert Finzi(19)......................... 4,125,532 458,396 12.9 12.9 10.7 12.9
(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>
John B. Fullerton(20).................... 2,556,361 284,049 8.0 8.0 6.6 8.4
Janet A. Hickey(21)...................... 4,125,532 458,396 12.9 12.9 10.7 12.9
Klas Hillstrom(22)....................... 2,813,196 312,583 8.8 8.8 7.3 8.8
Bert Kolde(23)........................... 2,195,123 243,904 6.9 6.9 5.7 6.9
Jeffrey T. Leeds(24)..................... 1,961,432 3,183 6.1 * 5.0 *
Brian P. Mathis(25)...................... 2,556,361 284,049 8.0 8.0 6.6 8.0
William F. Weld(26)...................... 2,551 284 * * * *
All executive officers and directors as a
group
(22 persons)(27)....................... 30,824,113 3,424,967 90.1 90.1 75.2 90.1
</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
October 1, 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,
2,190,857 shares of class A common stock and 281,206 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 October 1, 1999.
(5) Includes 161,478 shares of class A common stock and 17,944 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 October 1, 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 October 1, 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 10.
(6) Includes 170,432 shares of class A common stock held of record by Leeds II
L.P., 304,943 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 October 1, 1999, 1,550 shares of
class B common issuable upon exercise of options that will be exercisable
within 60 days of October 1, 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, 30,496 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.,
75
<PAGE> 78
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., 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 October 1, 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 October 1, 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 October 1, 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
October 1, 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, 30,496 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) Immediately following the completion of the offering, UBS intends to
convert enough of its shares of class B common stock into class A common
stock so that it beneficially owns less than 5% of the outstanding class B
common stock.
(9) 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 October 1, 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.
(10) Includes 575,642 shares of class A common stock and 278,735 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.,
99,050 shares of class A common stock and 11,006 shares of class B common
stock issuable upon exercise of options that will be exercisable within 60
days of October 1, 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 October 1,
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 October 1, 1999, 23,710 shares of
class A common stock and 2,635 shares of class B common stock issuable upon
exercise of
76
<PAGE> 79
options held of record by WEG IV L.P. that will be exercisable within 60
days of October 1, 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 October 1,
1999. WSI Inc has pledged all of its shares of 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.
(11) 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 October 1, 1999.
(12) 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 October 1, 1999.
(13) 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 October 1, 1999.
(14) 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 October 1, 1999.
(15) 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.
(16) 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.
(17) Consists of 375 shares of class A common stock and 42 shares of class B
common stock issuable upon exercise of options that will be exercisable
within 60 days of October 1, 1999.
(18) 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 L.L.C.
(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 2,312,427 shares of class A common stock and 256,939 shares of
class B common stock held of record by J.P. Morgan Investment Corporation,
161,478 shares of class A common stock and 17,944 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 October 1, 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 October 1, 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.
(21) 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
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common stock held jointly by DLJ Capital Corporation, Sprout Capital VI,
L.P., Sprout Capital VII, L.P. and Sprout CEO Fund, L.P.
(22) Consists of 2,813,196 shares of class A common stock and 312,583 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 October 1, 1999.
(23) 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.
(24) 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., 304,943 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 October 1, 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 October
1, 1999.
(25) Consists of 2,312,427 shares of class A common stock and 256,939 shares of
class B common stock held of record by J.P. Morgan Investment Corporation,
161,478 shares of class A common stock and 17,944 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 October 1, 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 October 1, 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.
(26) 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 October 1, 1999.
(27) 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 October 1, 1999. Also includes other
shares described in footnotes 9 through 26 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 October 1, 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 and giving effect to the expected exercise of stock options
prior to the completion of this offering, there would have been 31,893,519
shares of class A common stock and 3,543,800 shares of class B common stock
outstanding held of record by 81 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
38,693,519 shares of class A common stock and 3,543,800 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
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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.
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 5,000,000 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
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rights and privileges may include, among others, dividend rights, voting rights,
redemption provisions, liquidation preferences, conversion rights and preemptive
rights.
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 and October 1999, we issued warrants to an equipment leasing
firm which currently represents the right to purchase up to 58,500 shares of
class A common stock and 6,500 shares of class B common stock at a weighted
average exercise price of $4.50 per share. Each of these warrants expires five
years after the issuance date.
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 38,693,519 shares of class A
common stock and 3,543,800 shares of class B common stock outstanding (assuming
no exercise of outstanding options, after the expected exercise of stock options
prior to the completion of this offering). 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.......................... 100,000 Shares salable under Rule 144(k)
and not locked up
90 days................................... 250,000 Shares salable under Rule 144 or
701 and not locked up
180 days.................................. 30,216,548 Lockup released; shares salable
under Rule 144, 144(k) or 701
Thereafter................................ 7,881,014 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 386,935 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 October 1, 1999, approximately 1,867,419 shares of class A common
stock and 207,554 shares of class B common stock were issuable pursuant to
vested options, of which an aggregate of approximately 250,000 shares of class A
common stock and class B common stock are not subject to lock-up agreements with
the underwriters.
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 10,743,487 shares
of common stock. This registration statement is expected to become effective
upon filing.
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WARRANTS
As of October 18, 1999, warrants to purchase approximately 3,262,642 shares
of class A common stock and 362,519 shares of class B common stock were
exercisable, of which 2,798,182 shares of class A common stock and 310,912
shares of Class B common stock are subject to lock-up agreements with the
underwriters.
LOCK-UP AGREEMENTS
Subject to the exceptions described below, we and our executive officers
and directors as well as any of our executive officers' and directors' immediate
family members who purchase reserved shares, stockholders, warrantholders and
option holders, except for the holders of options to purchase up to 250,000
shares of common stock, stockholders holding 100,000 shares of common stock and
warrantholders holding warrants to purchase 516,067 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.
In addition, certain purchasers of reserved shares who are affiliated or
associated with NASD members or who hold senior positions at financial
institutions or members of their immediate families specified by the NASD in its
conduct rules will be subject to three month lock-up agreements. This three
month lock-up is not related to the 180-day lock-up described above. For a
discussion of the reserved share program, see "Underwriting--Reserved Shares."
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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 28,727,186 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 9,929,036 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
than 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.
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.
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
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<PAGE> 89
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.
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 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.
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.
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<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.
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<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>
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 $12.30, 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 expenses of the offering, exclusive of the underwriting discount, are
estimated at $2.6 million and are payable by Edison, as set forth in the
following table:
<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>
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
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<PAGE> 92
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 680,000 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. Certain purchasers of reserved shares who are affiliated or
associated with NASD members or who hold senior positions at financial
institutions or members of their immediate families specified by the NASD in its
conduct rules will be subject to three month lock-up agreements. This three
month lock-up is not related to the 180-day lock-up described under "-- No Sales
of Class A Common Stock or Similar Securities" below.
NO SALES OF CLASS A COMMON STOCK OR SIMILAR SECURITIES
Edison and Edison's executive officers and directors, as well as any of the
executive officers' and directors' immediate family members who purchase
reserved shares, stockholders, except for the holder of 100,000 shares of common
stock, optionholders, except for the holders of options to purchase up to
250,000 shares of common stock, and warrantholders holding warrants to purchase
516,067 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;
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<PAGE> 93
- 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 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
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<PAGE> 94
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 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, 2,190,857 shares of Class A common stock and 281,206 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."
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<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.
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<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(a)
which is dated October 5, 1999 and
15(b) which is dated October 15, 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
Stockholder notes receivable................................ 2,359,456 2,478,056
Other assets................................................ 1,434,487 4,086,887
------------ -------------
Total assets...................................... $ 58,294,323 $ 106,869,911
============ =============
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....................................... (29,495,918) (78,928,709)
------------ -------------
Total stockholders' equity........................ 29,190,304 63,042,412
------------ -------------
Total liabilities and stockholders' equity........ $ 58,294,323 $ 106,869,911
============ =============
</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........................................... 490,599 842,010 3,481,682
Interest expense.......................................... (527,421) (1,761,821) (3,244,782)
Loss on disposal of property and equipment................ -- (126,500) (368,110)
------------ ------------ ------------
Total other......................................... (36,822) (1,046,311) (131,210)
------------ ------------ ------------
Net loss.................................................... $(11,421,595) $(21,914,855) $(49,432,791)
============ ============ ============
Net loss attributable to common stockholders:
Net loss.................................................. $(11,421,595) $(21,914,855) $(49,432,791)
Dividends declared on preferred stock..................... -- (4,290,200) --
Preferred stock accretion................................. -- (277,694) (1,026,462)
------------ ------------ ------------
Net loss attributable to common stockholders........ $(11,421,595) $(26,482,749) $(50,459,253)
============ ============ ============
Per common share data:
Basic and diluted net loss per share...................... $ (1.84) $ (4.26) $ (8.12)
============ ============ ============
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:
Pro forma basic and diluted net loss per share............ $ (1.77)
============
Pro forma weighted average shares outstanding used in
computing basic and diluted net loss per share.......... 27,858,515
============
</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
------------- ---------- -------- --------- ------- ---------
<S> <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
Deferred compensation related to stock options.....
Stock-based compensation...........................
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
Issuance of Series D preferred stock, net..........
Issuance of stock warrants.........................
Issuance of Series C preferred stock as purchase
price adjustment.................................. 1,057,473
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
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
============ ========== ======== ========= ======= =========
<CAPTION>
PREFERRED STOCK
--------------------------------------------------------
SERIES C SERIES D SERIES E
-------- ----------------------- -------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ---------- --------- -------
<S> <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............................................... $52,011
Deferred compensation related to stock options.....
Stock-based compensation...........................
Net loss for the period from November 19, 1996
through June 30, 1997.............................
------- ---------- ---------- --------- -------
Balances, June 30, 1997............................ 52,011
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.................................. 10,575
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............................ 62,586 5,885,145 336,545
Issuance of Series D preferred stock, net.......... 8,216,576 82,166
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....... 1,026,462
Net loss for the year ended June 30, 1999..........
------- ---------- ---------- --------- -------
Balances, June 30, 1999............................ $62,586 14,101,721 $1,445,173 $
======= ========== ========== ========= =======
<CAPTION>
PREFERRED STOCK
---------------------------------------
SERIES F SERIES G
------------------- -----------------
SHARES AMOUNT SHARES AMOUNT
--------- ------- ------- -------
<S> <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...........................
Net loss for the period from November 19, 1996
through June 30, 1997.............................
--------- ------- ------- -------
Balances, June 30, 1997............................
Issuance of Series D preferred stock, net..........
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.......
Net loss for the year ended June 30, 1998..........
--------- ------- ------- -------
Balances, June 30, 1998............................
Issuance of Series D preferred stock, net..........
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.......
Net loss for the year ended June 30, 1999..........
--------- ------- ------- -------
Balances, June 30, 1999............................ 3,957,476 $39,575 800,000 $8,000
========= ======= ======= =======
<CAPTION>
COMMON STOCK
-------------------------------------
SERIES A SERIES B-H ADDITIONAL UNEARNED
------------------- --------------- PAID IN STOCK-BASED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- ------- ------ ------ ------------ ------------
<S> <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........................... 6,214,704 $62,147 5 $0 $ 11,039,388
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
Net loss for the period from November 19, 1996
through June 30, 1997.............................
--------- ------- --- -- ------------ -----------
Balances, June 30, 1997............................ 6,214,704 62,147 5 0 41,088,265 (120,429)
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..........
--------- ------- --- -- ------------ -----------
Balances, June 30, 1998............................ 6,214,704 62,147 7 0 58,786,885 (874,987)
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..........
--------- ------- --- -- ------------ -----------
Balances, June 30, 1999............................ 6,214,704 $62,147 7 $0 $145,877,150 $(5,836,556)
========= ======= === == ============ ===========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ------------
<S> <C> <C>
Balances, June 30, 1996............................ $(57,948,468) $ 13,928,602
Partner contributions -- Edison Project LP......... 1,224,965
Net loss for the period from July 1, 1996 through
November 18, 1996................................. (3,840,532) (3,840,532)
Effect of reorganization........................... 61,789,000 --
Issuance of Series A, B and C preferred stock,
net............................................... 30,036,663
Deferred compensation related to stock options..... --
Stock-based compensation........................... 45,342
Net loss for the period from November 19, 1996
through June 30, 1997............................. (7,581,063) (7,581,063)
------------ ------------
Balances, June 30, 1997............................ (7,581,063) 33,813,977
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.......... (21,914,855) (21,914,855)
------------ ------------
Balances, June 30, 1998............................ (29,495,918) 29,190,304
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.......... (49,432,791) (49,432,791)
------------ ------------
Balances, June 30, 1999............................ $(78,928,709) $ 63,042,412
============ ============
</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.................................................. $(11,421,595) $(21,914,855) $(49,432,791)
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 and other receivables........................ (5,179,091) (2,845,258) (3,126,279)
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. The Company has not capitalized
interest under SFAS No. 34 in connection with the purchase and renovation of
certain charter school buildings, since to do so would have required a
corresponding adjustment for impairment under SFAS No. 121.
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.
NOTES RECEIVABLE
Notes receivable are recorded at face value less an original issue
discount, if the note has no stated rate of interest. The original issue
discount is calculated using the Company's rate of interest associated with the
cost of funds for the period in which the note is issued. It is management's
policy to recognize any note as impaired when, based on its assessment of events
and circumstances, it is probable that the Company will be unable to collect all
amounts due. If a note is deemed impaired, the Company would measure impairment
based on the present value of future cash flows. No impairments have been
recognized to date.
DEFERRED CHARTER COSTS
Deferred charter costs arise as a result of the Company providing cash to
certain charter schools and receiving non-interest bearing notes. In accordance
with APB No. 21, the Company discounts the non-interest bearing notes and
records the corresponding charge that results from the discount as deferred
charter costs. These costs represent the accounting recognition given to the
Company's right to operate the charter school. Deferred charter costs are
included in other assets and are amortized on a straight line basis over the
same period as the related discount.
Net deferred charter costs and accumulated amortization as of June 30, 1999
were $1,207,366 and $1,033,949, respectively.
F-8
<PAGE> 104
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-9
<PAGE> 105
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 weighted average number of shares of common stock assuming
conversion of convertible preferred stock outstanding during the period under
the if-converted method. Each outstanding share of common and preferred stock
will automatically convert into .45 shares of class A common stock and .05
shares of class B common stock. See Note 15(a).
The calculation of pro forma net loss per share for the fiscal year ended
June 30, 1999 is as follows:
<TABLE>
<S> <C>
Net loss.................................................... $49,432,791
-----------
Common stock outstanding at July 1, 1998.................... 3,107,356
Convertible preferred stock outstanding at July 1, 1998..... 21,724,145
Add:
Issuance of convertible preferred stock as if converted on a
weighted average basis.................................... 3,027,014
-----------
Pro forma weighted average number of shares outstanding,
assuming conversion of convertible preferred stock........ 27,858,515
===========
Pro forma net loss per share................................ $ (1.77)
===========
</TABLE>
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,
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. The Company's Chief Operating Officer reviews
school performance based on a comprehensive, whole school approach. Real estate,
after school programs, food services and various other activities are not
evaluated on an individual basis. 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.
F-10
<PAGE> 106
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 9,711,772
---------- -----------
Total notes and other receivables................... $ 838,520 $ 3,893,084
========== ===========
</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.
F-11
<PAGE> 107
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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, net of unamortized discount of
$493,194.............................................. (9,711,772)
-----------
Notes and other receivables, noncurrent................. 3,893,084
===========
</TABLE>
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
F-12
<PAGE> 108
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-13
<PAGE> 109
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-14
<PAGE> 110
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 NOTES RECEIVABLE
The stockholder notes receivable consists of two 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 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.
In June 1999, the board of directors agreed to make loans to the Chief
Executive Officer ("CEO") 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, with payment due in full on the fifth anniversary of the loans.
The purpose of the loans are to provide funds to the CEO to exercise certain
options granted to him and to pay the related personal income tax impact.
Management expects that the option loan will be $2,200,000. The loan for the
estimated tax impact is based on the future estimated fair market value of the
Company's stock and, accordingly, is not estimable at this time. No loans have
been made at this time. To the extent that a loan is made for the purchase of
shares, it will be reflected as a reduction of equity in the balance sheet.
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 $ 8.08 343,326 $8.54
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......................................... $(11,421,595) $(26,482,749) $(50,459,253)
Net loss attributable to common stockholders -- pro
forma............................................ $(11,486,192) $(26,223,668) $(28,334,780)
Basic and diluted net loss attributable to common
stockholders per share -- as reported............ $ (1.84) $ (4.26) $ (8.12)
Basic net loss attributable to common stockholders
per share -- pro forma........................... $ (1.85) $ (4.22) $ (4.56)
</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>
On June 30, 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. These options to
purchase shares of Series A Common were granted under the Plan.
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 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
F-21
<PAGE> 117
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-22
<PAGE> 118
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
(a) In August 1999, the Company issued approximately 354,000 stock options
at $6.15 to employees and non-employees. The options vest over three to six
years and expire ten years from date of issuance.
In October 1999, the Board of Directors (the "Board") approved the adoption
of the 1999 Stock Incentive Plan (the "Incentive 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 at the closing 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. Pro forma per share data as shown in Note
2 to the financial statements reflects the effect of the conversion on
outstanding capital stock as if the initial public offering became effective.
(b) In October 1999, the Company anticipates issuing warrants to a third
party to purchase Series A Common at $6.15 per share. The warrants will vest
upon issuance and expire five years from date of issuance.
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
[EDISON SCHOOLS LOGO]
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 29, 1999
PROSPECTUS
6,800,000 SHARES
[EDISON SCHOOLS LOGO]
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 10 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.
ALT- 2
88
<PAGE> 123
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
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. 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>
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
$12.30, 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 expenses of the offering, exclusive of the underwriting discount, are
estimated at $2.6 million and are payable by Edison, as set forth in the
following table:
ALT- 3
89
<PAGE> 124
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
<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>
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 680,000 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. Certain purchasers of reserved shares who are affiliated or
associated with NASD members or who hold senior positions at financial
institutions or members of their immediate families specified by the NASD in its
conduct rules will be subject to three month lock-up agreements. This three
month lock-up is not related to the 180-day lock-up described under "-- No Sales
of Class A Common Stock or Similar Securities" below.
NO SALES OF CLASS A COMMON STOCK OR SIMILAR SECURITIES
Edison and Edison's executive officers and directors, as well as any of the
executive officers' and directors' immediate family members who purchase
reserved shares, stockholders, except for the holder of 100,000 shares of common
stock, and warrantholders holding warrants to purchase 516,067 shares of common
stock optionholders, except for the holders of options to purchase up to 250,000
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."
ALT- 4
90
<PAGE> 125
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
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 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.
SALES IN CERTAIN JURISDICTIONS
Each international manager has agreed that:
- it has not offered or sold and, prior to the expiration of the period of
six months from the completion of this offering, will not offer or sell
any shares of class A common stock to persons in the United Kingdom,
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments, as principal or agent, for
the purposes of their businesses or otherwise in circumstances which do
not constitute an offer to the public in the United Kingdom for the
purposes of the Public Offers of Securities Regulations 1995;
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<PAGE> 126
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
- it has complied and will comply with all applicable provisions of the
Public Offers of Securities Regulations 1995 and of the Financial
Services Act of 1986 with respect to anything done by it in relation to
the shares of class A common stock in, from or otherwise involving the
United Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue
or sale of shares of common stock to a person who is of a kind described
in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements)(Exemptions) Order 1996 (as amended) or is a person to
whom such document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction, except in the
United States, that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to Edison or shares of class A common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of class A common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with the shares of common stock may be distributed or published, in
or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
Purchasers of the shares of class A common stock offered hereby may be
required to pay stamp taxes and other charges in accordance with the laws and
practices of the country of purchase in addition to the offering price set forth
on the cover page hereof.
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
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<PAGE> 127
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
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, 2,190,857 shares of class A common stock and 281,206 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 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".
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<PAGE> 128
[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
[EDISON SCHOOLS LOGO]
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE> 129
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>
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 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
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<PAGE> 130
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 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.
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<PAGE> 131
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 by the D2F2 Foundation, the
Registrant issued to the D2F2 Foundation a warrant to purchase up to 3,775,000
shares of series D convertible preferred 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.
In October 1999, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 30,000 shares
of series A common stock.
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 56,806 shares of series A
common stock and 6,324 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 178,650 shares
of series A common stock and 19,850 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> 132
by the stockholders in July 1999. As of June 30, 1999, options to purchase
409,950 shares of series A common stock and 45,550 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
10.20* Stock Subscription Warrant, dated as of July 17, 1998,
issued to TBCC Funding Trust II
</TABLE>
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<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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* [Intentionally deleted]
10.25* [Intentionally deleted]
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+ Allonges, dated as of October 5, 1999, to promissory notes,
dated as of June 5, 1992 and January 23, 1996, from Benno C.
Schmidt, Jr. to the Registrant
10.36 Form of Letter Agreement between the Registrant and H.
Christopher Whittle
10.37 Letter Agreement, dated as of July 1, 1999, 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* Addendum to Series F Subscription Agreement, dated as of
July 28, 1999, between the Registrant and certain
stockholders
10.41* Guaranty of Payment Agreement, dated as of September 3,
1998, between the Registrant and NCB Development Corporation
10.42* Guaranty Agreement, dated as of November 25, 1997, between
the Registrant and BankBoston, N.A.
10.43 Stock Subscription Warrant, dated as of October 18, 1999,
issued to TBCC Funding Trust II
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.
+ Superceding 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.
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<PAGE> 134
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.
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.
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<PAGE> 135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 7 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in New York, New
York, on this 28th 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 28, 1999
- --------------------------------------------------- Directors
Benno C. Schmidt, Jr.
* President, Chief Executive October 28, 1999
- --------------------------------------------------- Officer and Director
H. Christopher Whittle (Principal Executive Officer)
/s/ JAMES L. STARR Executive Vice President and October 28, 1999
- --------------------------------------------------- Chief Financial Officer
James L. Starr (Principal Financial and
Accounting Officer)
* Executive Vice President and October 28, 1999
- --------------------------------------------------- Director
Laura K. Eshbaugh
* Director October 28, 1999
- ---------------------------------------------------
Virginia G. Bonker
* Director October 28, 1999
- ---------------------------------------------------
John W. Childs
* Director October 28, 1999
- ---------------------------------------------------
Charles J. Delaney
* Director October 28, 1999
- ---------------------------------------------------
Robert Finzi
* Director October 28, 1999
- ---------------------------------------------------
John B. Fullerton
* Director October 28, 1999
- ---------------------------------------------------
Janet A. Hickey
</TABLE>
II-7
<PAGE> 136
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director October 28, 1999
- ---------------------------------------------------
Klas Hillstrom
* Director October 28, 1999
- ---------------------------------------------------
Bert Kolde
* Director October 28, 1999
- ---------------------------------------------------
Jeffrey T. Leeds
* Director October 28, 1999
- ---------------------------------------------------
Brian P. Mathis
</TABLE>
By: /s/ JAMES L. STARR
--------------------------------------------------
James L. Starr
Attorney-in-Fact
II-8
<PAGE> 137
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> 138
<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* [Intentionally deleted].....................................
10.25* [Intentionally deleted].....................................
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+ Allonges, dated as of October 5, 1999, to promissory notes,
dated as of June 5, 1992 and January 23, 1996, from Benno C.
Schmidt, Jr. to the Registrant..............................
10.36 Form of Letter Agreement between the Registrant and H.
Christopher Whittle.........................................
10.37 Letter Agreement, dated as of July 1, 1999, 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* Addendum to Series F Subscription Agreement, dated as of
July 28, 1999, between the Registrant and certain
stockholders
10.41* Guaranty of Payment Agreement, dated as of September 3,
1998, between the Registrant and NCB Development Corporation
10.42* Guaranty Agreement, dated as of November 25, 1997, between
the Registrant and BankBoston, N.A.
10.43 Stock Subscription Warrant, dated as of October 18, 1999,
issued to TBCC Funding Trust II.............................
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.
+ Superceding exhibit.
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 1.1
EDISON SCHOOLS INC.
(a Delaware corporation)
__ Shares of Class A Common Stock
U.S. PURCHASE AGREEMENT
Dated: __, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. PURCHASE AGREEMENT.................................................................................1
SECTION 1. Representations and Warranties.....................................................4
(a) Representations and Warranties by the Company......................................4
(i) Compliance with Registration Requirements.....................................4
(ii) Independent Accountants......................................................5
(iii) Financial Statements........................................................6
(iv) No Material Adverse Change in Business.......................................6
(v) Good Standing of the Company..................................................6
(vi) No Subsidiaries..............................................................7
(vii) Capitalization...............................................................7
(viii) Authorization of Agreement.................................................7
(ix) Authorization and Description of Securities..................................7
(x) Absence of Defaults and Conflicts.............................................8
(xi) Absence of Labor Dispute.....................................................9
(xii) Absence of Proceedings......................................................9
(xiii) Accuracy of Exhibits.......................................................9
(xiv) Possession of Intellectual Property.........................................9
(xv) Absence of Further Requirements.............................................10
(xvi) Possession of Licenses and Permits.........................................10
(xvii) Compliance with Statutes, Rules and Regulations, etc......................11
(xviii) Title to Property........................................................11
(xix) Investment Company Act.....................................................12
(xx) Environmental Laws..........................................................12
(xxi) Registration Rights........................................................13
(xxii) Apex Online Learning Inc..................................................13
(xxiii) Management Agreements....................................................13
(xxiv) Insurance.................................................................13
(xxv) Tax Returns and Payment of Taxes...........................................14
(xxvi) No Stabilization or Manipulation..........................................14
(xxvii) Certain Transactions.....................................................14
(xxviii) Statistical and Market Data.............................................15
(xxix) Accounting and other Controls.............................................15
(xxx) Year 2000 Readiness........................................................15
(xxxi) Recapitalization...........................................................15
(xxxii) Option Lock-Ups...........................................................16
(b) Officer's Certificates............................................................16
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing...................................16
(a) Initial Securities................................................................16
(b) Option Securities.................................................................16
(c) Payment...........................................................................17
(d) Denominations; Registration.......................................................17
(e) Appointment of Qualified Independent Underwriter..................................18
SECTION 3. Covenants of the Company..........................................................18
(a) Compliance with Securities Regulations and Commission Requests....................18
(b) Filing of Amendments..............................................................18
(c) Delivery of Registration Statements...............................................19
(d) Delivery of Prospectuses..........................................................19
(e) Continued Compliance with Securities Laws.........................................19
(f) Blue Sky Qualifications...........................................................20
(g) Rule 158..........................................................................20
(h) Use of Proceeds...................................................................20
(i) Listing...........................................................................20
(j) Restriction on Sale of Securities.................................................20
(k) Reporting Requirements............................................................21
(l) Compliance with NASD Rules........................................................21
(m) Compliance with Rule 463..........................................................22
(n) Filing of Sixth Amended and Restated Certificate of Incorporation.................22
SECTION 4. Payment of Expenses...............................................................22
(a) Expenses..........................................................................22
(b) Termination of Agreement..........................................................23
SECTION 5. Conditions of U.S. Underwriters' Obligations......................................23
(a) Effectiveness of Registration Statement...........................................23
(b) Opinion of Counsel for Company....................................................23
(c) Opinion of Counsel for U.S. Underwriters..........................................24
(d) Officers' Certificate.............................................................24
(e) Accountant's Comfort Letter.......................................................24
(f) Bring-down Comfort Letter.........................................................24
(g) Approval of Listing...............................................................25
(h) No Objection......................................................................25
(i) Lock-up Agreements................................................................25
(k) Purchase of Initial International Securities......................................25
(l) Conditions to Purchase of U.S. Option Securities..................................25
(m) Additional Documents..............................................................26
(n) Termination of Agreement..........................................................26
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
SECTION 6. Indemnification...................................................................27
(a) Indemnification of U.S. Underwriters..............................................27
(b) Indemnification of Company, Directors and Officers................................29
(c) Actions against Parties; Notification.............................................29
(d) Settlement without Consent if Failure to Reimburse................................30
(e) Indemnification for Reserved Securities...........................................30
SECTION 7. Contribution......................................................................30
SECTION 8. Representations, Warranties and Agreements to Survive Delivery....................32
SECTION 9. Termination of Agreement..........................................................32
(a) Termination; General..............................................................32
(b) Liabilities.......................................................................33
SECTION 10. Default by One or More of the U.S. Underwriters...................................33
SECTION 11. Notices...........................................................................34
SECTION 12. Parties...........................................................................34
SECTION 13. GOVERNING LAW AND TIME............................................................34
SECTION 14. Effect of Headings................................................................35
SCHEDULES
Schedule A - List of Underwriters....................................................Sch A-1
Schedule B - Pricing Information.....................................................Sch B-1
Schedule C - List of Persons subject to Lock-up......................................Sch C-1
Schedule D - List of Management Agreements...........................................Sch D-1
EXHIBITS
Exhibit A-1 - Form of Opinion of Company's Counsel.....................................A-1-1
Exhibit A-2 - Form of Opinion of Company's
Special Regulatory Counsel..............................................A-2-1
Exhibit A-3 - Form of Opinion of Company's
General Counsel.........................................................A-3-1
Exhibit B-1 - Form of Lock-up Letter.....................................................B-1
Exhibit C - Form of Option Lock-up Pursuant to
Section (1)(A)(Xxxii).....................................................C-1
</TABLE>
iii
<PAGE> 5
EDISON SCHOOLS INC.
(a Delaware corporation)
__ Shares of Class A Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
__, 1999
MERRILL LYNCH & CO.
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.
as U.S. Representative(s) of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Edison Schools Inc., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in
Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, 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 (in such capacity,
the "U.S. Representatives"), with respect to the issue and sale by the Company
and the purchase by the U.S. Underwriters, acting severally and not jointly, of
the respective
<PAGE> 6
numbers of shares of class A common stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the U.S. Underwriters, acting severally and not jointly,
of the option described in Section 2(b) hereof to purchase all or any part of __
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid __ shares of Common Stock (the "Initial U.S. Securities") to be
purchased by the U.S. Underwriters and all or any part of the __ shares of
Common Stock subject to the option described in Section 2(b) hereof (the "U.S.
Option Securities") are hereinafter called, collectively, the "U.S. Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of an aggregate of __ shares of Common
Stock (the "Initial International Securities") through arrangements with certain
underwriters outside the United States and Canada (the "International Managers")
for which 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 (the
"Lead Managers") and the grant by the Company to the International Managers,
acting severally and not jointly, of an option to purchase all or any part of
the International Managers' pro rata portion of up to __ additional shares of
Common Stock solely to cover overallotments, if any (the "International Option
Securities" and, together with the U.S. Option Securities, the "Option
Securities"). The Initial International Securities and the International Option
Securities are hereinafter called the "International Securities". It is
understood that the Company is not obligated to sell and the U.S. Underwriters
are not obligated to purchase, any Initial U.S. Securities unless all of the
Initial International Securities are contemporaneously purchased by the
International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities, and the International Securities
are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a
public offering of the U.S. Securities as soon as the U.S. Representatives deem
advisable after this Agreement has been executed and delivered.
2
<PAGE> 7
The Company and the U.S. Underwriters agree that up to __ shares of the
Initial U.S. Securities to be purchased by the U.S. Underwriters and that up to
__ shares of the Initial International Securities to be purchased by the
International Managers (collectively, the "Reserved Securities") shall be
reserved for sale by the Underwriters to certain eligible employees and persons
having business relationships with the Company, as part of the distribution of
the Securities by the Underwriters, subject to the terms of this Agreement, the
applicable rules, regulations and interpretations of the National Association of
Securities Dealers, Inc. and all other applicable laws, rules and regulations.
To the extent that such Reserved Securities are not orally confirmed for
purchase by such eligible employees and persons having business relationships
with the Company by the end of the first business day after the date of this
Agreement, such Reserved Securities may be offered to the public as part of the
public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-84177) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the U.S. Securities (the "Form of U.S.
Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of International Prospectus is identical to
the Form of U.S. Prospectus, except for the front cover and back cover pages and
the information under the caption "Underwriting". The information included in
any such prospectus or in any such Term Sheet, as the case may be, that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of U.S. Prospectus and Form of International
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement,"
3
<PAGE> 8
and after such filing the term "Registration Statement" shall include the Rule
462(b) Registration Statement. The final Form of U.S. Prospectus and the final
Form of International Prospectus in the forms first furnished to the
Underwriters for use in connection with the offering of the Securities are
herein called the "U.S. Prospectus" and the "International Prospectus,"
respectively, and collectively, the "Prospectuses." If Rule 434 is relied on,
the terms "U.S. Prospectus" and "International Prospectus" shall refer to the
preliminary U.S. Prospectus dated __, 1999 and preliminary International
Prospectus dated __, 1999, respectively, each together with the applicable Term
Sheet and all references in this Agreement to the date of such Prospectuses
shall mean the date of the applicable Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
On October __, 1999, the Company filed its fifth amended and restated
Certificate of Incorporation (the "Fifth Amendment"), with the Secretary of
State of the State of Delaware. The Fifth Amendment provides for the automatic
conversion (the "Recapitalization"), immediately prior to the closing of the
offering, of each outstanding share of the Company's capital stock into 0.45
shares of Common Stock and 0.05 shares of the Company's class B common stock,
par value $.01 per share ("Class B common stock"). Immediately after the closing
of the offering, the Company will file its sixth amended and restated
Certificate of Incorporation (the "Sixth Amendment"), substantially in the form
filed as exhibit 3.1 to the Registration Statement.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each U.S. Underwriter as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b), hereof and agrees with each U.S.
Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
4
<PAGE> 9
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any U.S. Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading and the Prospectuses, any
preliminary prospectuses and any supplement thereto or prospectus wrapper
prepared in connection therewith, at their respective times of issuance
and at the Closing Time, complied and will comply in all material
respects with any applicable laws or regulations of foreign jurisdictions
in which the Prospectuses and such preliminary prospectuses, as amended
or supplemented, if applicable, are distributed in connection with the
offer and sale of Reserved Securities. Neither of the Prospectuses nor
any amendments or supplements thereto (including any prospectus wrapper),
at the time the Prospectuses or any amendments or supplements thereto
were issued and at the Closing Time (and, if any U.S. Option Securities
are purchased, at the Date of Delivery), included or will include an
untrue statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. If
Rule 434 is used, the Company will comply with the requirements of Rule
434 and the Prospectuses shall not be "materially different", as such
term is used in Rule 434, from the prospectuses included in the
Registration Statement at the time it became effective. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the U.S.
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any U.S. Underwriter through the
U.S. Representatives expressly for use in the Registration Statement or
the U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectuses
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the
Registration Statement are
5
<PAGE> 10
independent public accountants as required by the 1933 Act and the 1933
Act Regulations.
(iii) Financial Statements. The financial statements included in
the Registration Statement and the Prospectuses, together with the
related schedules and notes, present fairly the financial position of the
Company at the dates indicated and the statement of operations,
stockholders' equity and cash flows of the Company for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The selected financial
and other data and the summary financial and operating data included in
the Prospectuses present fairly the information shown therein and, in the
cases of the selected financial data and the summary financial data, have
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The pro forma
financial information (including the proforma as adjusted financial
information) included in the Registration Statement and the Prospectuses
present fairly the information shown therein and have been properly
compiled on the bases described therein, and the adjustments used therein
are appropriate to give effect to the transactions and circumstances
referred to therein.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Company, whether or not arising in the ordinary course of business (a
"Material Adverse Effect"), (B) there have been no transactions entered
into by the Company other than those in the ordinary course of business,
which are material with respect to the Company, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing could not reasonably be expected to result in a Material Adverse
Effect.
6
<PAGE> 11
(vi) No Subsidiaries. The Company has no subsidiaries.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company (a) as of June 30, 1999, was as set forth in
the Prospectuses in the column entitled "Actual" under the caption
"Capitalization", (b) is, as of the date hereof, after giving effect to
the Recapitalization, as set forth in the Prospectuses in the column
entitled "Pro Forma" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses or pursuant to the exercise of convertible securities,
options or warrants referred to in the Prospectuses), and (c) after
giving effect to the transactions contemplated by this Agreement, the
International Purchase Agreement and the Registration Statement, will be
as set forth in the Prospectuses in the column entitled "Pro Forma as
Adjusted" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectuses or
pursuant to the exercise of convertible securities, options or warrants
referred to in the Prospectuses). The shares of issued and outstanding
capital stock of the Company have been duly authorized and validly issued
and are fully paid and non-assessable; none of the outstanding shares of
capital stock of the Company was issued in violation of the preemptive or
other similar rights of any securityholder of the Company. The shares of
issued and outstanding capital stock of the Company have been issued in
compliance, in all material respects, with all federal and state
securities laws. Except as disclosed in the Prospectuses, there are no
outstanding options or warrants to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of the Company's capital stock or any such options,
warrants, rights, convertible securities or obligations. The description
of the Company's stock option and purchase plans and the options or other
rights granted and exercised thereunder set forth in the Prospectuses
accurately and fairly describe, in all material respects, the information
required to be shown with respect to such plans, arrangements, options
and rights.
(viii) Authorization of Agreement. This Agreement and the
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
to be purchased by the U.S. Underwriters and the International Managers
from the Company have been duly authorized for issuance and sale to the
U.S. Underwriters pursuant to this Agreement and the International
Managers pursuant to the International Purchase Agreement, respectively,
and, when issued and delivered by the
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<PAGE> 12
Company pursuant to this Agreement and the International Purchase
Agreement, respectively, against payment of the consideration set forth
herein and the International Purchase Agreement, respectively, will be
validly issued, fully paid and non-assessable; the Common Stock conforms
to all statements relating thereto contained in the Prospectuses and such
description conforms to the rights set forth in the instruments defining
the same; no holder of the Securities will be subject to personal
liability by reason of being such a holder; and the issuance of the
Securities is not subject to the preemptive or other similar rights of
any securityholder of the Company.
(x) Absence of Defaults and Conflicts. The Company is not in
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained
in any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or other agreement or instrument to which the
Company is a party or by which it may be bound, or to which any of the
property or assets of the Company is subject (collectively, "Agreements
and Instruments") except for such defaults under Agreements and
Instruments that could not reasonably be expected to result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the International Purchase Agreement and the consummation
of the transactions contemplated in this Agreement, the International
Purchase Agreement and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Prospectuses under the caption
"Use of Proceeds") and compliance by the Company with its obligations
under this Agreement and the International Purchase Agreement have been
duly authorized by all necessary corporate action and do not and will
not, whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
could not reasonably be expected to result in a Material Adverse Effect),
nor will such action result in any violation of (a) the provisions of the
charter or by-laws of the Company or (b) any applicable law, statute,
rule, regulation, judgment, standard, guide, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any of its assets, properties or
operations, including, without limitation, the Elementary and Secondary
Education Act of 1965, as amended, and all rules and regulations
promulgated thereunder (collectively, the "ESEA"), the Individuals with
Disabilities in Education Act and all rules and regulations promulgated
thereunder (collectively, the "IDEA") and any other federal, state or
local law, statute, rule, regulation, standard, guide or order pertaining
to the authorization to operate public schools or the eligibility to
receive funding under
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federal, state or local programs related to the operation of public
schools, except, in the case of clause (b) above, for such violations
which could not reasonably be expected to result in a Material Adverse
Effect. As used herein, a "Repayment Event" means any event or condition
which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right to
require the repurchase, redemption or repayment of all or a portion of
such indebtedness by the Company.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company (including, without limitation, all principals,
teachers and other personnel employed by or working for or in any school
operated by the Company) exists or, to the knowledge of the Company, is
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers, customers or contractors, which, in any of the foregoing
cases, may reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign (including, without
limitation, any proceeding before the United States Department of
Education (the "USDE"), the United States Department of Justice (the
"DOJ"), the Equal Employment Opportunity Commission (the "EEOC"), state
and local educational agencies (including school boards and public school
districts) or charter school boards), now pending, or, to the knowledge
of the Company, threatened, against or affecting the Company or any
school operated by the Company, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which could
reasonably be expected to result in a Material Adverse Effect, or which
could materially and adversely affect the consummation of the
transactions contemplated in this Agreement and the International
Purchase Agreement or the performance by the Company of its obligations
hereunder or thereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any school operated by
the Company is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and each
of the schools operated by the Company own or possess, or can acquire on
reasonable
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<PAGE> 14
terms, adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other intellectual
property (including, without limitation, the right to use Success for
All, a K-5 reading program developed by Johns Hopkins University and the
mathematics programs developed by the University of Chicago School
Mathematics Project) (collectively, "Intellectual Property") necessary to
carry on the business now operated by them, and neither the Company nor,
to the knowledge of the Company, any of the schools operated by it has
received any notice or is not otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which could render any
Intellectual Property invalid or inadequate to protect the interest of
the Company therein, and which infringement or conflict (if the subject
of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, could reasonably be expected to
result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities under this Agreement and the International Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement and the International Purchase Agreement, except (i) such as
have been already obtained or as may be required under the 1933 Act or
the 1933 Act Regulations and foreign or state securities or blue sky laws
and (ii) such as have been obtained under the laws and regulations of
jurisdictions outside the United States in which the Reserved Securities
are offered. Neither the Company nor any of the schools operated by the
Company is subject to any requirements of, or regulation under, the
Higher Education Act of 1965, as amended.
(xvi) Possession of Licenses and Permits. The Company and each of
the schools operated by it possess such permits, licenses, approvals,
consents and other authorizations, including, without limitation,
authorizations required (i) to participate in federal, state and local
funding programs under the ESEA and the IDEA to the extent the Company or
such school currently receives material funding thereunder, (ii) to
operate the charter schools currently operated by it, and (iii) to
receive funding under federal, state and local education laws, statutes,
rules, regulations, standards, guides or orders to the extent the Company
or such school currently receives material funding thereunder
(collectively, "Governmental Licenses"), issued by the appropriate
federal, state, local or foreign regulatory agencies or bodies necessary
to conduct the business now operated by them, except where the failure to
possess such
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<PAGE> 15
Governmental Licenses could not reasonably be expected to have a Material
Adverse Effect; the Company and, to the knowledge of the Company, each of
the schools operated by the Company, is in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so
to comply could not, singly or in the aggregate, reasonably be expected
to have a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be
in full force and effect could not reasonably be expected to have a
Material Adverse Effect; and neither the Company nor, to the knowledge of
the Company, any of the schools operated by it has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, could reasonably be
expected to result in a Material Adverse Effect.
(xvii) Compliance with Statutes, Rules and Regulations, etc. The
Company and each of the schools operated by it are in compliance with all
applicable laws, statutes, rules, regulations, standards, guides or
orders (including, without limitation, ESEA, IDEA, Family Education
Rights and Privacy Act of 1974, as amended, Gun-Free Schools Act of 1994,
Section 504 of the Rehabilitation Act of 1973, Americans with
Disabilities Act of 1990, Title VI and Title VII of the Civil Rights Act
of 1964, Title IX of the Education Amendments of 1972, Age Discrimination
Act of 1975, Age Discrimination in Employment Act of 1967, Equal Pay Act
of 1963 and the Drug-Free Workplace Act of 1988) administered, issued or
implemented by any federal, state or local government or any agency or
subdivision of any of the foregoing, including, without limitation, the
USDE, the DOJ, the EEOC, state and local education agencies (including
school boards and public school districts) or charter school boards, to
the extent applicable, except where failure to be so in compliance could
not reasonably be expected to have a Material Adverse Effect. The Company
has not been advised, and has no reason to believe, that either it or any
of the schools operated by the Company is not conducting business in
compliance with all applicable laws, statutes, rules and regulations of
the jurisdictions in which it is conducting business, including, without
limitation, all applicable federal, state and local laws, rules and
regulations; except where failure to be so in compliance could not
reasonably be expected to have a Material Adverse Effect.
(xviii) Title to Property. The Company has good and marketable
title to all real property owned by the Company and good title to all
other properties owned by it, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the
Prospectuses or (b) do not, singly or in the aggregate, materially affect
the value of such property and do not interfere with the use made and
proposed to be made of
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such property by the Company; and all of the leases and subleases
material to the business of the Company and the schools operated by it,
and under which the Company or any of the schools operated by it holds
properties described in the Prospectuses, are in full force and effect,
and neither the Company nor any school operated by it has any notice of
any claim of any sort that has been asserted by anyone adverse to the
rights of the Company or any of the schools operated by it under any of
the leases or subleases mentioned above, or affecting or questioning the
rights of the Company or any of the schools operated by it to the
continued possession of the leased or subleased premises under any such
lease or sublease, which claim, if the subject of an unfavorable
decision, ruling or finding, could reasonably be expected to result in a
Material Adverse Effect.
(xix) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectuses will not be, an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended (the "1940
Act").
(xx) Environmental Laws. Except as described in the Registration
Statement and except as could not, singly or in the aggregate, be
reasonably expected to result in a Material Adverse Effect, (A) neither
the Company nor, to the knowledge of the Company, any of the schools
operated by it is in violation of any federal, state, local or foreign
law, statute, rule, regulation, standard, guide, ordinance, code, policy
or rule of common law or any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent, decree
or judgment, relating to pollution or protection of human health or
safety, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), natural
resources or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances
(including, without limitation, asbestos, polychlorinated biphenyls,
urea-formaldehyde insulation, petroleum or petroleum products)
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling,
release or threatened release of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and the schools operated by it
have all permits, authorizations and approvals required under any
applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or
proceedings relating to any Environmental Law against the Company or any
of the schools operated by it, and (D) there are no events or
circumstances that might reasonably be expected to form
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the basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against
or affecting the Company or the schools operated by it relating to
Hazardous Materials or any Environmental Laws.
(xxi) Registration Rights. Except as disclosed in the
Prospectuses under the caption "Shares Eligible for Future
Sale-Registration Rights", there are no persons with registration rights
or other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.
(xxii) Apex Online Learning Inc. The Company owns 1,000,000 shares
of Series B preferred stock, par value $0.001 per share, of Apex Online
Learning Inc., a Washington corporation ("APEX"), which currently
represents approximately 16.5% of all of the issued and outstanding
capital stock of APEX, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity. The Company does not own the
equity securities or similar interests of any other entity.
(xxiii) Management Agreements. The Company has provided to
Debevoise & Plimpton, counsel for the Underwriters, true, correct and
complete copies of each of the management agreements and school charters
to which the Company or any of the schools operated by the Company is a
party, as amended (collectively, the "Management Agreements"), none of
which have been subsequently amended, supplemented or modified, and each
of the Management Agreements is in full force and effect on the date
hereof, and, neither the Company, nor, to the knowledge of Company, any
other party is in default in the performance or observation of any
material obligation, agreement, covenant or condition contained therein.
Schedule D hereto is a true, correct and complete list of the Management
Agreements.
(xxiv) Insurance. The Company and each of the schools operated by
it and, to the knowledge of the Company, the school districts and charter
school boards responsible for supervising the schools operated by the
Company, are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent and
customary in the education industry; neither the Company, nor any of the
schools operated by it nor, to the knowledge of the Company, any school
district or charter school board responsible for supervising any school
operated by the Company, has been refused any insurance coverage sought
or applied for; and the Company does not have any reason to believe that
it or any of the schools operated by it or any school district or charter
school board responsible for supervising any school operated by the
Company, will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage
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from similar insurers as may be necessary to continue its operations
except where the failure to renew or maintain such coverage could not
reasonably be expected to result in a Material Adverse Effect. The
officers and directors of the Company are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as the Company believes are prudent and customary for
officers' and directors' liability insurance of a public company and as
the Company believes could cover claims which could reasonably be
expected to be made in connection with the issuance of the Securities;
and the Company has no reason to believe that it will not be able to
renew its existing directors' and officers' liability insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to cover its officers and directors.
(xxv) Tax Returns and Payment of Taxes. The Company has timely
filed all federal, state, local and foreign tax returns that are required
to be filed or has duly requested extensions thereof and all such tax
returns are true, correct and complete, except to the extent that any
failure to file or request an extension, or any incorrectness could not
reasonably be expected to result in a Material Adverse Effect. The
Company has timely paid all taxes shown as due on such filed tax returns
(including any related assessments, fines or penalties), except to the
extent that any such taxes are being contested in good faith and by
appropriate proceedings, or to the extent that any failure to pay could
not reasonably be expected to result in a Material Adverse Effect; and
adequate charges, accruals and reserves have been provided for in the
financial statements referred to in Section 1(a)(iv) above in accordance
with GAAP in respect of all Federal, state, local and foreign taxes for
all periods as to which the tax liability of the Company has not been
finally determined or remains open to examination by applicable taxing
authorities. The Company is not a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Internal
Revenue Code of 1986, as amended (the "Code").
(xxvi) No Stabilization or Manipulation. Neither the Company nor,
to the best of its knowledge, any of its directors, officers or
affiliates has taken or will take, directly or indirectly, any action
designed to, or that might be reasonably expected to, cause or result in
stabilization or manipulation of the price of the Securities in violation
of Regulation M under the Securities Exchange Act of 1934, as amended
(the "1934 Act").
(xxvii) Certain Transactions. Except as disclosed in the
Prospectuses, there are no outstanding loans, advances, or guarantees of
indebtedness by the Company to or for the benefit of any of the executive
officers or directors of the Company or any of the members of the
families of any of them that would be required to be so disclosed under
the 1933 Act, the 1933 Act Regulations or Form S-1.
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(xxviii) Statistical and Market Data. The statistical and
market-related data included in the Prospectuses are derived from sources
which the Company reasonably and in good faith believes to be accurate,
reasonable and reliable and agrees with the sources from which it was
derived.
(xxix) Accounting and other Controls. The Company has established
a system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions were, are and will be executed in
accordance with management's general or specific authorization; (ii)
transactions were, are and will be recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii)
access to assets was, is and will be permitted only in accordance with a
management's general or specific authorizations; and (iv) the recorded
accountability for assets was, is and will be compared with existing
assets at reasonable intervals and appropriate action was, is and will be
taken with respect to any differences.
(xxx) Year 2000 Readiness. The Company has, to the extent
disclosed in the Prospectus, reviewed its operations and those of the
schools operated by it and of any third party with which the Company or
any of the schools operated by the Company has a material relationship to
evaluate the extent to which the business or operations of the Company or
any of the schools operated by it will be affected by the Year 2000
Problem. Other than as set forth in the Prospectuses, the Company does
not anticipate incurring operating expenses or costs material to the
financial position or results of operations of the Company and the
schools operated by it in connection with the actions that the Company
currently believes are necessary to address the Year 2000 Problem. As a
result of the aforementioned review, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem could have a
Material Adverse Effect. The "Year 2000 Problem" as used herein means any
risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000.
(xxxi) Recapitalization. On October __, 1999 the Company filed the
Fifth Amendment with the Secretary of State of the State of Delaware,
which provides for the Recapitalization and which has been duly
authorized by the Board of Directors and shareholders of the Company. The
Company has undertaken all necessary corporate action, including
obtaining the approval of the Board of Directors and the shareholders of
the Company, in order to file the Sixth Amendment with the Secretary of
State of the State of Delaware immediately after the closing of the
offering.
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(xxxii) Option Lock-Ups. The Company has received a written
180-day lock-up agreement from each holder of an option or options to
purchase any class of its capital stock substantially in the form of
Exhibit C hereto, and each such lock-up is in full force and effect and
has not been amended or supplemented as of the date hereof.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company and delivered to the Global Coordinator, the U.S. Representatives or to
counsel for the U.S. Underwriters shall be deemed a representation and warranty
by the Company to each U.S. Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each U.S. Underwriter, severally and not
jointly, and each U.S. Underwriter, severally and not jointly, agrees to
purchase from the Company, at the price per share set forth in Schedule B, the
number of Initial U.S. Securities set forth in Schedule A opposite the name of
such U.S. Underwriter, plus any additional number of Initial U.S. Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the U.S. Underwriters,
severally and not jointly, to purchase up to an additional __ shares of Common
Stock at the price per share set forth in Schedule B, less an amount per share
equal to any dividends or distributions declared by the Company and payable on
the Initial U.S. Securities but not payable on the U.S. Option Securities. The
option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Company setting forth the number of U.S. Option Securities as
to which the several U.S. Underwriters are then exercising the option and the
time and date of payment and delivery for such U.S. Option Securities. Any such
time and date of delivery for the U.S. Option Securities (a "Date of Delivery")
shall be determined by the Global Coordinator, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to all
or any portion of the U.S. Option Securities, each of the U.S. Underwriters,
acting severally and not jointly, will purchase that proportion of the total
number of U.S. Option Securities then being purchased which the number of
Initial U.S. Securities set forth in Schedule A opposite the name of such U.S.
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Underwriter bears to the total number of Initial U.S. Securities, subject in
each case to such adjustments as the Global Coordinator in its discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Hale &
Dorr LLP, 1455 Pennsylvania Avenue, N.W., Washington, D.C. 20004, or at such
other place as shall be agreed upon by the Global Coordinator and the Company,
at 9:00 A.M. (New York city time) on the third (fourth, if the pricing occurs
after 4:30 P.M. (New York city time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10),
or such other time not later than ten business days after such date as shall be
agreed upon by the Global Coordinator and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option Securities
are purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
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(e) Appointment of Qualified Independent Underwriter. The Company hereby
confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby confirms
its agreement with the Company to render services as, a "qualified independent
underwriter" within the meaning of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD") with respect to
the offering and sale of the U.S. Securities. Merrill Lynch, solely in its
capacity as qualified independent underwriter and not otherwise, is referred to
herein as the "Independent Underwriter".
SECTION 3. Covenants of the Company. The Company covenants with each U.S.
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Global Coordinator immediately, and confirm the notice in writing, (i)
when any post-effective amendment to the Registration Statement shall
become effective, or any supplement to the Prospectuses or any amended
Prospectuses shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to
the Prospectuses or for additional information, and (iv) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use
of any preliminary prospectus, or of the suspension of the qualification
of the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes.
The Company will promptly effect the filings necessary pursuant to Rule
424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule
424(b) was received for filing by the Commission and, in the event that
it was not, it will promptly file such prospectus. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to
the Registration Statement (including any filing under Rule 462(b)), any
Term Sheet or any amendment, supplement or revision to either the
prospectus included in the Registration Statement at the time it became
effective or to the Prospectuses, will furnish the Global Coordinator
with copies of any such documents a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not file or use
any such document to which the Global Coordinator or counsel for the U.S.
Underwriters shall reasonably object.
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(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the U.S. Representatives and counsel for the
U.S. Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein) and signed
copies of all consents and certificates of experts, and will also deliver
to the U.S. Representatives, without charge, a conformed copy of the
Registration Statement as originally filed and of each amendment thereto
(without exhibits) for each of the U.S. Underwriters. The copies of the
Registration Statement and each amendment thereto furnished to the U.S.
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
U.S. Underwriter, without charge, as many copies of each preliminary
prospectus as such U.S. Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each U.S. Underwriter, without
charge, during the period when the U.S. Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, such number of copies of
the U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter
may reasonably request. The U.S. Prospectus and any amendments or
supplements thereto furnished to the U.S. Underwriters will be identical
to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the
1934 Act Regulations so as to permit the completion of the distribution
of the Securities as contemplated in this Agreement, the International
Purchase Agreement and in the Prospectuses. If at any time when a
prospectus is required by the 1933 Act or the 1934 Act to be delivered in
connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the
opinion of counsel for the U.S. Underwriters or for the Company, to amend
the Registration Statement or amend or supplement any Prospectus in order
that the Prospectuses will not include any untrue statements of a
material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, or if it shall be
necessary, in the opinion of such counsel, at any such time to amend the
Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act, the 1933 Act Regulations,
the 1934 Act or the 1934 Act Regulations, the Company will promptly
prepare and file with the Commission, subject to Section 3(b), such
amendment or supplement as may be necessary to
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correct such statement or omission or to make the Registration Statement
or the Prospectuses comply with such requirements, and the Company will
furnish to the U.S. Underwriters such number of copies of such amendment
or supplement as the U.S. Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the U.S. Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws of
such states and other jurisdictions (domestic or foreign) as the Global
Coordinator may designate and to maintain such qualifications in effect
for a period of not less than one year from the later of the effective
date of the Registration Statement and any Rule 462(b) Registration
Statement; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In
each jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in
the Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect
and maintain the quotation of the Common Stock (including the Securities)
on the Nasdaq National Market and will file with the Nasdaq National
Market all documents and notices required by the Nasdaq National Market
of companies that have securities that are traded in the over-the-counter
market and quotations for which are reported by the Nasdaq National
Market.
(j) Restriction on Sale of Securities. (1) During a period of
180 days from the date of the Prospectuses, the Company will not, without
the prior written consent of the Global Coordinator, (i) directly or
indirectly, offer, pledge, sell,
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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 or otherwise transfer or dispose of any share of Common Stock or
Class B common stock or any securities convertible into or exercisable or
exchangeable for Common Stock or Class B common stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock or the Class B
common stock, whether any such swap or the transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock,
Class B common stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Securities to be sold
hereunder or under the International Purchase Agreement, (B) any shares
of Common Stock or Class B common stock issued by the Company upon the
exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in the Prospectuses, (C)
any shares of Common Stock or Class B common stock issued or options to
purchase shares of Common Stock or Class B common stock granted pursuant
to existing employee benefit plans of the Company referred to in the
Prospectuses or (D) any shares of Common Stock that may be issued by the
Company from time to time upon the conversion of shares of Class B common
stock into shares of Common Stock pursuant to the Fifth Amendment or the
Sixth Amendment.
(2) During a period of 180 days from the date of the
Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, release any holder of an option
or options to purchase any shares of its capital stock from the
lock-up agreement referred to in Section 1(a)(xxxii) and the
Company will enforce such lock-up agreements to the fullest extent
permitted by law.
(k) Reporting Requirements. The Company, during the period when
the Prospectuses are required to be delivered under the 1933 Act or the
1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that
it will ensure that the Reserved Securities will be restricted as
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date
of this Agreement. The Underwriters will notify the Company as to which
persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
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transfer restriction upon such securities for such period of time. Should
the Company release, or seek to release, from such restrictions any of
the Reserved Securities, the Company agrees to reimburse the Underwriters
for any reasonable expenses (including, without limitation, legal
expenses) they incur in connection with such release.
(m) Compliance with Rule 463. The Company will comply with the
requirements of Rule 463 of the 1933 Act Regulations.
(n) Filing of Sixth Amended and Restated Certificate of
Incorporation. The Company has taken all necessary corporate action,
including obtaining the approval of the Board of Directors and the
shareholders of the Company, in order to file the Sixth Amendment with
the Secretary of the State of the State of Delaware, and the Company will
file the Sixth Amendment as soon as reasonably practicable after the
closing of the transactions contemplated by this Agreement and the
International Purchase Agreement.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters and the
transfer of the Securities between the U.S. Underwriters and the International
Managers, (iv) the fees and disbursements of the Company's counsel, accountants
and other advisors, (v) the qualification of the Securities under securities
laws in accordance with the provisions of Section 3(f) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the Underwriters
in connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of any transfer
agent or registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the NASD of the terms of the sale of the Securities, (x) the
fees and expenses incurred in connection with the inclusion of the Securities in
the Nasdaq National Market, (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related
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to the Reserved Securities which are designated by the Company for sale to
employees, directors and other persons with relationships with the Company who
have expressed an interest in purchasing the Reserved Securities and (xii) the
expenses of the Independent Underwriter.
(b) Termination of Agreement. If this Agreement is terminated by the U.S.
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the U.S. Underwriters.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The obligations
of the several U.S. Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company delivered pursuant to the
provisions hereof, to the performance by the Company of its covenants and other
obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act
or proceedings therefor initiated or threatened by the Commission, and
any request on the part of the Commission for additional information
shall have been complied with to the reasonable satisfaction of counsel
to the U.S. Underwriters. A prospectus containing the Rule 430A
Information shall have been filed with the Commission in accordance with
Rule 424(b) (or a post-effective amendment providing such information
shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon
Rule 434, a Term Sheet shall have been filed with the Commission in
accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Representatives shall have received the favorable opinions, dated as of
Closing Time, of:
(i) Hale and Dorr LLP, counsel for the Company, in form
and substance satisfactory to counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other
U.S. Underwriters to the effect set forth in Exhibit A-1 hereto and to
such further effect as counsel to the U.S. Underwriters may reasonably
request; and
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(ii) Christopher D. Cerf, general counsel for the
Company, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter
for each of the other U.S. Underwriters to the effect set forth in
Exhibit A-2 hereto and to such further effect as counsel to the U.S.
Underwriters may reasonably request.
(c) Opinion of Counsel for U.S. Underwriters. At Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Debevoise & Plimpton, counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter
for each of the other U.S. Underwriters, in form and substance reasonably
satisfactory to the U.S. Underwriters. In giving such opinion such
counsel may rely, insofar as such opinion involves factual matters, to
the extent they deem proper, upon certificates of officers of the Company
and certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectuses, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company, whether or not
arising in the ordinary course of business, and the U.S. Representatives
shall have received a certificate of the Chief Executive Officer, Chief
Financial Officer and Chief Operating Officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though
expressly made at and as of Closing Time, (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution
of this Agreement, the U.S. Representatives shall have received from
PricewaterhouseCoopers a letter dated such date, in form and substance
satisfactory to the U.S. Representatives, together with signed or
reproduced copies of such letter for each of the other U.S. Underwriters
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.
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(f) Bring-down Comfort Letter. At Closing Time, the U.S.
Representatives shall have received from PricewaterhouseCoopers a letter,
dated as of Closing Time, to the effect that they reaffirm the statements
made in the letter furnished pursuant to subsection (e) of this Section,
except that the specified date referred to shall be a date not more than
three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject
only to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the
form of Exhibit B hereto signed by the persons listed on Schedule C
hereto.
(j) Recapitalization. Each share of capital stock of the
Company shall have been converted into 0.45 shares of Common Stock and
0.05 shares of class B common stock.
(k) Purchase of Initial International Securities.
Contemporaneously with the purchase by the U.S. Underwriters of the
Initial U.S. Securities under this Agreement, the International Managers
shall have purchased the Initial International Securities under the
International Purchase Agreement.
(l) Conditions to Purchase of U.S. Option Securities. In the
event that the U.S. Underwriters exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the U.S. Option
Securities, the representations and warranties of the Company contained
herein and the statements in any certificates furnished by the Company
hereunder shall be true and correct as of each Date of Delivery and, at
the relevant Date of Delivery, the U.S. Representatives shall have
received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the Chief Executive Officer, Chief Financial Officer
and Chief Operating Officer of the Company confirming that the
certificate delivered at the Closing Time pursuant to Section 5(d)
hereof remains true and correct as of such Date of Delivery.
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(ii) Opinion of Counsel for Company. The favorable opinion of Hale
and Dorr LLP, counsel for the Company, together with the favorable
opinion of Christopher D. Cerf, general counsel for the Company,
each in form and substance satisfactory to counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section
5(b) hereof.
(iii) Opinion of Counsel for U.S. Underwriters. The favorable
opinion of Debevoise & Plimpton, counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section
5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from
PricewaterhouseCoopers, in form and substance satisfactory to the
U.S. Representatives and dated such Date of Delivery,
substantially in the same form and substance as the letter
furnished to the U.S. Representatives pursuant to Section 5(f)
hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than two days
prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished
with such documents, certificates and opinions as they may require for
the purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy
of any of the representations or warranties, or the fulfillment of any of
the conditions, herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Securities as
herein contemplated shall be satisfactory in form and substance to the
U.S. Representatives and counsel for the U.S. Underwriters.
(n) Termination of Agreement. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of U.S. Option Securities on a Date of Delivery which is after
the Closing Time, the obligations of the several U.S. Underwriters to
purchase the relevant Option Securities, may be terminated by the U.S.
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
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SECTION 6. Indemnification.
(a) Indemnification of U.S. Underwriters. (1) The Company agrees to
indemnify and hold harmless each U.S. Underwriter and each person, if any, who
controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of any
applicable laws or regulations of foreign jurisdictions where Reserved
Securities have been offered and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in __ in connection with the
reservation and sale of the Reserved Securities to the employees,
directors and other persons with relationships with the Company who have
expressed an interest in purchasing the Reserved Securities or the
omission or alleged omission therefrom of a material fact necessary to
make the statements therein, when considered in conjunction with the
Prospectuses or preliminary prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof;
provided that (subject to Section 6(d) below) any such settlement is
effected with the written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in
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investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission
or in connection with any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense (x) to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto), and
(y) with respect to any preliminary prospectus, to the extent that the Company
shall sustain the burden of proving (i) that any such loss, claim, expense,
damage or liability of such U.S. Underwriter results from the fact that such
U.S. Underwriter sold Securities to a person as to whom there was not sent or
given, at or prior to the written confirmation of such sale, a copy of the U.S.
Prospectus (as then amended or supplemented) in any case where such delivery is
required by the 1933 Act, (ii) that the Company had previously furnished copies
thereof in sufficient quantities to such U.S. Underwriter and the loss, claim,
expense, damage or liability of such Underwriter results from an untrue
statement or omission of a material fact contained in the preliminary prospectus
that was corrected in the U.S. Prospectus and (iii) that sending such U.S.
Prospectus by the Closing Time to the person or persons asserting such loss,
liability, claim, damage or expense would have constituted a defense to the
claim asserted by such person or persons.
(2) In addition to and without limitation of the Company's obligation to
indemnify Merrill Lynch as an Underwriter, the Company also agrees to indemnify
and hold harmless the Independent Underwriter and each person, if any, who
controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
NASD in connection with the offering of the U.S. Securities.
(3) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of a U.S.
Underwriter or who controls an underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act and who, at the date of this
Agreement, is a director or officer of the Company or controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934
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Act, such indemnity agreement is subject to the undertaking of the Company in
the Registration Statement under Item 12.
(b) Indemnification of Company, Directors and Officers. Each U.S.
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection
(a)(1) of this Section, as incurred, but only with respect to untrue statements
or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary U.S.
prospectus or the U.S. Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such U.S. Underwriter through the U.S. Representatives expressly for
use in the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a)(1) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances; provided, that, if indemnity is
sought pursuant to Section 6(a)(2), then, in addition to the fees and expenses
of such counsel for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one counsel (in
addition to any local counsel) separate from its own counsel and that of the
other indemnified parties for the Independent Underwriter in its capacity as a
"qualified independent underwriter" and all persons, if any, who control the
Independent Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of 1934 Act in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances if, in the reasonable
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judgment of the Independent Underwriter, there may exist a conflict of interest
between the Independent Underwriter and the other indemnified parties. Any such
separate counsel for the Independent Underwriter and such control persons of the
Independent Underwriter shall be designated in writing by the Independent
Underwriter. No indemnifying party shall, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(ii) and Section 6(a)(1)(iii) effected without its written
consent if (i) such settlement is entered into more than 45 days after receipt
by such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of the employees, directors and other persons with
relationships with the Company who have expressed an interest in purchasing the
Reserved Securities to pay for and accept delivery of Reserved Securities which,
by the end of the first business day following the date of this Agreement, were
subject to a properly confirmed agreement to purchase.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the U.S. Underwriters on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law,
30
<PAGE> 35
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and of the U.S. Underwriters on the other hand in connection with
the statements or omissions, or in connection with any violation of the nature
referred to in Section 6(a)(1)(ii)(A) hereof, which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
U.S. Underwriters on the other hand in connection with the offering of the U.S.
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or,
if Rule 434 is used, the corresponding location on the Term Sheet, bear to the
aggregate initial public offering price of the U.S. Securities as set forth on
such cover.
The relative fault of the Company on the one hand and the U.S.
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission or any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof.
The Company and the U.S. Underwriters agree that Merrill Lynch will not
receive any additional benefits hereunder for serving as the Independent
Underwriter in connection with the offering and sale of the U.S. Securities.
The Company and the U.S. Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the U.S. Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which
31
<PAGE> 36
the U.S. Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such U.S.
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any U.S. Underwriter or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the U.S. Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the U.S. Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the U.S. Representatives, impracticable to market the Securities or
to enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the
32
<PAGE> 37
Nasdaq National Market, or if trading generally on the American Stock Exchange
or the New York Stock Exchange or in the Nasdaq National Market has been
suspended or materially limited, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices have been required, by any of said
exchanges or by such system or by order of the Commission, the NASD or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one or
more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery
to purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting U.S. Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of U.S. Securities to be purchased on such date, each of
the non-defaulting U.S. Underwriters shall be obligated, severally and
not jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of U.S. Securities to be purchased on such date, this Agreement
or, with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the U.S. Underwriters to purchase and of the
Company to sell the Option Securities to be purchased and sold on such
Date of Delivery shall terminate without liability on the part of any
non-defaulting U.S. Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not
33
<PAGE> 38
result in a termination of the obligation of the U.S. Underwriters to purchase
and the Company to sell the relevant U.S. Option Securities, as the case may be,
either the U.S. Representatives or the Company shall have the right to postpone
Closing Time or the relevant Date of Delivery, as the case may be, for a period
not exceeding seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
As used herein, the term "U.S. Underwriter" includes any person substituted for
a U.S. Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Syndicate
Operations, with a copy to Debevoise & Plimpton, 875 Third Avenue, New York, New
York, attention of Michael W. Blair; and notices to the Company shall be
directed to it at 515 Fifth Avenue, 15th Floor, New York, NY 10175, attention of
James L. Starr, Executive Vice President and Chief Financial Officer, with a
copy to Hale and Dorr LLP, 1455 Pennsylvania Avenue, N.W., Washington, D.C.
20004, attention of David Sylvester and Brent B. Siler.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the U.S. Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the U.S.
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the U.S. Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any U.S.
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
(WITHOUT GIVING EFFECT TO ITS PRINCIPLES OR RULES OF CONFLICT OF LAWS TO THE
EXTENT SUCH PRINCIPLES OR RULES WOULD REQUIRE OR PERMIT THE APPLICATION OF THE
LAWS OF ANOTHER JURISDICTION). SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME.
34
<PAGE> 39
SECTION 14. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
35
<PAGE> 40
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the U.S. Underwriters and the Company in accordance with its terms.
Very truly yours,
EDISON SCHOOLS INC.
By:
-----------------------------
Title:
Name:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
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.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
----------------------------
Authorized Signatory
For themselves and as U.S. Representatives of the
other U.S. Underwriters named in Schedule A hereto.
36
<PAGE> 41
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
------------------------ ----------
<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 ................................................................. __
=====
</TABLE>
Sch A-1
<PAGE> 42
SCHEDULE B
EDISON SCHOOLS INC.
__ Shares of Common Stock
(Par Value $.01 Per Share)
I. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $__.
II. The purchase price per share for the U.S. Securities to be
paid by the several U.S. Underwriters shall be $__, being an amount equal
to the initial public offering price set forth above less $__ per share;
provided that the purchase price per share for any U.S. Option Securities
purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any
dividends or distributions declared by the Company and payable on the
Initial U.S. Securities but not payable on the U.S. Option Securities.
Sch B-1
<PAGE> 43
SCHEDULE C
List of persons and entities
subject to lock-up
Benno C. Schmidt, Jr.
H. Christopher Whittle
Christopher D. Cerf
James L. Starr
John Chubb, Ph.D
Laura Eshbaugh
Michael Finnerty
Deborah McGriff, Ph.D
Manuel Rivera, Ph.D
Donald Sunderland
Cheryl Wilhoyte
Virginia Bonker
John W. Childs
Robert Finzi
John B. Fullerton
Janet A. Hickey
Klas Hillstrom
Jeffrey Leeds II
All other holders of any class of the
Company's capital stock.
All holders of options or warrants to purchase
shares of any class of the Company's capital
stock except [To come].
Sch C-1
<PAGE> 44
SCHEDULE D
[List of Management Agreements to Come]
<PAGE> 45
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectuses and to enter into and perform its obligations under the
U.S. Purchase Agreement and the International Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction listed on
Schedule A to this opinion.
(iv) The authorized, issued and outstanding capital stock of
record of the Company (a) was, as of June 30, 1999, as set forth in the
Prospectuses in the column entitled "Actual" under the caption
"Capitalization" (b) is, as of the date hereof, after giving effect to
the Recapitalization, as set forth in the Prospectus in the column
entitled "Pro Forma" under the caption "Capitalization", (except for
issuances subsequent to June 30, 1999, if any, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectuses or
pursuant to the exercise of convertible securities, options or warrants
referred to in the Prospectuses), and (c) after giving effect to the
transactions contemplated by this Agreement, the International Purchase
Agreement and the Registration Statement, will be as set forth in the
Prospectuses in the column entitled "Pro Forma as Adjusted" under the
caption "Capitalization" (except for issuances subsequent to June 30,
1999, if any, pursuant to reservations, agreements or employee benefit
plans referred to in the Prospectuses or pursuant to the exercise of
convertible securities, options or warrants referred to in the
Prospectuses); the shares of issued and outstanding capital stock have
been duly authorized and validly issued and are fully paid and
non-assessable; and none of the outstanding shares of capital stock of
record of the Company was issued in violation of any preemptive or other
similar rights of any securityholder of the Company arising under (a) the
Company's certificate of incorporation or by-laws (as in effect from time
A-1-1
<PAGE> 46
to time), (b) any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument filed as an exhibit to the
Registration Statement, (c) the Delaware General Corporation Law or (d)
to our knowledge, arising otherwise.
(v) The Securities to be purchased by the U.S. Underwriters and
the International Managers from the Company have been duly authorized for
issuance and sale to the Underwriters pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement, respectively, and,
when issued and delivered by the Company pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement, respectively, against
payment of the consideration set forth in the U.S. Purchase Agreement and
the International Purchase Agreement, will be validly issued and fully
paid and non-assessable and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(vi) The issuance of the Securities is not subject to any
preemptive or other similar rights of any securityholder of the Company
arising under (a) the Company's certificate of incorporation or by-laws
(as in effect on the date hereof), (b) any contract, indenture, mortgage,
loan agreement, note, lease or other agreement or instrument filed as an
exhibit to the Registration Statement, (c) the Delaware General
Corporation Law or (d) to our knowledge, arising otherwise.
(vii) To our knowledge, the Company does not have any
subsidiaries, and, to our knowledge, the Company does not have any equity
investments in other companies, except the Company's interest in APEX.
(viii) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by the
Company.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act;
any required filing of the Prospectuses pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and, to our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectuses and each amendment or
supplement to the Registration Statement and the Prospectuses as of their
respective effective or issue dates (other than the financial statements
and supporting schedules included therein or omitted therefrom,
A-1-2
<PAGE> 47
as to which we need express no opinion) complied as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xi) If Rule 434 has been relied upon, the Prospectuses were not
"materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it became
effective.
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and by-laws
of the Company and the requirements of the Nasdaq National Market.
(xiii) To our knowledge, there is not pending or threatened any
action, suit, proceeding, inquiry or investigation, to which the Company
or any school operated by the Company is a party, or to which the
property of the Company or any school operated by the Company is subject,
before or brought by any court or governmental agency or body, domestic
or foreign, which might reasonably be expected to result in a Material
Adverse Effect, or which might reasonably be expected to materially and
adversely affect the consummation of the transactions contemplated in the
U.S. Purchase Agreement and International Purchase Agreement or the
performance by the Company of its obligations thereunder.
(xiv) The information in the Prospectuses under "Summary -
Description of Capital Stock", "Description of Capital Stock", "Shares
Eligible for Future Sale", "Certain United States Tax Considerations for
Non-United States Holders", and in the first paragraph and the first and
third sentences in the second paragraph under "Management--Election of
Directors", the last sentence of "Management--Executive Officers and
Directors", and in the Registration Statement in the first two paragraphs
under Item 14, to the extent that it constitutes matters of law,
summaries of legal matters, the Company's charter and bylaws or legal
proceedings, or legal conclusions, has been reviewed by us and is correct
in all material respects.
(xv) To our knowledge, there are no statutes or regulations that
are required to be described in the Prospectuses that are not described
as required.
(xvi) To our knowledge, there are no franchises, contracts,
indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described
or referred to therein or filed or incorporated by reference as exhibits
thereto.
A-1-3
<PAGE> 48
(xvii) To our knowledge, the Company is not in violation of its
charter or by-laws.
(xviii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, domestic or foreign (other than under
the 1933 Act and the 1933 Act Regulations, which have been obtained, or
as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or required
in connection with the due authorization, execution and delivery of the
U.S. Purchase Agreement and the International Purchase Agreement or for
the offering, issuance, sale or delivery of the Securities.
(xix) The execution, delivery and performance of the U.S.
Purchase Agreement and the International Purchase Agreement and the
consummation of the transactions contemplated in the U.S. Purchase
Agreement, the International Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities) and
compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not and will not,
whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreements) under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease
or any other agreement or instrument filed as an exhibit to the
Registration Statement (except for such conflicts, breaches or defaults
or liens, charges or encumbrances that could not reasonably be expected
to have a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company,
applicable law, statute, rule or regulation or any judgment, order, writ
or decree specifically naming the Company, known to us, of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any of its properties, assets or
operations.
(xx) To our knowledge, except as described in the Prospectuses
under the caption "Shares Eligible for Future Sale--Registration Rights"
there are no persons with registration rights or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
(xxi) To our knowledge, except as disclosed in the Prospectuses,
there are no outstanding options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any
A-1-4
<PAGE> 49
contracts or commitments to issue or sell, shares of the Company's
capital stock or any such options, rights, convertible securities or
obligations.
(xxii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
1940 Act.
(xxiii) The Fifth Amendment filed by the Company with the
Secretary of State of the State of Delaware on October __, 1999 was duly
authorized by the Board of Directors and shareholders of the Company.
Each share of the Company's capital stock has been converted into 0.45
shares of Common Stock and 0.05 shares of class B common stock. The
Company has undertaken all necessary corporate action, including
obtaining the approval of the Board of Directors and the shareholders of
the Company, in order to execute, deliver and file the Sixth Amendment
with the Secretary of State of the State of Delaware immediately after
the closing of the offering, substantially in the form of Exhibit 3.1 to
the Registration Statement.
In connection with the preparation of the Registration Statement
and the Prospectuses, we have participated in conferences with officers
and representatives of the Company, counsel for the Underwriters and
independent accountants of the Company, at which conferences we made
inquiries of such persons and others and discussed the contents of the
Registration Statement and the Prospectuses. While the limitations
inherent in the independent verification of factual matters and the
character of determinations involved in the registration process are such
that we are not passing upon and do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectuses, subject to the foregoing and
based on such participation, inquiries and discussions, nothing has come
to our attention that would lead us to believe that the Registration
Statement or any amendment thereto, including the Rule 430A Information
and Rule 434 Information (if applicable) (except for financial statements
and schedules and other financial data included therein or omitted
therefrom and percentages derived from financial data included therein,
as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading or that the Prospectuses or any amendment or supplement
thereto (except for financial statements and schedules and other
financial data included therein or omitted therefrom and percentages
derived from financial data included therein, as to which we need make no
statement), as of their respective dates or at the Closing Time, included
or includes an untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
A-1-5
<PAGE> 50
Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law
(1991).
A-1-6
<PAGE> 51
Exhibit A-2
FORM OF OPINION OF THE GENERAL COUNSEL
FOR THE COMPANY TO BE DELIVERED
PURSUANT TO SECTION 5(b)(iii)
(i) All descriptions in the Prospectuses of and references in
the Prospectuses to franchises, contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments or documents or
transactions to which the Company is or was a party are accurate in all
material respects;
(ii) To my knowledge, no default by the Company exists in the
due performance or observance of any material obligation, agreement,
covenant or condition contained in any Management Agreement or any other
contract, indenture, mortgage, loan agreement, note, lease or other
agreement or instrument that is described or referred to in the
Registration Statement or the Prospectuses or filed or incorporated by
reference as an exhibit to the Registration Statement.
(iii) The execution, delivery and performance of the U.S.
Purchase Agreement and the International Purchase Agreement and the
consummation of the transactions contemplated in the U.S. Purchase
Agreement, the International Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities, and
compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not and will not,
whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreements) under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to any Management
Agreement or other contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument filed
as an exhibit to the Registration Statement or otherwise known to me
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that could not reasonably be expected to have a Material
Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company, applicable law,
statute, rule, regulation, judgment, order, writ or decree, known to me,
of any government, government
<PAGE> 52
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any of its properties, assets or operations.
(iv) The execution, delivery and performance of the U.S.
Purchase Agreement and the International Purchase Agreement and the
consummation of the transactions contemplated in the U.S. Purchase
Agreement, the International Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities, and
compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not and will not
result in any violation of the ESEA, the IDEA, including any rules or
regulations promulgated pursuant to such laws, or any other federal,
state or local statute pertaining to the authorization to operate public
schools or eligibility for funding under federal, state or local
programs.
(v) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, the USDE or, to
my knowledge, any state agency under any state statute pertaining to
authorization to operate public schools or eligibility for funding under
federal or state programs is necessary or required in connection with the
due authorization, execution and delivery of the U.S. Purchase Agreement
and the International Purchase Agreement or for the offering, issuance,
sale or delivery of the Securities.
(vi) To my knowledge, the Company and each of the schools
operated by it possess all permits, licenses, approvals, consents and
other authorizations required, including without limitation
authorizations required (i) to participate in federal funding programs
under the ESEA and the IDEA to the extent the Company or such school
currently receives material funding thereunder, (ii) to operate charter
schools under state charter statutes, and (iii) to receive funding under
federal, state or local education laws, statutes, rules, regulations,
standards, guides and orders to the extent the Company or such school
currently receives material funding thereunder (collectively,
"Governmental Licenses"), issued by the appropriate federal, state or
local regulatory agencies or bodies necessary to conduct the business now
operated by them, except where the failure to possess such Governmental
Licenses could not reasonably be expected to have a material Adverse
Effect; the Company and, to my knowledge each of the schools operated by
it, is in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply could not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect could not have a
Material Adverse Effect; and, to my knowledge, the Company
A-2-2
<PAGE> 53
has not received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
could result in a Material Adverse Effect.
(vii) To my knowledge, there is not pending or threatened any
action, suit, proceeding, inquiry or investigation, to which the Company
or any school operated by the Company is a party, or to which the
property of the Company or any school operated by the Company is subject,
before or brought by the USDE, the DOJ, the EEOC, state and local
educational agencies (including school boards and public school
districts) or charter school boards which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the consummation of the
transactions contemplated in the U.S. Purchase Agreement and
International Purchase Agreement or the performance by the Company of its
obligations thereunder.
(viii) To my knowledge, the Company and each of the schools
operated by the Company are in compliance with all applicable education
laws, statutes, rules, regulations, standards, guides or orders
administered, issued or implemented by any federal, state or local
government or any agency or subdivision of any of the foregoing,
including, without limitation, the USDE, the DOJ, the EEOC, state and
local education agencies (including school boards and public school
districts) or charter school boards, except where the failure to be in
compliance would not reasonably be expected to have a Material Adverse
Effect. To my knowledge, neither the Company nor any of the schools
operated by it has been advised that either the Company or any of the
schools operated by the Company is not conducting business in compliance
with all applicable federal, state and local education laws, statutes,
rules, regulations, standards, guides and orders, except where failure to
be so in compliance could not reasonably be expected to have a Material
Adverse Effect.
(ix) The information in the Prospectuses under "Risk
Factors--The operation of our charter schools depends on the maintenance
of the underlying charter grant", "Risk Factors--Risks Related to
Governmental Regulation of the Education Industry and Government
Subsidies", "Business--Government Laws and Regulations", to the extent
that it constitutes matters of law, summaries of legal matters, or legal
conclusions (collectively "Education Matters"), has been reviewed by me
and is correct in all material respects.
A-2-3
<PAGE> 54
(x) Neither the Company, nor any of the schools operated by the
Company is subject to any requirements of, or regulation under, the
Higher Education Act of 1965, as amended.
Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law
(1991).
A-2-4
<PAGE> 55
Form of lock-up from directors, officers or other stockholders pursuant to
Section 5(i)
Exhibit B
__, 1999
MERRILL LYNCH & CO.
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.
as U.S. Representative(s) of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Edison Schools Inc.
Dear Sirs:
The undersigned, a stockholder, officer or director of Edison Schools
Inc., a Delaware corporation (the "Company"), understands that Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Banc of America Securities LLC, Credit Suisse First Boston Corporation,
Donaldson, Lufkin & Jenrette Securities Corporation, J.P. Morgan Securities Inc.
propose to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement")
with the Company providing for the public offering of shares (the "Securities")
of the Company's common stock, par value $.01 per share (the "Common Stock"). In
recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder, officer or director of the Company, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned agrees with each underwriter to be named in the
U.S. Purchase Agreement that, during a period of 180 days from the date of the
U.S. Purchase Agreement, the undersigned will not, without the prior written
consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell,
contract to sell, sell any option or contract to
B-5
<PAGE> 56
purchase, purchase any option or contract to sell, grant any option, right or
warrant for the sale of, or otherwise dispose of or transfer any shares of the
Company's Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise.
Notwithstanding the foregoing restrictions on transfer, the undersigned
shall be permitted to make the following transfers: (i) transfers made by gift,
will or intestacy, provided the donee thereof agrees in writing to be bound by
the terms hereof; (ii) transfers to the transferor's affiliates, as such term is
defined in Rule 405 promulgated under the Securities Act, provided that each
transferee agrees in writing to be bound by the terms hereof; (iii) transfers
made with prior written consent of Merrill Lynch; and (iv) in the event the
undersigned is an individual, transfers to his or her immediate family or to a
trust the beneficiaries of which are exclusively the undersigned or a member or
members of his or her immediate family, provided that any transferee agrees in
writing to be bound by the terms hereof.
Very truly yours,
Signature:
--------------------------
Print Name:
-------------------------
B-6
<PAGE> 57
Exhibit C-1
FORM OF OPTION LOCK-UP PURSUANT TO SECTION (1)(A)(XXXII)
[To come]
C-1
<PAGE> 1
================================================================================
EXHIBIT 1.2
EDISON SCHOOLS INC.
(a Delaware corporation)
__ Shares of Class A Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated: __, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERNATIONAL PURCHASE AGREEMENT...............................................................................................1
SECTION 1. Representations and Warranties.....................................................................4
(a) Representations and Warranties by the Company .....................................................4
(i) Compliance with Registration Requirements.....................................................4
(ii) Independent Accountants......................................................................5
(iii) Financial Statements........................................................................6
(iv) No Material Adverse Change in Business.......................................................6
(v) Good Standing of the Company..................................................................6
(vi) No Subsidiaries..............................................................................6
(vii) Capitalization..............................................................................7
(viii) Authorization of Agreement.................................................................7
(ix) Authorization and Description of Securities..................................................7
(x) Absence of Defaults and Conflicts.............................................................8
(xi) Absence of Labor Dispute.....................................................................9
(xii) Absence of Proceedings......................................................................9
(xiii) Accuracy of Exhibits.......................................................................9
(xiv) Possession of Intellectual Property.........................................................9
(xv) Absence of Further Requirements.............................................................10
(xvi) Possession of Licenses and Permits.........................................................10
(xvii) Compliance with Statutes, Rules and Regulations, etc......................................11
(xviii) Title to Property........................................................................11
(xix) Investment Company Act.....................................................................12
(xx) Environmental Laws..........................................................................12
(xxi) Registration Rights........................................................................13
(xxii) Apex Online Learning Inc..................................................................13
(xxiii) Management Agreements....................................................................13
(xxiv) Insurance.................................................................................13
(xxv) Tax Returns and Payment of Taxes...........................................................14
(xxvi) No Stabilization or Manipulation..........................................................14
(xxvii) Certain Transactions.....................................................................14
(xxviii) Statistical and Market Data.............................................................15
(xxix) Accounting and other Controls.............................................................15
(xxx) Year 2000 Readiness........................................................................15
(xxxi) Recapitalization..........................................................................15
(xxxii) Option Lock-Ups. ......................................................................16
(b) Officer's Certificates..................................................... ......................16
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 2. Sale and Delivery to International Managers; Closing .............................................16
(a) Initial Securities................................................................................16
(b) Option Securities.................................................................................16
(c) Payment...........................................................................................17
(d) Denominations; Registration.......................................................................17
(e) Appointment of Qualified Independent Underwriter. ................................................18
SECTION 3. Covenants of the Company..........................................................................18
(a) Compliance with Securities Regulations and Commission Requests....................................18
(b) Filing of Amendments..............................................................................18
(c) Delivery of Registration Statements...............................................................19
(d) Delivery of Prospectuses..........................................................................19
(e) Continued Compliance with Securities Laws.........................................................19
(f) Blue Sky Qualifications...........................................................................20
(g) Rule 158..........................................................................................20
(h) Use of Proceeds...................................................................................20
(i) Listing...........................................................................................20
(j) Restriction on Sale of Securities.................................................................21
(k) Reporting Requirements............................................................................21
(l) Compliance with NASD Rules........................................................................22
(m) Compliance with Rule 463..........................................................................22
(n) Filing of Sixth Amended and Restated Certificate of
Incorporation. ...................................................................................22
SECTION 4. Payment of Expenses...............................................................................22
(a) Expenses..........................................................................................22
(b) Termination of Agreement..........................................................................23
SECTION 5. Conditions of International Managers' Obligations ................................................23
(a) Effectiveness of Registration Statement...........................................................23
(b) Opinion of Counsel for Company....................................................................23
(c) Opinion of Counsel for International Managers ....................................................24
(d) Officers' Certificate.............................................................................24
(e) Accountant's Comfort Letter.......................................................................24
(f) Bring-down Comfort Letter.........................................................................25
(g) Approval of Listing...............................................................................25
(h) No Objection......................................................................................25
(i) Lock-up Agreements................................................................................25
(k) Purchase of Initial U.S. Securities...............................................................25
(l) Conditions to Purchase of International Option Securities.........................................25
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
(m) Additional Documents..............................................................................26
(n) Termination of Agreement..........................................................................26
SECTION 6. Indemnification...................................................................................27
(a) Indemnification of International Managers.........................................................27
(b) Indemnification of Company, Directors and Officers ...............................................29
(c) Actions against Parties; Notification.............................................................29
(d) Settlement without Consent if Failure to Reimburse ...............................................30
(e) Indemnification for Reserved Securities...........................................................30
SECTION 7. Contribution......................................................................................31
SECTION 8. Representations, Warranties and Agreements to Survive Delivery....................................32
SECTION 9. Termination of Agreement..........................................................................32
(a) Termination; General..............................................................................32
(b) Liabilities.......................................................................................33
SECTION 10. Default by One or More of the International Managers .............................................33
SECTION 11. Notices...........................................................................................34
SECTION 12. Parties...........................................................................................34
SECTION 13. GOVERNING LAW AND TIME............................................................................35
SECTION 14. Effect of Headings................................................................................35
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
SCHEDULES
Schedule A - List of Underwriters...................................................................Sch A-1
Schedule B - Pricing Information....................................................................Sch B-1
Schedule C - List of Persons subject to Lock-up.....................................................Sch C-1
Schedule D - List of Management Agreements..........................................................Sch D-1
EXHIBITS
Exhibit A-1 - Form of Opinion of Company's Counsel....................................................A-1-1
Exhibit A-2 - Form of Opinion of Company's
Special Regulatory Counsel.............................................................A-2-1
Exhibit A-3 - Form of Opinion of Company's
General Counsel........................................................................A-3-1
Exhibit B-1 - Form of Lock-up Letter....................................................................B-1
Exhibit C - Form of Option Lock-up Pursuant to
Section (1)(A)(Xxxii)...... .............................................................C-1
</TABLE>
iv
<PAGE> 6
EDISON SCHOOLS INC.
(a Delaware corporation)
__ Shares of Class A Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
__, 1999
MERRILL LYNCH INTERNATIONAL
BANK OF AMERICA INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
as Lead Managers of the several International Managers
c/o Merrill Lynch International
International Ropemaker Place
25 Ropemaker Street
London EC2Y GLY
England
Ladies and Gentlemen:
Edison Schools Inc., a Delaware corporation (the "Company"), confirms
its agreement with Merrill Lynch International ("Merrill Lynch") and each of the
other International Managers named in Schedule A hereto (collectively, the
"International Managers", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch, Bank of America International Limited, Credit Suisse First Boston
(Europe) Limited, Donaldson, Lufkin & Jenrette International and J.P. Morgan
Securities Ltd. are acting as representatives (in such capacity, the "Lead
Managers"), with respect to the issue and sale by the Company and the purchase
by the International Managers, acting severally and not jointly, of the
respective numbers of shares of class A common stock, par value $.01 per share,
of the Company ("Common Stock") set forth in said Schedule A, and with respect
to the grant by the Company to the International Managers, acting severally and
not jointly, of the option described in Section 2(b) hereof to purchase all or
any part of __
<PAGE> 7
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid __ shares of Common Stock (the "Initial International Securities") to
be purchased by the International Managers and all or any part of the __ shares
of Common Stock subject to the option described in Section 2(b) hereof (the
"International Option Securities") are hereinafter called, collectively, the
"International Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of an aggregate of __ shares of Common Stock (the
"Initial U.S. Securities") through arrangements with certain underwriters in the
United States and Canada (the "U.S. Underwriters") for which Merrill Lynch &
Co., 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 (the "U.S. Representatives") and the grant by the Company to the
U.S. Underwriters, acting severally and not jointly, of an option to purchase
all or any part of the U.S. Underwriters' pro rata portion of up to __
additional shares of Common Stock solely to cover overallotments, if any (the
"U.S. Option Securities" and, together with the International Option Securities,
the "Option Securities"). The Initial U.S. Securities and the U.S. Option
Securities are hereinafter called the "U.S. Securities". It is understood that
the Company is not obligated to sell and the International Managers are not
obligated to purchase, any Initial International Securities unless all of the
Initial U.S. Securities are contemporaneously purchased by the U.S.
Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities, and the U.S. Securities are
hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (in such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to make
a public offering of the International Securities as soon as the Lead Managers
deem advisable after this Agreement has been executed and delivered.
The Company and the International Managers agree that up to __ shares
of the Initial International Securities to be purchased by the International
Managers and that up to __ shares of the Initial U.S. Securities to be purchased
by the U.S. Underwriters (collectively, the "Reserved Securities") shall be
reserved for sale by the Underwriters to certain eligible
2
<PAGE> 8
employees and persons having business relationships with the Company, as part of
the distribution of the Securities by the Underwriters, subject to the terms of
this Agreement, the applicable rules, regulations and interpretations of the
National Association of Securities Dealers, Inc. and all other applicable laws,
rules and regulations. To the extent that such Reserved Securities are not
orally confirmed for purchase by such eligible employees and persons having
business relationships with the Company by the end of the first business day
after the date of this Agreement, such Reserved Securities may be offered to the
public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-84177) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form of
U.S. Prospectus"). The Form of U.S. Prospectus is identical to the Form of
International Prospectus, except for the front cover and back cover pages and
the information under the caption "Underwriting". The information included in
any such prospectus or in any such Term Sheet, as the case may be, that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of International Prospectus and Form of U.S.
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final Form of
International Prospectus and the final Form of U.S. Prospectus in the forms
first furnished to the Underwriters for use in connection with the offering of
the Securities are herein called the "International Prospectus" and the "U.S.
3
<PAGE> 9
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "International Prospectus" and "U.S. Prospectus" shall
refer to the preliminary International Prospectus dated October 19, 1999 and
preliminary U.S. Prospectus dated October 19, 1999, respectively, each together
with the applicable Term Sheet and all references in this Agreement to the date
of such Prospectuses shall mean the date of the applicable Term Sheet. For
purposes of this Agreement, all references to the Registration Statement, any
preliminary prospectus, the International Prospectus, the U.S. Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
On October __, 1999, the Company filed its fifth amended and restated
Certificate of Incorporation (the "Fifth Amendment"), with the Secretary of
State of the State of Delaware. The Fifth Amendment provides for the automatic
conversion (the "Recapitalization"), immediately prior to the closing of the
offering, of each outstanding share of the Company's capital stock into 0.45
shares of Common Stock and 0.05 shares of the Company's class B common stock,
par value $.01 per share ("Class B common stock"). Immediately after the closing
of the offering, the Company will file its sixth amended and restated
Certificate of Incorporation (the "Sixth Amendment"), substantially in the form
filed as exhibit 3.1 to the Registration Statement.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each International Manager as of the date hereof, as
of the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b), hereof and agrees with each
International Manager, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any International
Option Securities are purchased, at the Date of Delivery), the
Registration Statement, the Rule 462(b) Registration Statement and
4
<PAGE> 10
any amendments and supplements thereto complied and will comply in all
material respects with the requirements of the 1933 Act and the 1933
Act Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and
the Prospectuses, any preliminary prospectuses and any supplement
thereto or prospectus wrapper prepared in connection therewith, at
their respective times of issuance and at the Closing Time, complied
and will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectuses and such
preliminary prospectuses, as amended or supplemented, if applicable,
are distributed in connection with the offer and sale of Reserved
Securities. Neither of the Prospectuses nor any amendments or
supplements thereto (including any prospectus wrapper), at the time the
Prospectuses or any amendments or supplements thereto were issued and
at the Closing Time (and, if any International Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
If Rule 434 is used, the Company will comply with the requirements of
Rule 434 and the Prospectuses shall not be "materially different", as
such term is used in Rule 434, from the prospectuses included in the
Registration Statement at the time it became effective. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
International Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by any International
Manager through the Lead Managers expressly for use in the Registration
Statement or the International Prospectus.
Each preliminary prospectus and the prospectuses filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectuses
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included
in the Registration Statement and the Prospectuses, together with the
related schedules and notes,
5
<PAGE> 11
present fairly the financial position of the Company at the dates
indicated and the statement of operations, stockholders' equity and
cash flows of the Company for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved. The selected financial and other data and the
summary financial and operating data included in the Prospectuses
present fairly the information shown therein and, in the cases of the
selected financial data and the summary financial data, have been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The pro forma
financial information (including the proforma as adjusted financial
information) included in the Registration Statement and the
Prospectuses present fairly the information shown therein and have been
properly compiled on the bases described therein, and the adjustments
used therein are appropriate to give effect to the transactions and
circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company, whether or not arising in the ordinary course
of business (a "Material Adverse Effect"), (B) there have been no
transactions entered into by the Company other than those in the
ordinary course of business, which are material with respect to the
Company, and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing could not reasonably be expected to result in a Material
Adverse Effect.
(vi) No Subsidiaries. The Company has no subsidiaries.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company (a) as of June 30, 1999, was as set forth
in the Prospectuses in the column entitled "Actual" under the caption
"Capitalization", (b) is, as of the date
6
<PAGE> 12
hereof, after giving effect to the Recapitalization, as set forth in
the Prospectuses in the column entitled "Pro Forma" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to
this Agreement, pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectuses or pursuant to the
exercise of convertible securities, options or warrants referred to in
the Prospectuses), and (c) after giving effect to the transactions
contemplated by this Agreement, the International Purchase Agreement
and the Registration Statement, will be as set forth in the
Prospectuses in the column entitled "Pro Forma as Adjusted" under the
caption "Capitalization" (except for subsequent issuances, if any,
pursuant to this Agreement, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectuses or pursuant to
the exercise of convertible securities, options or warrants referred to
in the Prospectuses). The shares of issued and outstanding capital
stock of the Company have been duly authorized and validly issued and
are fully paid and non-assessable; none of the outstanding shares of
capital stock of the Company was issued in violation of the preemptive
or other similar rights of any securityholder of the Company. The
shares of issued and outstanding capital stock of the company have been
issued in compliance, in all material respects, with all federal and
state securities laws. Except as disclosed in the Prospectuses, there
are no outstanding options or warrants to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities
or obligations convertible into, or any contracts or commitments to
issue or sell, shares of the Company's capital stock or any such
options, warrants, rights, convertible securities or obligations. The
description of the Company's stock option and purchase plans and the
options or other rights granted and exercised thereunder set forth in
the Prospectuses accurately and fairly describe, in all material
respects, the information required to be shown with respect to such
plans, arrangements, options and rights.
(viii) Authorization of Agreement. This Agreement and the U.S.
Purchase Agreement have been duly authorized, executed and delivered by
the Company.
(ix) Authorization and Description of Securities. The
Securities to be purchased by the International Managers and the U.S.
Underwriters from the Company have been duly authorized for issuance
and sale to the International Managers pursuant to this Agreement and
the U.S. Underwriters pursuant to the U.S. Purchase Agreement,
respectively, and, when issued and delivered by the Company pursuant to
this Agreement and the U.S. Purchase Agreement, respectively, against
payment of the consideration set forth herein and the U.S. Purchase
Agreement, respectively, will be validly issued, fully paid and
non-assessable; the Common Stock conforms to all statements relating
thereto contained in the Prospectuses and such description conforms to
the rights set forth in the instruments defining the same; no holder of
the Securities will be subject to personal liability by reason of being
such a
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<PAGE> 13
holder; and the issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the
Company.
(x) Absence of Defaults and Conflicts. The Company is not in
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or other agreement or instrument to which
the Company is a party or by which it may be bound, or to which any of
the property or assets of the Company is subject (collectively,
"Agreements and Instruments") except for such defaults under Agreements
and Instruments that could not reasonably be expected to result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the U.S. Purchase Agreement and the consummation of
the transactions contemplated in this Agreement, the U.S. Purchase
Agreement and in the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use of
Proceeds") and compliance by the Company with its obligations under
this Agreement and the U.S. Purchase Agreement have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
could not reasonably be expected to result in a Material Adverse
Effect), nor will such action result in any violation of (a) the
provisions of the charter or by-laws of the Company or (b) any
applicable law, statute, rule, regulation, judgment, standard, guide,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
of its assets, properties or operations, including, without limitation,
the Elementary and Secondary Education Act of 1965, as amended, and all
rules and regulations promulgated thereunder (collectively, the
"ESEA"), the Individuals with Disabilities in Education Act and all
rules and regulations promulgated thereunder (collectively, the "IDEA")
and any other federal, state or local law, statute, rule, regulation,
standard, guide or order pertaining to the authorization to operate
public schools or the eligibility to receive funding under federal,
state or local programs related to the operation of public schools,
except, in the case of clause (b) above, for such violations which
could not reasonably be expected to result in a Material Adverse
Effect. As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf)
the right to require the repurchase, redemption or repayment of all or
a portion of such indebtedness by the Company.
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(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company (including, without limitation, all
principals, teachers and other personnel employed by or working for or
in any school operated by the Company) exists or, to the knowledge of
the Company, is imminent, and the Company is not aware of any existing
or imminent labor disturbance by the employees of any of its principal
suppliers, manufacturers, customers or contractors, which, in any of
the foregoing cases, may reasonably be expected to result in a Material
Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign (including, without
limitation, any proceeding before the United States Department of
Education (the"USDE"), the United States Department of Justice (the
"DOJ"), the Equal Employment Opportunity Commission (the "EEOC"), state
and local educational agencies (including school boards and public
school districts) or charter school boards), now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company
or any school operated by the Company, which is required to be
disclosed in the Registration Statement (other than as disclosed
therein), or which could reasonably be expected to result in a Material
Adverse Effect, or which could materially and adversely affect the
consummation of the transactions contemplated in this Agreement and the
U.S. Purchase Agreement or the performance by the Company of its
obligations hereunder or thereunder; the aggregate of all pending legal
or governmental proceedings to which the Company or any school operated
by the Company is a party or of which any of their respective property
or assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectuses or to be filed as exhibits thereto which
have not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company and
each of the schools operated by the Company own or possess, or can
acquire on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks, trade names or other
intellectual property (including, without limitation, the right to use
Success for All, a K-5 reading program developed by Johns Hopkins
University and the mathematics programs developed by the University of
Chicago School Mathematics Project) (collectively, "Intellectual
Property") necessary to carry on the business now operated by them, and
neither the Company nor, to the knowledge of
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<PAGE> 15
the Company, any of the schools operated by it has received any notice
or is not otherwise aware of any infringement of or conflict with
asserted rights of others with respect to any Intellectual Property or
of any facts or circumstances which could render any Intellectual
Property invalid or inadequate to protect the interest of the Company
therein, and which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities under this Agreement and the U.S. Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement and the U.S. Purchase Agreement, except (i) such as have been
already obtained or as may be required under the 1933 Act or the 1933
Act Regulations and foreign or state securities or blue sky laws and
(ii) such as have been obtained under the laws and regulations of
jurisdictions outside the United States in which the Reserved
Securities are offered. Neither the Company nor any of the schools
operated by the Company is subject to any requirements of, or
regulation under, the Higher Education Act of 1965, as amended.
(xvi) Possession of Licenses and Permits. The Company and each
of the schools operated by it possess such permits, licenses,
approvals, consents and other authorizations, (including, without
limitation, authorizations required (i) to participate in federal,
state and local funding programs under the ESEA and the IDEA to the
extent the Company or such school currently receives material funding
thereunder, (ii) to operate the charter schools currently operated by
it, and (iii) to receive funding under federal, state and local
education laws, statutes, rules, regulations, standards, guides or
orders to the extent the Company or such school currently receives
material funding thereunder)(collectively, "Governmental Licenses"),
issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct the business now operated by
them, except where the failure to possess such Governmental Licenses
could not reasonably be expected to have a Material Adverse Effect; the
Company and, to the knowledge of the Company, each of the schools
operated by the Company, is in compliance with the terms and conditions
of all such Governmental Licenses, except where the failure so to
comply could not, singly or in the aggregate, reasonably be expected to
have a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to
be in full force and effect could not reasonably be expected to have a
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<PAGE> 16
Material Adverse Effect; and neither the Company nor, to the knowledge
of the Company, any of the schools operated by it has received any
notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, could reasonably
be expected to result in a Material Adverse Effect.
(xvii) Compliance with Statutes, Rules and Regulations, etc.
The Company and each of the schools operated by it are in compliance
with all applicable laws, statutes, rules, regulations, standards,
guides or orders (including, without limitation, ESEA, IDEA, Family
Education Rights and Privacy Act of 1974, as amended, Gun-Free Schools
Act of 1994, Section 504 of the Rehabilitation Act of 1973, Americans
with Disabilities Act of 1990, Title VI and Title VII of the Civil
Rights Act of 1964, Title IX of the Education Amendments of 1972, Age
Discrimination Act of 1975, Age Discrimination in Employment Act of
1967, Equal Pay Act of 1963 and the Drug-Free Workplace Act of 1988)
administered, issued or implemented by any federal, state or local
government or any agency or subdivision of any of the foregoing,
including, without limitation, the USDE, the DOJ, the EEOC, state and
local education agencies (including school boards and public school
districts) or charter school boards, to the extent applicable, except
where failure to be so in compliance could not reasonably be expected
to have a Material Adverse Effect. The Company has not been advised,
and has no reason to believe, that either it or any of the schools
operated by the Company is not conducting business in compliance with
all applicable laws, statutes, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable federal, state and local laws, rules and
regulations; except where failure to be so in compliance could not
reasonably be expected to have a Material Adverse Effect.
(xviii) Title to Property. The Company has good and marketable
title to all real property owned by the Company and good title to all
other properties owned by it, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the
Prospectuses or (b) do not, singly or in the aggregate, materially
affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company; and all
of the leases and subleases material to the business of the Company and
the schools operated by it, and under which the Company or any of the
schools operated by it holds properties described in the Prospectuses,
are in full force and effect, and neither the Company nor any school
operated by it has any notice of any claim of any sort that has been
asserted by anyone adverse to the rights of the Company or any of the
schools operated by it under any of the leases or subleases mentioned
above, or affecting or questioning the rights of the Company or any of
the schools operated by it to the continued possession of the
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<PAGE> 17
leased or subleased premises under any such lease or sublease, which
claim, if the subject of an unfavorable decision, ruling or finding,
could reasonably be expected to result in a Material Adverse Effect.
(xix) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectuses will not be, an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended (the "1940
Act").
(xx) Environmental Laws. Except as described in the
Registration Statement and except as could not, singly or in the
aggregate, be reasonably expected to result in a Material Adverse
Effect, (A) neither the Company nor, to the knowledge of the Company,
any of the schools operated by it is in violation of any federal,
state, local or foreign law, statute, rule, regulation, standard,
guide, ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to
pollution or protection of human health or safety, the environment
(including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), natural resources or
wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances
(including, without limitation, asbestos, polychlorinated biphenyls,
urea-formaldehyde insulation, petroleum or petroleum products)
(collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling, release or threatened release of Hazardous Materials
(collectively, "Environmental Laws"), (B) the Company and the schools
operated by it have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with
their requirements, (C) there are no pending or threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against
the Company or any of the schools operated by it, and (D) there are no
events or circumstances that might reasonably be expected to form the
basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against
or affecting the Company or the schools operated by it relating to
Hazardous Materials or any Environmental Laws.
(xxi) Registration Rights. Except as disclosed in the
Prospectuses under the caption "Shares Eligible for Future
Sale-Registration Rights", there are no persons with registration
rights or other similar rights to have any securities registered
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pursuant to the Registration Statement or otherwise registered by the
Company under the 1933 Act.
(xxii) Apex Online Learning Inc. The Company owns 1,000,000
shares of Series B preferred stock, par value $0.001 per share, of Apex
Online Learning Inc., a Washington corporation ("APEX"), which
currently represents approximately 16.5% of all of the issued and
outstanding capital stock of APEX, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity. The
Company does not own the equity securities or similar interests of any
other entity.
(xxiii) Management Agreements. The Company has provided to
Debevoise & Plimpton, counsel for the Underwriters, true, correct and
complete copies of each of the management agreements and school
charters to which the Company or any of the schools operated by the
Company is a party or pursuant to which any such school is operated, as
amended (collectively, the "Management Agreements"), none of which have
been subsequently amended, supplemented or modified, and each of the
Management Agreements is in full force and effect on the date hereof,
and, neither the Company, nor, to the knowledge of Company, any other
party is in default in the performance or observation of any material
obligation, agreement, covenant or condition contained therein.
Schedule D hereto is a true, correct and complete list of the
Management Agreements.
(xxiv) Insurance. The Company and each of the schools operated
by it and, to the knowledge of the Company, the school districts and
charter school boards responsible for supervising the schools operated
by the Company, are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the education industry; neither the Company,
nor any of the schools operated by it nor, to the knowledge of the
Company, any school district or charter school board responsible for
supervising any school operated by the Company, has been refused any
insurance coverage sought or applied for; and the Company does not have
any reason to believe that it or any of the schools operated by it or
any school district or charter school board responsible for supervising
any school operated by the Company, will not be able to renew its
existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its operations except where the failure to renew or maintain
such coverage could not reasonably be expected to result in a Material
Adverse Effect. The officers and directors of the Company are insured
by insurers of recognized financial responsibility against such losses
and risks and in such amounts as the Company believes are prudent and
customary for officers' and directors' liability insurance of a public
company and as the Company believes could cover claims which could
reasonably be expected to be made in connection with the
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<PAGE> 19
issuance of the Securities; and the Company has no reason to believe
that it will not be able to renew its existing directors' and officers'
liability insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
cover its officers and directors.
(xxv) Tax Returns and Payment of Taxes. The Company has timely
filed all federal, state, local and foreign tax returns that are
required to be filed or has duly requested extensions thereof and all
such tax returns are true, correct and complete, except to the extent
that any failure to file or request an extension, or any incorrectness
could not reasonably be expected to result in a Material Adverse
Effect. The Company has timely paid all taxes shown as due on such
filed tax returns (including any related assessments, fines or
penalties), except to the extent that any such taxes are being
contested in good faith and by appropriate proceedings, or to the
extent that any failure to pay could not reasonably be expected to
result in a Material Adverse Effect; and adequate charges, accruals and
reserves have been provided for in the financial statements referred to
in Section 1(a)(iv) above in accordance with GAAP in respect of all
Federal, state, local and foreign taxes for all periods as to which the
tax liability of the Company has not been finally determined or remains
open to examination by applicable taxing authorities. The Company is
not a "United States real property holding corporation" within the
meaning of Section 897(c)(2) of the Internal Revenue Code of 1986, as
amended (the "Code").
(xxvi) No Stabilization or Manipulation. Neither the Company
nor, to the best of its knowledge, any of its directors, officers or
affiliates has taken or will take, directly or indirectly, any action
designed to, or that might be reasonably expected to, cause or result
in stabilization or manipulation of the price of the Securities in
violation of Regulation M under the Securities Exchange Act of 1934, as
amended (the "1934 Act").
(xxvii) Certain Transactions. Except as disclosed in the
Prospectuses, there are no outstanding loans, advances, or guarantees
of indebtedness by the Company to or for the benefit of any of the
executive officers or directors of the Company or any of the members of
the families of any of them that would be required to be so disclosed
under the 1933 Act, the 1933 Act Regulations or Form S-1.
(xxviii) Statistical and Market Data. The statistical and
market-related data included in the Prospectuses are derived from
sources which the Company reasonably and in good faith believes to be
accurate, reasonable and reliable and agrees with the sources from
which it was derived.
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(xxix) Accounting and other Controls. The Company has
established a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions were, are and will
be executed in accordance with management's general or specific
authorization; (ii) transactions were, are and will be recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets was, is and will be
permitted only in accordance with a management's general or specific
authorizations; and (iv) the recorded accountability for assets was, is
and will be compared with existing assets at reasonable intervals and
appropriate action was, is and will be taken with respect to any
differences.
(xxx) Year 2000 Readiness. The Company has, to the extent
disclosed in the Prospectus, reviewed its operations and those of the
schools operated by it and of any third party with which the Company or
any of the schools operated by the Company has a material relationship
to evaluate the extent to which the business or operations of the
Company or any of the schools operated by it will be affected by the
Year 2000 Problem. Other than as set forth in the Prospectuses, the
Company does not anticipate incurring operating expenses or costs
material to the financial position or results of operations of the
Company and the schools operated by it in connection with the actions
that the Company currently believes are necessary to address the Year
2000 Problem. As a result of the aforementioned review, the Company has
no reason to believe, and does not believe, that the Year 2000 Problem
could have a Material Adverse Effect. The "Year 2000 Problem" as used
herein means any risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000.
(xxxi) Recapitalization. On October __, 1999 the Company filed
the Fifth Amendment with the Secretary of State of the State of
Delaware, which provides for the Recapitalization and which has been
duly authorized by the Board of Directors and shareholders of the
Company. The Company has undertaken all necessary corporate action,
including obtaining the approval of the Board of Directors and the
shareholders of the Company, in order to file the Sixth Amendment with
the Secretary of State of the State of Delaware immediately after the
closing of the offering.
(xxxii) Option Lock-Ups. The Company has received a written
180-day lock-up agreement from each holder of an option or options to
purchase any class of its capital stock substantially in the form of
Exhibit C hereto, and each such lock-up
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is in full force and effect and has not been amended or supplemented as
of the date hereof.
(b) Officer's Certificates. Any certificate signed by any officer of
the Company and delivered to the Global Coordinator, the Lead Managers or to
counsel for the International Managers shall be deemed a representation and
warranty by the Company to each International Manager as to the matters covered
thereby.
SECTION 2. Sale and Delivery to International Managers;
Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each International Manager, severally and
not jointly, and each International Manager, severally and not jointly, agrees
to purchase from the Company, at the price per share set forth in Schedule B,
the number of Initial International Securities set forth in Schedule A opposite
the name of such International Manager, plus any additional number of Initial
International Securities which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
International Managers, severally and not jointly, to purchase up to an
additional __ shares of Common Stock at the price per share set forth in
Schedule B, less an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial International Securities but
not payable on the International Option Securities. The option hereby granted
will expire 30 days after the date hereof and may be exercised in whole or in
part from time to time only for the purpose of covering over-allotments which
may be made in connection with the offering and distribution of the Initial
International Securities upon notice by the Global Coordinator to the Company
setting forth the number of International Option Securities as to which the
several International Managers are then exercising the option and the time and
date of payment and delivery for such International Option Securities. Any such
time and date of delivery for the International Option Securities (a "Date of
Delivery") shall be determined by the Global Coordinator, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the International Option Securities, each
of the International Managers, acting severally and not jointly, will purchase
that proportion of the total number of International Option Securities then
being purchased which the number of Initial International Securities set forth
in Schedule A opposite the name of such International Manager bears to the total
number of Initial International Securities, subject in each case to
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<PAGE> 22
such adjustments as the Global Coordinator in its discretion shall make to
eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Hale &
Dorr LLP, 1455 Pennsylvania Avenue, N.W., Washington, D.C. 20004, or at such
other place as shall be agreed upon by the Global Coordinator and the Company,
at 9:00 A.M. (New York city time) on the third (fourth, if the pricing occurs
after 4:30 P.M. (New York city time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10),
or such other time not later than ten business days after such date as shall be
agreed upon by the Global Coordinator and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Manages, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Lead Managers for the respective accounts of the International Managers of
certificates for the International Securities to be purchased by them. It is
understood that each International Manager has authorized the Lead Managers, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the International
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the International Managers, may (but
shall not be obligated to) make payment of the purchase price for the Initial
International Securities or the International Option Securities, if any, to be
purchased by any International Manager whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such International Manager from its obligations
hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the International
Managers may request in writing at least one full business day before the
Closing Time or the relevant Date of Delivery, as the case may be. The
certificates for the Initial International Securities and the International
Option Securities, if any, will be made available for examination and packaging
by the Lead Managers in The City of New York not later than 10:00 A.M. (Eastern
time) on the business day prior to the Closing Time or the relevant Date of
Delivery, as the case may be.
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(e) Appointment of Qualified Independent Underwriter. The Company
hereby confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby
confirms its agreement with the Company to render services as, a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. (the "NASD") with respect
to the offering and sale of the International Securities. Merrill Lynch, solely
in its capacity as qualified independent underwriter and not otherwise, is
referred to herein as the "Independent Underwriter".
SECTION 3. Covenants of the Company. The Company covenants
with each International Manager as follows:
(a) Compliance with Securities Regulations and
Commission Requests. The Company, subject to Section 3(b), will comply
with the requirements of Rule 430A or Rule 434, as applicable, and will
notify the Global Coordinator immediately, and confirm the notice in
writing, (i) when any post-effective amendment to the Registration
Statement shall become effective, or any supplement to the Prospectuses
or any amended Prospectuses shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectuses or for additional
information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of
any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities
for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company
will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was
not, it will promptly file such prospectus. The Company will make every
reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) Filing of Amendments. The Company will give the
Global Coordinator notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectuses, will furnish the
Global Coordinator with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Global
Coordinator or counsel for the International Managers shall reasonably
object.
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(c) Delivery of Registration Statements. The Company
has furnished or will deliver to the Lead Managers and counsel for the
International Managers, without charge, signed copies of the
Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates
of experts, and will also deliver to the Lead Managers, without charge,
a conformed copy of the Registration Statement as originally filed and
of each amendment thereto (without exhibits) for each of the
International Managers. The copies of the Registration Statement and
each amendment thereto furnished to the International Managers will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has
delivered to each International Manager, without charge, as many copies
of each preliminary prospectus as such International Manager reasonably
requested, and the Company hereby consents to the use of such copies
for purposes permitted by the 1933 Act. The Company will furnish to
each International Manager, without charge, during the period when the
International Prospectus is required to be delivered under the 1933 Act
or the 1934 Act, such number of copies of the International Prospectus
(as amended or supplemented) as such International Manager may
reasonably request. The International Prospectus and any amendments or
supplements thereto furnished to the International Managers will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The
Company will comply with the 1933 Act, the 1933 Act Regulations, the
1934 Act and the 1934 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement,
the U.S. Purchase Agreement and in the Prospectuses. If at any time
when a prospectus is required by the 1933 Act or the 1934 Act to be
delivered in connection with sales of the Securities, any event shall
occur or condition shall exist as a result of which it is necessary, in
the opinion of counsel for the International Managers or for the
Company, to amend the Registration Statement or amend or supplement any
Prospectus in order that the Prospectuses will not include any untrue
statements of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel,
at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of
the 1933 Act, the 1933 Act Regulations, the 1934 Act or the 1934 Act
Regulations, the Company will promptly prepare and file with the
Commission,
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subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the
Registration Statement or the Prospectuses comply with such
requirements, and the Company will furnish to the International
Managers such number of copies of such amendment or supplement as the
International Managers may reasonably request.
(f) Blue Sky Qualifications. The Company will use its
best efforts, in cooperation with the International Managers, to
qualify the Securities for offering and sale under the applicable
securities laws of such states and other jurisdictions (domestic or
foreign) as the Global Coordinator may designate and to maintain such
qualifications in effect for a period of not less than one year from
the later of the effective date of the Registration Statement and any
Rule 462(b) Registration Statement; provided, however, that the Company
shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for
a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such
reports pursuant to the 1934 Act as are necessary in order to make
generally available to its securityholders as soon as practicable an
earnings statement for the purposes of, and to provide the benefits
contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net
proceeds received by it from the sale of the Securities in the manner
specified in the Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to
effect and maintain the quotation of the Common Stock (including the
Securities) on the Nasdaq National Market and will file with the Nasdaq
National Market all documents and notices required by the Nasdaq
National Market of companies that have securities that are traded in
the over-the-counter market and quotations for which are reported by
the Nasdaq National Market.
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(j) Restriction on Sale of Securities. (1) During a
period of 180 days from the date of the Prospectuses, the Company will
not, without the prior written consent of the Global Coordinator, (i)
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, right or warrant to purchase or otherwise
transfer or dispose of any share of Common Stock or Class B common
stock or any securities convertible into or exercisable or exchangeable
for Common Stock or Class B common stock or file any registration
statement under the 1933 Act with respect to any of the foregoing or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock or the Class B common
stock, whether any such swap or the transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock, Class B
common stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Securities to be sold
hereunder or under the U.S. Purchase Agreement, (B) any shares of
Common Stock or Class B common stock issued by the Company upon the
exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in the Prospectuses, (C)
any shares of Common Stock or Class B common stock issued or options to
purchase shares of Common Stock or Class B common stock granted
pursuant to existing employee benefit plans of the Company referred to
in the Prospectuses or (D) any shares of Common Stock that may be
issued by the Company from time to time upon the conversion of shares
of Class B common stock into shares of Common Stock pursuant to the
Fifth Amendment or the Sixth Amendment.
(2) During a period of 180 days from the date of
the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, release any holder
of an option or options to purchase any shares of its capital
stock from the lock-up agreement referred to in Section
1(a)(xxxii) and the Company will enforce such lock-up
agreements to the fullest extent permitted by law.
(k) Reporting Requirements. The Company, during the
period when the Prospectuses are required to be delivered under the
1933 Act or the 1934 Act, will file all documents required to be filed
with the Commission pursuant to the 1934 Act within the time periods
required by the 1934 Act and the rules and regulations of the
Commission thereunder.
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(l) Compliance with NASD Rules. The Company hereby
agrees that it will ensure that the Reserved Securities will be
restricted as required by the NASD or the NASD rules from sale,
transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. The Underwriters will
notify the Company as to which persons will need to be so restricted.
At the request of the Underwriters, the Company will direct the
transfer agent to place a stop transfer restriction upon such
securities for such period of time. Should the Company release, or seek
to release, from such restrictions any of the Reserved Securities, the
Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) Compliance with Rule 463. The Company will comply
with the requirements of Rule 463 of the 1933 Act Regulations.
(n) Filing of Sixth Amended and Restated Certificate
of Incorporation. The Company has taken all necessary corporate action,
including obtaining the approval of the Board of Directors and the
shareholders of the Company, in order to file the Sixth Amendment with
the Secretary of the State of the State of Delaware, and the Company
will file the Sixth Amendment as soon as reasonably practicable after
the closing of the transactions contemplated by this Agreement and the
International Purchase Agreement.
SECTION 4. Payment of Expenses. (a) Expenses. The Company
will pay all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters and the transfer of the Securities between the International
Managers and the U.S. Underwriters, (iv) the fees and disbursements of the
Company's counsel, accountants and other advisors, (v) the qualification of the
Securities under securities laws in accordance with the provisions of Section
3(f) hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing
and delivery to the Underwriters of copies of each preliminary prospectus, any
Term Sheets and of the Prospectuses and any amendments or supplements thereto,
(vii) the preparation, printing and delivery to the Underwriters of copies of
the Blue Sky Survey and any supple-
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<PAGE> 28
ment thereto, (viii) the fees and expenses of any transfer agent or registrar
for the Securities, (ix) the filing fees incident to, and the reasonable fees
and disbursements of counsel to the Underwriters in connection with, the review
by the NASD of the terms of the sale of the Securities, (x) the fees and
expenses incurred in connection with the inclusion of the Securities in the
Nasdaq National Market, (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to employees, directors and other persons with
relationships with the Company who have expressed an interest in purchasing the
Reserved Securities and (xii) the expenses of the Independent Underwriter.
(b) Termination of Agreement. If this Agreement is terminated by
the Lead Managers in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the International Managers for all
of their out-of-pocket expenses, including the reasonable fees and disbursements
of counsel for the International Managers.
SECTION 5. Conditions of International Managers' Obligations.
The obligations of the several International Managers hereunder are subject to
the accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company delivered
pursuant to the provisions hereof, to the performance by the Company of its
covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The
Registration Statement, including any Rule 462(b) Registration
Statement, has become effective and at Closing Time no stop order
suspending the effectiveness of the Registration Statement shall have
been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the International Managers. A
prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time,
the International Managers shall have received the favorable opinions,
dated as of Closing Time, of:
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<PAGE> 29
(i) Hale and Dorr LLP, counsel for the
Company, in form and substance satisfactory to counsel for the
International Managers, together with signed or reproduced copies of
such letter for each of the other International Managers to the effect
set forth in Exhibit A-1 hereto and to such further effect as counsel
to the International Managers may reasonably request; and
(ii) Christopher D. Cerf, general counsel
for the Company, in form and substance satisfactory to counsel for the
International Managers, together with signed or reproduced copies of
such letter for each of the other International Managers to the effect
set forth in Exhibit A-2 hereto and to such further effect as counsel
to the International Managers may reasonably request.
(c) Opinion of Counsel for International Managers. At
Closing Time, the Lead Managers shall have received the favorable
opinion, dated as of Closing Time, of Debevoise & Plimpton, counsel for
the International Managers, together with signed or reproduced copies
of such letter for each of the other International Managers, in form
and substance reasonably satisfactory to the International Managers. In
giving such opinion such counsel may rely, insofar as such opinion
involves factual matters, to the extent they deem proper, upon
certificates of officers of the Company and certificates of public
officials.
(d) Officers' Certificate. At Closing Time, there
shall not have been, since the date hereof or since the respective
dates as of which information is given in the Prospectuses, any
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company,
whether or not arising in the ordinary course of business, and the Lead
Managers shall have received a certificate of the Chief Executive
Officer, Chief Financial Officer and Chief Operating Officer of the
Company, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to
Closing Time, and (iv) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by the
Commission.
(e) Accountant's Comfort Letter. At the time of the
execution of this Agreement, the Lead Managers shall have received from
PricewaterhouseCoopers a letter dated such date, in form and substance
satisfactory to the Lead Managers, together with signed or reproduced
copies of such letter for each of the other International Managers
containing statements and information of the type ordinarily
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<PAGE> 30
included in accountants' "comfort letters" to underwriters with respect
to the financial statements and certain financial information contained
in the Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the
Lead Managers shall have received from PricewaterhouseCoopers a letter,
dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of
this Section, except that the specified date referred to shall be a
date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the
Securities shall have been approved for inclusion in the Nasdaq
National Market, subject only to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has
not raised any objection with respect to the fairness and
reasonableness of the underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this
Agreement, the Lead Managers shall have received an agreement
substantially in the form of Exhibit B hereto signed by the persons
listed on Schedule C hereto.
(j) Recapitalization. Each share of capital stock of
the Company shall have been converted into 0.45 shares of Common Stock
and 0.05 shares of class B common stock.
(k) Purchase of Initial U.S. Securities.
Contemporaneously with the purchase by the International Managers of
the Initial International Securities under this Agreement, the U.S.
Underwriters shall have purchased the Initial U.S. Securities under
the U.S. Purchase Agreement.
(l) Conditions to Purchase of International Option
Securities. In the event that the International Managers exercise their
option provided in Section 2(b) hereof to purchase all or any portion
of the International Option Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of
Delivery, the Lead Managers shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the Chief Executive Officer, Chief Financial
Officer and Chief Operating Officer
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<PAGE> 31
of the Company confirming that the certificate delivered at
the Closing Time pursuant to Section 5(d) hereof remains true
and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
Hale and Dorr LLP, counsel for the Company, together with the
favorable opinion of Christopher D. Cerf, general counsel for
the Company, each in form and substance satisfactory to
counsel for the International Managers, dated such Date of
Delivery, relating to the International Option Securities to
be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(b) hereof.
(iii) Opinion of Counsel for International Managers. The
favorable opinion of Debevoise & Plimpton, counsel for the
International Managers, dated such Date of Delivery, relating
to the International Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from
PricewaterhouseCoopers, in form and substance satisfactory to
the Lead Managers and dated such Date of Delivery,
substantially in the same form and substance as the letter
furnished to the Lead Managers pursuant to Section 5(f)
hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more
than two days prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each
Date of Delivery, counsel for the International Managers shall have
been furnished with such documents, certificates and opinions as they
may require for the purpose of enabling them to pass upon the issuance
and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and
sale of the Securities as herein contemplated shall be satisfactory in
form and substance to the Lead Managers and counsel for the
International Managers.
(n) Termination of Agreement. If any condition
specified in this Section shall not have been fulfilled when and as
required to be fulfilled, this Agreement, or, in the case of any
condition to the purchase of International Option Securities on a Date
of Delivery which is after the Closing Time, the obligations of the
several International Managers to purchase the relevant Option
Securities, may be terminated by the Lead Managers by notice to the
Company at any time at or prior
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<PAGE> 32
to Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of International Managers. (1) The Company
agrees to indemnify and hold harmless each International Manager and each
person, if any, who controls any International Manager within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of (A) the violation
of any applicable laws or regulations of foreign jurisdictions where
Reserved Securities have been offered and (B) any untrue statement or
alleged untrue statement of a material fact included in the supplement
or prospectus wrapper material distributed in __ in connection with the
reservation and sale of the Reserved Securities to the employees,
directors and other persons with relationships with the Company who
have expressed an interest in purchasing the Reserved Securities or the
omission or alleged omission therefrom of a material fact necessary to
make the statements therein, when considered in conjunction with the
Prospectuses or preliminary prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission or in
connection with any violation of the nature referred to in Section
6(a)(1)(ii)(A)
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<PAGE> 33
hereof; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iv) against any and all expense whatsoever, as
incurred (including the fees and disbursements of counsel chosen by
Merrill Lynch), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof,
to the extent that any such expense is not paid under (i), (ii) or
(iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense (x) to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the International Prospectus (or any amendment or supplement
thereto), and (y) with respect to any preliminary prospectus, to the extent that
the Company shall sustain the burden of proving (i) that any such loss, claim,
expense, damage or liability of such International Manager results from the fact
that such International Manager sold Securities to a person as to whom there was
not sent or given, at or prior to the written confirmation of such sale, a copy
of the International Prospectus (as then amended or supplemented) in any case
where such delivery is required by the 1933 Act, (ii) that the Company had
previously furnished copies thereof in sufficient quantities to such
International Manager and the loss, claim, expense, damage or liability of such
Underwriter results from an untrue statement or omission of a material fact
contained in the preliminary prospectus that was corrected in the International
Prospectus and (iii) that sending such International Prospectus by the Closing
Time to the person or persons asserting such loss, liability, claim, damage or
expense would have constituted a defense to the claim asserted by such person or
persons.
(2) In addition to and without limitation of the Company's obligation
to indemnify Merrill Lynch as an Underwriter, the Company also agrees to
indemnify and hold harmless the Independent Underwriter and each person, if any,
who controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
NASD in connection with the offering of the International Securities.
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<PAGE> 34
(3) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of an
International Manager or who controls an underwriter within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act and who, at the date of
this Agreement, is a director or officer of the Company or controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
such indemnity agreement is subject to the undertaking of the Company in the
Registration Statement under Item 12.
(b) Indemnification of Company, Directors and Officers. Each
International Manager severally agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a)(1) of this Section, as incurred, but only with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in the Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or any preliminary
International prospectus or the International Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
furnished to the Company by such International Manager through the Lead Managers
expressly for use in the Registration Statement (or any amendment thereto) or
such preliminary prospectus or the International Prospectus (or any amendment or
supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section
6(a)(1) above, counsel to the indemnified parties shall be selected by Merrill
Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above,
counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances;
provided, that, if indemnity is sought pursuant to Section 6(a)(2), then, in
addition to the fees and expenses of such counsel for the indemnified parties,
the indemnifying party shall be liable for the reasonable fees and expenses
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<PAGE> 35
of not more than one counsel (in addition to any local counsel) separate from
its own counsel and that of the other indemnified parties for the Independent
Underwriter in its capacity as a "qualified independent underwriter" and all
persons, if any, who control the Independent Underwriter within the meaning of
Section 15 of the 1933 Act or Section 20 of 1934 Act in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances if, in the
reasonable judgment of the Independent Underwriter, there may exist a conflict
of interest between the Independent Underwriter and the other indemnified
parties. Any such separate counsel for the Independent Underwriter and such
control persons of the Independent Underwriter shall be designated in writing by
the Independent Underwriter. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(1)(ii) and Section 6(a)(1)(iii) effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with
the offer and sale of the Reserved Securities, the Company agrees, promptly upon
a request in writing, to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of the employees, directors and other persons
with relationships with the Company who have expressed an interest in purchasing
the Reserved Securities to pay for and accept delivery of Reserved Securities
which, by the end of the first business day following the date of this
Agreement, were subject to a properly confirmed agreement to purchase.
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SECTION 7. Contribution. If the indemnification provided for
in Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the International Managers on the other hand from
the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the International Managers on the other hand in connection with the
statements or omissions, or in connection with any violation of the nature
referred to in Section 6(a)(1)(ii)(A) hereof, which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
International Managers on the other hand in connection with the offering of the
International Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
International Securities pursuant to this Agreement (before deducting expenses)
received by the Company and the total underwriting discount received by the
International Managers, in each case as set forth on the cover of the
International Prospectus, or, if Rule 434 is used, the corresponding location on
the Term Sheet, bear to the aggregate initial public offering price of the
International Securities as set forth on such cover.
The relative fault of the Company on the one hand and the International
Managers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the International Managers and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission or any violation of the nature referred to in
Section 6(a)(1)(ii)(A) hereof.
The Company and the International Managers agree that Merrill Lynch
will not receive any additional benefits hereunder for serving as the
Independent Underwriter in connection with the offering and sale of the
International Securities.
The Company and the International Managers agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the International Managers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations
31
<PAGE> 37
referred to above in this Section 7. The aggregate amount of losses,
liabilities, claims, damages and expenses incurred by an indemnified party and
referred to above in this Section 7 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Manager has otherwise been required to pay
by reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial International
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery. All representations, warranties and agreements contained in
this Agreement or in certificates of officers of the Company submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any International Manager or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the International Managers.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Lead Managers may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information
32
<PAGE> 38
is given in the International Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, whether or not arising in the ordinary course
of business, or (ii) if there has occurred any material adverse change in the
financial markets in the United States or the international financial markets,
any outbreak of hostilities or escalation thereof or other calamity or crisis or
any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Lead Managers,
impracticable to market the Securities or to enforce contracts for the sale of
the Securities, or (iii) if trading in any securities of the Company has been
suspended or materially limited by the Commission or the Nasdaq National Market,
or if trading generally on the American Stock Exchange or the New York Stock
Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the NASD or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the International
Managers. If one or more of the International Managers shall fail at Closing
Time or a Date of Delivery to purchase the Securities which it or they are
obligated to purchase under this Agreement (the "Defaulted Securities"), the
Lead Managers shall have the right, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting International Managers, or
any other underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Lead Managers shall not have completed such arrangements
within such 24-hour period, then:
(a) if the number of Defaulted Securities does not
exceed 10% of the number of International Securities to be purchased on
such date, each of the non-defaulting International Managers shall be
obligated, severally and not jointly, to purchase the full amount
thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10%
of the number of International Securities to be purchased on such date,
this Agreement or, with respect to any Date of Delivery which occurs
after the Closing Time, the obligation
33
<PAGE> 39
of the International Managers to purchase and of the Company to sell
the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting
International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "International
Manager" includes any person substituted for a International Manager under this
Section 10.
SECTION 11. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers at North Tower,
World Financial Center, New York, New York 10281-1201, attention of Syndicate
Operations, with a copy to Debevoise & Plimpton, 875 Third Avenue, New York, New
York, attention of Michael W. Blair; and notices to the Company shall be
directed to it at 515 Fifth Avenue, 15th Floor, New York, NY 10175, attention of
James L. Starr, Executive Vice President and Chief Financial Officer, with a
copy to Hale and Dorr LLP, 1455 Pennsylvania Avenue, N.W., Washington, D.C.
20004, attention of David Sylvester and Brent B. Siler.
SECTION 12. Parties. This Agreement shall each inure to the
benefit of and be binding upon the International Managers and the Company and
their respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the International Managers and the Company and their respective successors
and the controlling persons and officers and directors referred to in Sections 6
and 7 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the International Managers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any International Manager shall be deemed to be a successor by reason merely of
such purchase.
34
<PAGE> 40
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK (WITHOUT GIVING EFFECT TO ITS PRINCIPLES OR RULES OF CONFLICT OF
LAWS TO THE EXTENT SUCH PRINCIPLES OR RULES WOULD REQUIRE OR PERMIT THE
APPLICATION OF THE LAWS OF ANOTHER JURISDICTION). SPECIFIED TIMES OF DAY REFER
TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section
headings herein and the Table of Contents are for convenience only and shall not
affect the construction hereof.
35
<PAGE> 41
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the International Managers and the Company in accordance with its terms.
Very truly yours,
EDISON SCHOOLS INC.
By:
---------------------------------
Title:
Name:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
BANK OF AMERICA INTERNATIONAL LIMITED,
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED,
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL,
J.P. MORGAN SECURITIES LTD.
By: MERRILL LYNCH INTERNATIONAL
By
--------------------------------
Authorized Signatory
For themselves and as Lead Managers of the
other International Managers named in
Schedule A hereto.
36
<PAGE> 42
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial International.
Name of International Manager Securities
----------------------------- ----------
<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............................................................................... __
===========
</TABLE>
Sch A-1
<PAGE> 43
SCHEDULE B
EDISON SCHOOLS INC.
__ Shares of Common Stock
(Par Value $.01 Per Share)
I. The initial public offering price per share for
the Securities, determined as provided in said Section 2, shall be $__.
II. The purchase price per share for the International
Securities to be paid by the several International Managers shall be
$__, being an amount equal to the initial public offering price set
forth above less $__ per share; provided that the purchase price per
share for any International Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall
be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial
International Securities but not payable on the International Option
Securities.
Sch B-1
<PAGE> 44
SCHEDULE C
List of persons and entities
subject to lock-up
Benno C. Schmidt, Jr.
H. Christopher Whittle
Christopher D. Cerf
James L. Starr
John Chubb, Ph.D
Laura Eshbaugh
Michael Finnerty
Deborah McGriff, Ph.D
Manuel Rivera, Ph.D
Donald Sunderland
Cheryl Wilhoyte
Virginia Bonker
John W. Childs
Robert Finzi
John B. Fullerton
Janet A. Hickey
Klas Hillstrom
Jeffrey Leeds II
All other holders of any class of the Company's capital stock.
All holders of options or warrants to purchase shares of any class of the
Company's capital stock except [To come].
Sch C-1
<PAGE> 45
SCHEDULE D
[List of Management Agreements to Come]
<PAGE> 46
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Delaware.
(ii) The Company has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under the U.S. Purchase Agreement and the International
Purchase Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction listed on Schedule A to this opinion.
(iv) The authorized, issued and outstanding capital
stock of record of the Company (a) was, as of June 30, 1999, as set
forth in the Prospectuses in the column entitled "Actual" under the
caption "Capitalization" (b) is, as of the date hereof, after giving
effect to the Recapitalization, as set forth in the Prospectus in the
column entitled "Pro Forma" under the caption "Capitalization", (except
for issuances subsequent to June 30, 1999, if any, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses or pursuant to the exercise of convertible securities,
options or warrants referred to in the Prospectuses), and (c) after
giving effect to the transactions contemplated by this Agreement, the
International Purchase Agreement and the Registration Statement, will
be as set forth in the Prospectuses in the column entitled "Pro Forma
as Adjusted" under the caption "Capitalization" (except for issuances
subsequent to June 30, 1999, if any, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectuses or
pursuant to the exercise of convertible securities, options or warrants
referred to in the Prospectuses); the shares of issued and outstanding
capital stock have been duly authorized and validly issued and are
fully paid and non-assessable; and none of the outstanding shares of
capital stock of record of the Company was issued in violation of any
preemptive or other similar rights of any securityholder of the Company
arising under (a) the Company's certificate of incorporation or by-laws
(as in effect from time
A-1-1
<PAGE> 47
to time), (b) any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument filed as an exhibit to the
Registration Statement, (c) the Delaware General Corporation Law or (d)
to our knowledge, arising otherwise.
(v) The Securities to be purchased by the U.S.
Underwriters and the International Managers from the Company have been
duly authorized for issuance and sale to the Underwriters pursuant to
the U.S. Purchase Agreement and the International Purchase Agreement,
respectively, and, when issued and delivered by the Company pursuant to
the U.S. Purchase Agreement and the International Purchase Agreement,
respectively, against payment of the consideration set forth in the
U.S. Purchase Agreement and the International Purchase Agreement, will
be validly issued and fully paid and non-assessable and no holder of
the Securities is or will be subject to personal liability by reason of
being such a holder.
(vi) The issuance of the Securities is not subject to
any preemptive or other similar rights of any securityholder of the
Company arising under (a) the Company's certificate of incorporation or
by-laws (as in effect on the date hereof), (b) any contract, indenture,
mortgage, loan agreement, note, lease or other agreement or instrument
filed as an exhibit to the Registration Statement, (c) the Delaware
General Corporation Law or (d) to our knowledge, arising otherwise.
(vii) To our knowledge, the Company does not have any
subsidiaries, and, to our knowledge, the Company does not have any
equity investments in other companies, except the Company's interest in
APEX.
(viii) The U.S. Purchase Agreement and the International
Purchase Agreement have been duly authorized, executed and delivered by
the Company.
(ix) The Registration Statement, including any
Rule 462(b) Registration Statement, has been declared effective under
the 1933 Act; any required filing of the Prospectuses pursuant to Rule
424(b) has been made in the manner and within the time period required
by Rule 424(b); and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
(x) The Registration Statement, including any
Rule 462(b) Registration Statement, the Rule 430A Information and the
Rule 434 Information, as applicable, the Prospectuses and each
amendment or supplement to the Registration Statement and the
Prospectuses as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein
or omitted therefrom,
A-1-2
<PAGE> 48
as to which we need express no opinion) complied as to form in all
material respects with the requirements of the 1933 Act and the 1933
Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectuses
were not "materially different," as such term is used in Rule 434, from
the prospectuses included in the Registration Statement at the time it
became effective.
(xii) The form of certificate used to evidence the
Common Stock complies in all material respects with all applicable
statutory requirements, with any applicable requirements of the charter
and by-laws of the Company and the requirements of the Nasdaq National
Market.
(xiii) To our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company or any school operated by the Company is a party, or
to which the property of the Company or any school operated by the
Company is subject, before or brought by any court or governmental
agency or body, domestic or foreign, which might reasonably be expected
to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the consummation of the
transactions contemplated in the U.S. Purchase Agreement and
International Purchase Agreement or the performance by the Company of
its obligations thereunder.
(xiv) The information in the Prospectuses under
"Summary - Description of Capital Stock", "Description of Capital
Stock", "Shares Eligible for Future Sale", "Certain United States Tax
Considerations for Non-United States Holders", and in the first
paragraph and the first and third sentences in the second paragraph
under "Management--Election of Directors", the last sentence of
"Management--Executive Officers and Directors", and in the Registration
Statement in the first two paragraphs under Item 14, to the extent that
it constitutes matters of law, summaries of legal matters, the
Company's charter and bylaws or legal proceedings, or legal
conclusions, has been reviewed by us and is correct in all material
respects.
(xv) To our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that
are not described as required.
(xvi) To our knowledge, there are no franchises,
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto.
A-1-3
<PAGE> 49
(xvii) To our knowledge, the Company is not in violation
of its charter or by-laws.
(xviii) No filing with, or authorization, approval,
consent, license, order, registration, qualification or decree of, any
court or governmental authority or agency, domestic or foreign (other
than under the 1933 Act and the 1933 Act Regulations, which have been
obtained, or as may be required under the securities or blue sky laws
of the various states, as to which we need express no opinion) is
necessary or required in connection with the due authorization,
execution and delivery of the U.S. Purchase Agreement and the
International Purchase Agreement or for the offering, issuance, sale or
delivery of the Securities.
(xix) The execution, delivery and performance of the
U.S. Purchase Agreement and the International Purchase Agreement and
the consummation of the transactions contemplated in the U.S. Purchase
Agreement, the International Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities) and
compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not and will not,
whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreements) under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or any other agreement or instrument filed as an exhibit to the
Registration Statement (except for such conflicts, breaches or defaults
or liens, charges or encumbrances that could not reasonably be expected
to have a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company,
applicable law, statute, rule or regulation or any judgment, order,
writ or decree specifically naming the Company, known to us, of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any of its properties, assets
or operations.
(xx) To our knowledge, except as described in the
Prospectuses under the caption "Shares Eligible for Future
Sale--Registration Rights" there are no persons with registration
rights or other similar rights to have any securities registered
pursuant to the Registration Statement or otherwise registered by the
Company under the 1933 Act.
(xxi) To our knowledge, except as disclosed in the
prospectuses, there are no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any
A-1-4
<PAGE> 50
contracts or commitments to issue or sell, shares of the company's
capital stock or any such options, rights, convertible securities or
obligations.
(xxii) The Company is not an "investment company" or an
entity "controlled" by an "investment company," as such terms are
defined in the 1940 Act.
(xxiii) The Fifth Amendment filed by the Company with the
Secretary of State of the State of Delaware on October __, 1999 was
duly authorized by the Board of Directors and shareholders of the
Company. Each share of the Company's capital stock has been converted
into 0.45 shares of Common Stock and 0.05 shares of class B common
stock. The Company has undertaken all necessary corporate action,
including obtaining the approval of the Board of Directors and the
shareholders of the Company, in order to execute, deliver and file the
Sixth Amendment with the Secretary of State of the State of Delaware
immediately after the closing of the offering, substantially in the
form of Exhibit 3.1 to the Registration Statement.
In connection with the preparation of the Registration
Statement and the Prospectuses, we have participated in conferences
with officers and representatives of the Company, counsel for the
Underwriters and independent accountants of the Company, at which
conferences we made inquiries of such persons and others and discussed
the contents of the Registration Statement and the Prospectuses. While
the limitations inherent in the independent verification of factual
matters and the character of determinations involved in the
registration process are such that we are not passing upon and do not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the
Prospectuses, subject to the foregoing and based on such participation,
inquiries and discussions, nothing has come to our attention that would
lead us to believe that the Registration Statement or any amendment
thereto, including the Rule 430A Information and Rule 434 Information
(if applicable) (except for financial statements and schedules and
other financial data included therein or omitted therefrom and
percentages derived from financial data included therein, as to which
we need make no statement), at the time such Registration Statement or
any such amendment became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
that the Prospectuses or any amendment or supplement thereto (except
for financial statements and schedules and other financial data
included therein or omitted therefrom and percentages derived from
financial data included therein, as to which we need make no
statement), as of their respective dates or at the Closing Time,
included or includes an untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
A-1-5
<PAGE> 51
Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law
(1991).
A-1-6
<PAGE> 52
Exhibit A-2
FORM OF OPINION OF THE GENERAL COUNSEL
FOR THE COMPANY TO BE DELIVERED
PURSUANT TO SECTION 5(b)(iii)
(i) All descriptions in the Prospectuses of and
references in the Prospectuses to franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments or
documents or transactions to which the Company is or was a party are
accurate in all material respects;
(ii) To my knowledge, no default by the Company exists
in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any Management Agreement
or any other contract, indenture, mortgage, loan agreement, note, lease
or other agreement or instrument that is described or referred to in
the Registration Statement or the Prospectuses or filed or incorporated
by reference as an exhibit to the Registration Statement.
(iii) The execution, delivery and performance of the
U.S. Purchase Agreement and the International Purchase Agreement and
the consummation of the transactions contemplated in the U.S. Purchase
Agreement, the International Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities, and
compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not and will not,
whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreements) under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to any Management
Agreement or other contract, indenture, mortgage, deed of trust, loan
or credit agreement, note, lease or any other agreement or instrument
filed as an exhibit to the Registration Statement or otherwise known to
me (except for such conflicts, breaches or defaults or liens, charges
or encumbrances that could not reasonably be expected to have a
Material Adverse Effect), nor will such action result in any violation
of the provisions of the charter or by-laws of the Company, applicable
law, statute, rule, regulation, judgment, order, writ or decree, known
to me, of any government, government
<PAGE> 53
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any of its properties, assets or operations.
(iv) The execution, delivery and performance of the
U.S. Purchase Agreement and the International Purchase Agreement and
the consummation of the transactions contemplated in the U.S. Purchase
Agreement, the International Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities, and
compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not and will not
result in any violation of the ESEA, the IDEA, including any rules or
regulations promulgated pursuant to such laws, or any other federal,
state or local statute pertaining to the authorization to operate
public schools or eligibility for funding under federal, state or local
programs.
(v) No filing with, or authorization, approval,
consent, license, order, registration, qualification or decree of, the
USDE or, to my knowledge, any state agency under any state statute
pertaining to authorization to operate public schools or eligibility
for funding under federal or state programs is necessary or required in
connection with the due authorization, execution and delivery of the
U.S. Purchase Agreement and the International Purchase Agreement or for
the offering, issuance, sale or delivery of the Securities.
(vi) To my knowledge, the Company and each of the
schools operated by it possess all permits, licenses, approvals,
consents and other authorizations required, including without
limitation authorizations required (i) to participate in federal
funding programs under the ESEA and the IDEA to the extent the Company
or such school currently receives material funding thereunder, (ii) to
operate charter schools under state charter statutes, and (iii) to
receive funding under federal, state or local education laws, statutes,
rules, regulations, standards, guides and orders to the extent the
Company or such school currently receives material funding thereunder
(collectively, "Governmental Licenses"), issued by the appropriate
federal, state or local regulatory agencies or bodies necessary to
conduct the business now operated by them, except where the failure to
possess such Governmental Licenses could not reasonably be expected to
have a material Adverse Effect; the Company and, to my knowledge each
of the schools operated by it, is in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply could not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect could not have a Material Adverse Effect; and, to my
knowledge, the Company
A-2-2
<PAGE> 54
has not received any notice of proceedings relating to the revocation
or modification of any such Governmental Licenses which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, could result in a Material Adverse Effect.
(vii) To my knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company or any school operated by the Company is a party, or
to which the property of the Company or any school operated by the
Company is subject, before or brought by the USDE, the DOJ, the EEOC,
state and local educational agencies (including school boards and
public school districts) or charter school boards which might
reasonably be expected to result in a Material Adverse Effect, or which
might reasonably be expected to materially and adversely affect the
consummation of the transactions contemplated in the U.S. Purchase
Agreement and International Purchase Agreement or the performance by
the Company of its obligations thereunder.
(viii) To my knowledge, the Company and each of the
schools operated by the Company are in compliance with all applicable
education laws, statutes, rules, regulations, standards, guides or
orders administered, issued or implemented by any federal, state or
local government or any agency or subdivision of any of the foregoing,
including, without limitation, the USDE, the DOJ, the EEOC, state and
local education agencies (including school boards and public school
districts) or charter school boards, except where the failure to be in
compliance would not reasonably be expected to have a Material Adverse
Effect. To my knowledge, neither the Company nor any of the schools
operated by it has been advised that either the Company or any of the
schools operated by the Company is not conducting business in
compliance with all applicable federal, state and local education laws,
statutes, rules, regulations, standards, guides and orders, except
where failure to be so in compliance could not reasonably be expected
to have a Material Adverse Effect.
(ix) The information in the Prospectuses under "Risk
Factors--The operation of our charter schools depends on the
maintenance of the underlying charter grant", "Risk Factors--Risks
Related to Governmental Regulation of the Education Industry and
Government Subsidies", "Business--Government Laws and Regulations", to
the extent that it constitutes matters of law, summaries of legal
matters, or legal conclusions (collectively "Education Matters"), has
been reviewed by me and is correct in all material respects.
A-2-3
<PAGE> 55
(x) Neither the Company, nor any of the schools
operated by the Company is subject to any requirements of, or
regulation under, the Higher Education Act of 1965, as amended.
Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law
(1991).
A-2-4
<PAGE> 56
Form of lock-up from directors, officers or other stockholders
pursuant to Section 5(i)
Exhibit B
__, 1999
MERRILL LYNCH & CO.
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.
as U.S. Representative(s) of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Edison Schools Inc.
Dear Sirs:
The undersigned, a stockholder, officer or director of Edison Schools
Inc., a Delaware corporation (the "Company"), understands that Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Credit Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation, J.P. Morgan Securities Inc. propose to enter into a U.S. Purchase
Agreement (the "U.S. Purchase Agreement") with the Company providing for the
public offering of shares (the "Securities") of the Company's common stock, par
value $.01 per share (the "Common Stock"). In recognition of the benefit that
such an offering will confer upon the undersigned as a stockholder, officer or
director of the Company, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the undersigned agrees
with each underwriter to be named in the U.S. Purchase Agreement that, during a
period of 180 days from the date of the U.S. Purchase Agreement, the undersigned
will not, without the prior written consent of Merrill Lynch, directly or
indirectly, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase,
B-5
<PAGE> 57
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or hereafter acquired by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended (the "Securities Act"), with respect to any of the foregoing or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise.
Notwithstanding the foregoing restrictions on transfer, the undersigned
shall be permitted to make the following transfers: (i) transfers made by gift,
will or intestacy, provided the donee thereof agrees in writing to be bound by
the terms hereof; (ii) transfers to the transferor's affiliates, as such term is
defined in Rule 405 promulgated under the Securities Act, provided that each
transferee agrees in writing to be bound by the terms hereof; (iii) transfers
made with prior written consent of Merrill Lynch; and (iv) in the event the
undersigned is an individual, transfers to his or her immediate family or to a
trust the beneficiaries of which are exclusively the undersigned or a member or
members of his or her immediate family, provided that any transferee agrees in
writing to be bound by the terms hereof.
Very truly yours,
Signature:
----------------------------------
Print Name:
---------------------------------
B-6
<PAGE> 58
Exhibit C-1
FORM OF OPTION LOCK-UP PURSUANT TO SECTION (1)(A)(XXXII)
[To come]
C-1
<PAGE> 1
EXHIBIT 5.1
[HALE AND DORR LLP letterhead]
______________, 1999
Edison Schools Inc.
521 Fifth Avenue
15th Floor
New York, New York 10175
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-84177) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of 7,820,000 shares of Class A Common Stock, $.01 par value per share (the
"Shares"), of Edison Schools Inc., a Delaware corporation (the "Company"),
including 1,020,000 Shares issuable upon exercise of an over-allotment option
granted by the Company.
The Shares are to be sold by the Company pursuant to U.S. and
international underwriting agreements (the "Underwriting Agreements") to be
entered into by and among the Company and 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., and their respective foreign affiliates, as representatives of
the several underwriters named in the Underwriting Agreement, the forms of which
have been filed as Exhibits 1.1 and 1.2 to the Registration Statement.
We are acting as counsel for the Company in connection with the issue
and sale by the Company of the Shares. We have examined signed copies of the
Registration Statement as filed with the Commission. We have also examined and
relied upon the Underwriting Agreements, minutes of meetings of the stockholders
and the Board of Directors of the Company as provided to us by the Company,
stock record books of the Company as provided to us by the Company, the
Certificate of Incorporation and ByLaws of the Company, each as restated and/or
amended to date, and such other documents as we have deemed necessary for
purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to
<PAGE> 2
original documents of all documents submitted to us as copies, the authenticity
of the originals of such latter documents and the legal competence of all
signatories to such documents.
We assume that the appropriate actions will be taken, prior to the
offer and sale of the Shares in accordance with the Underwriting Agreements, to
register and qualify the Shares for sale under all applicable state securities
or "blue sky" laws.
We express no opinion herein as to the laws of any state or
jurisdiction other than the state laws of the Commonwealth of Massachusetts, the
Delaware General Corporation Law statute and the federal laws of the United
States of America. To the extent that any other laws govern the matters as to
which we are opining herein, we have assumed that such laws are identical to the
state laws of the Commonwealth of Massachusetts, and we are expressing no
opinion herein as to whether such assumption is reasonable or correct.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, when the Shares are issued
and paid for in accordance with the terms and conditions of the Underwriting
Agreements, the Shares will be validly issued, fully paid and nonassessable.
It is understood that this opinion is to be used only in connection
with the offer and sale of the Shares while the Registration Statement is in
effect.
Please note that we are opining only as to the matters expressly set
forth herein, and no opinion should be inferred as to any other matters. This
opinion is based upon currently existing statutes, rules, regulations and
judicial decisions, and we disclaim any obligation to advise you of any change
in any of these sources of law or subsequent legal or factual developments which
might affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/HALE AND DORR LLP
<PAGE> 1
EXHIBIT 10.35
ALLONGE TO PROMISSORY NOTE
This instrument is an Allonge to Promissory Note, entered into as of
the 5th day of October, 1999, by and between the undersigned, Benno C. Schmidt,
Jr. (the "Maker"), and EDISON SCHOOLS INC. (successor to THE EDISON PROJECT
L.P.), a Delaware corporation (the "Lender").
W I T N E S S E T H:
Reference is hereby made to that certain promissory note dated June 5,
1992 executed by the Maker in favor of the Lender in the original principal
amount of $1,600,000, as amended by those certain Letter Agreements dated March
15, 1995, May 1, 1996, March 1, 1997 and December 15, 1997 (the "Note").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Maker and the Lender hereby
agree as follows:
1. The Note is hereby amended to provide that the Loan evidenced by the
Note and any interest accrued thereon shall be due and payable on the first to
occur of (i) February 15, 2002 or (ii) the date on which Maker's employment by
Lender is terminated.
2. Effective the day and year first above written, the interest rate is
changed to a rate equal to the prime rate in effect from time to time (the term
"prime rate" at any time shall mean the rate of interest then most recently
announced by Chase Manhattan Bank as its prime rate).
3. Except as amended herein, the Note shall remain in full force and
effect.
<PAGE> 2
IN WITNESS WHEREOF, the Maker and the Lender have caused this
instrument to be duly executed as of this 5th day of October, 1999.
/s/ Benno C. Schmidt, Jr.
-----------------------------------------
Benno C. Schmidt, Jr.
EDISON SCHOOLS INC.
By: /s/ H. Christopher Whittle
-----------------------------------------
H. Christopher Whittle
President and Chief Executive Officer
THIS ALLONGE SHOULD BE PERMANENTLY
AFFIXED TO THE PROMISSORY NOTE DESCRIBED ABOVE.
<PAGE> 3
ALLONGE TO PROMISSORY NOTE
This instrument is an Allonge to Promissory Note, entered into as of the
5th day of October, 1999, by and between the undersigned, Benno C. Schmidt, Jr.
(the "Maker"), and EDISON SCHOOLS INC. (successor to THE EDISON PROJECT L.P.),
a Delaware corporation (the "Lender").
WITNESSETH:
Reference is hereby made to that certain promissory note dated January 23,
1996 executed by the Maker in favor of the Lender in the original principal
amount of $200,000, as amended by those certain Letter Agreements dated March 1,
1997 and December 15, 1997 (the "Note").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Maker and the Lender hereby
agree as follows:
2. The Note is hereby amended to provide that the Loan evidenced by the
Note and any interest accrued thereon shall be due and payable on the first to
occur of (i) February 15, 2002 or (ii) the date on which Maker's employment by
Lender is terminated.
2. Effective the day and year first above written, the interest rate is
changed to a rate equal to the prime rate in effect from time to time (the term
"prime rate" at any time shall mean the rate of interest then most recently
announced by Chase Manhattan Bank as its prime rate).
3. Except as amended herein, the Note shall remain in full force and
effect.
<PAGE> 4
IN WITNESS WHEREOF, the Maker and the Lender have caused this instrument
to be duly executed as of this 5th day of October, 1999.
/s/ Benno C. Schmidt, Jr.
------------------------------------
Benno C. Schmidt, Jr.
EDISON SCHOOLS INC.
By: /s/ H. Christopher Whittle
-------------------------------------
H. Christopher Whittle
President and Chief Executive Officer
THIS ALLONGE SHOULD BE PERMANENTLY
AFFIXED TO THE PROMISSORY NOTE DESCRIBED ABOVE.
<PAGE> 1
EXHIBIT 10.36
As of July 1, 1999
Mr. H. Christopher Whittle
The Edison Project Inc.
15th Floor
521 Fifth Avenue
New York, NY 10175
Dear Chris:
This letter agreement ("Agreement") amends and restates the terms of
your employment with The Edison Project Inc. ("Edison" or the "Company") as
approved by Edison's Board of Directors (the "Board"). This Agreement supercedes
and replaces any prior written or oral understandings between the Company and
you.
Position/Responsibilities. You will continue to be employed as Edison's
President and Chief Executive Officer ("CEO"), working out of the Company's
headquarters in New York City. Your responsibilities are set forth on Exhibit A
attached hereto.
Term. The term of your employment commences as of the date hereof and
ends on June 30, 2004, unless terminated earlier by you or by the Company as
provided below.
Base Salary. You will be paid at an annual base salary rate of
$320,366. Contingent upon achievement of Edison's Board-approved business plan
for each fiscal year as determined by the Board in its sole discretion, your
base salary will be increased at the start of the following fiscal year by no
less than eight percent (8%) of your then current base salary.
Bonus. In addition to your base salary, you will be eligible to receive
for each fiscal year an annual bonus of up to 50% of your then current base
salary under a plan to be determined by the Board in its sole discretion.
Benefits. You will be entitled to the standard Company benefits for
executives at your level as in effect from time to time, a current schedule of
which is attached as Exhibit D. The Company will further maintain for your
benefit supplemental long-term disability insurance and supplemental term life
insurance such that your total life insurance coverage through the Company is
$800,000, provided that such supplemental coverage can be obtained at a premium
that is customary for a man of your age in good physical condition.
<PAGE> 2
You will receive three weeks of vacation annually in addition to the official
Company holidays.
Expense Reimbursements. You will be reimbursed for all reasonable
expenses you incur in fulfilling your responsibilities hereunder upon submission
of adequate documentation for such expenses and subject to the Company's
policies.
Termination/Severance Pay. (i) Either you or Edison may terminate your
employment at any time without cause by giving written notice to that effect.
The termination of employment shall be effective on the date specified in such
notice.
(ii) If Edison terminates your employment without cause or if you
terminate your employment for "good reason," Edison will pay you as severance
pay for a period beginning on the effective date of termination and ending
twenty-four (24) months from such date (the "Severance Period") your then
current base salary plus the maximum bonus amount you would have had the
opportunity to earn during such period (together, the "Enhanced Base"). The
Enhanced Base will be paid on Edison's normal payroll cycle during the Severance
Period whether or not you obtain other employment. For purposes of this
Agreement, "good reason" shall mean (a) the assignment to you of duties and
responsibilities which results in your having materially less significant duties
and responsibilities or exercising materially less significant power and
authority than you had, or duties and responsibilities or power and authority
not in all material respects comparable to that of the level and nature which
you had immediately prior to any such assignment; (b) your removal, or the
failure to re-appoint you to your then current position with Edison; and (c)
Edison's failure to perform in a timely manner its material obligations under
this Agreement, other than in the case of each of (a), (b) and (c), (A) with
your express written consent or (B) in connection with any termination of your
employment by Edison as the result of your disability or "for cause."
(iii) If you terminate your employment without good reason, Edison will
pay you as severance pay your base salary as of the date of termination for a
period of twelve (12) months (the "Payment Period"), provided that if you become
employed elsewhere during the Payment Period the amounts otherwise payable to
you under this sentence shall be reduced by the total amount of any compensation
you earn from such employment during the Payment Period. For purposes of the
severance pay offset provisions of this paragraph, the terms "employed" and
"employment" shall mean the providing of any services for compensation whether
as a full-time or part-time employee or as a consultant. Payments made to you as
reimbursement for documented expenses will not constitute compensation for
purposes of this paragraph.
2
<PAGE> 3
(iv) If you terminate your employment without good reason prior to July
1, 2002 and a) you or WSI Inc. have borrowed money from the Company in
conjunction with the exercise of your March 1, 1997 option to purchase 600,000
shares of Series A Common stock of the Company and your December 15, 1997 option
to purchase 850,000 shares of Series A Common stock of the Company and b) the
stock of the Company at the time of termination is not publicly traded, you
agree to pay the Company within thirty (30) days of such termination a penalty
fee in the amount of $1 million.
(v) In consideration of the severance pay provided for in (ii) and
(iii) above, you agree to deliver to Edison on or promptly following the
effective date of the termination of your employment a Separation and Release in
the form customarily being used by Edison at such time.
(vi) Edison shall have the right to terminate your employment for cause
by giving you written notice to that effect. The termination of employment shall
be effective on the date specified in such notice. However, "for cause" is
restricted to (1) commission of a willful act of dishonesty in the course of
your duties with Edison which significantly injures Edison; (2) conviction of a
crime of moral turpitude or of a felony; or (3) chronic alcoholism or drug
abuse. If you are terminated for cause, Edison will pay your unpaid base salary
through the effective date of termination.
Death. If you die during your employment hereunder, this Agreement
shall terminate upon the date of your death. Edison's obligations under this
Agreement (other than obligations then due and owing hereunder) will terminate
upon Edison's payment to the personal representative of your estate (i) your
unpaid base salary through the date of your death and (ii) any expenses properly
reimbursable under this Agreement and not yet reimbursed.
Exclusivity. In return for the compensation payments set forth in this
agreement, you agree to devote 100% of your professional time and energies to
Edison and not engage in any other business activities without prior approval of
the Board except for your activities on behalf of WSI Inc. and its affiliates.
Confidentiality. It is understood that in order to perform your duties
at Edison, it will be necessary for Edison to divulge to you its proprietary
information, including, but not limited to, information and data relating to or
concerned with Edison's business, finances, development projects and other
affairs. You agree that you will not divulge such proprietary information to
anyone outside Edison at any time whether or not you are in the employ of
Edison, except as may otherwise be necessary and appropriate in connection with
the business and affairs of Edison. You also agree that any developments,
discoveries, or inventions made by you alone or with others (other than for or
on behalf of a business which is not a "competing" business as defined below)
3
<PAGE> 4
during the term of your employment with Edison and directly applicable to the
type of businesses or development projects engaged in by Edison during such
period shall be the sole property of Edison.
Non-competition and Non-solicitation. You further agree that during
your employment with Edison and for one year after the termination of such
employment for any reason, you will not at any time engage in or participate as
an executive officer, employee, director, agent, consultant, representative,
stockholder, or partner, or have any financial interest, in any business which
"competes" with Edison or any subsidiary of Edison. For the purposes hereof, a
"competing" business shall mean any business which directly competes with any of
the businesses of Edison as such shall exist during your employment with Edison
(for example, the business of managing public and/or private schools for profit
or the sale of school management or student assessment systems such as "The
Edison Common"), but a "competing" business shall not include the business of
developing for or marketing to or implementing in schools electronic curriculum
services or technology delivery systems for such services. Ownership by you of
publicly traded stock of any corporation conducting any such business shall not
be deemed a violation of the preceding two sentences provided you do not own
more than three percent (3%) of the stock of any such corporation. You further
agree that for a period of one year after termination of your employment with
Edison for any reason, you will not, directly or indirectly, solicit the
employment or other services of any executive employee Edison. For the purposes
of the foregoing, any executive employee who within twelve (12) months of
terminating his employment with Edison becomes employed by any entity of which
you are an officer or director or owner of more than an aggregate of 3% of the
outstanding stock or equity interest therein shall be deemed, prima facie, to
have been so solicited.
Entire Agreement. Together with the attached exhibits, this letter
agreement constitutes the entire understanding of the parties with respect to
the subject matter hereof and supersedes all prior agreements and
understandings, written or oral, among the parties with respect to such subject
matter. This agreement is governed by the substantive laws of the State of New
York.
Duplicate originals of this agreement are being provided to you. Please
sign below to evidence your agreement to the foregoing, and return one original
to me for our records.
Sincerely,
THE EDISON PROJECT INC.
By:
----------------------------
4
<PAGE> 5
ACCEPTED AND AGREED:
- --------------------------
H. Christopher Whittle
- --------------------------
Date
5
<PAGE> 6
EXHIBIT A
RESPONSIBILITIES OF THE PRESIDENT/CEO
-------------------------------------
All of the following responsibilities are subject to the direction, authority
and approval of Edison's Board.
- - Full and usual authority of a CEO, including hiring, firing and supervising
Edison employees, agents, representatives, etc.
- - Final authority over day-to-day operations
- - Overall business leadership of the Company
- - Direction of the Company's capital formation efforts
- - Oversight of the Company's development and product design activities
- - Direction of new product development efforts
- - Co-spokesperson for the Company
- - Direction of the Company's media relations
6
<PAGE> 1
July 1, 1999 EXHIBIT 10.37
Mr. Christopher D. Cerf
The Edison Project Inc.
15th Floor
521 Fifth Avenue
New York, NY 10175
Dear Chris:
This letter agreement (the "Agreement") supercedes and replaces any
previous written or oral agreements between you and The Edison Project Inc.
("Edison" or the "Company") regarding your employment with the Company.
Position/Responsibilities. You will be employed as Edison's Chief
Operating Officer ("COO") working out of the Company's headquarters in New York
City and a Washington, D.C. office approved by me. You will report directly to
me. Your responsibilities are as set forth on Exhibit A attached hereto.
Term. The term of your employment shall be extended through July 1,
2002 unless terminated earlier by you or the Company as provided below, which
term shall automatically renew for successive one-year terms unless terminated
earlier by you or the Company as provided below.
Base Salary/Benefits. You shall be paid at an annual base salary rate
of $240,000. You will also be entitled to the standard Company benefits for
executives at your level as in effect from time to time, a current schedule of
which is attached as Exhibit B. The Company will provide you supplemental life
insurance such that your total insurance benefit is no less than $800,000,
provided that such supplemental coverage can be obtained by the Company at
standard rates for a man of your age in good physical condition. You will
receive three weeks of vacation annually in addition to the official Company
holidays. You will be considered for appropriate base salary increases annually
to reflect your performance, the Company's performance, and increases awarded to
other management executives.
Bonus. In addition to your base salary, beginning with Fiscal Year 2000
you will be eligible to receive an annual bonus of up to 50% of your base salary
for each fiscal year, half of such bonus to be directly tied to the Company's
academic results and half to be directly tied to the Company's financial
results. For each fiscal year, you and I will mutually agree on the appropriate
measures for determining the basis on which your bonus will be judged, with such
annual measures subject to review and approval by the Compensation Committee of
the Company's Board of Directors. The Compensation Committee shall also make the
final determination of your achievement of such bonus. Payment of this bonus for
each fiscal year will be made after 1) receipt of the Company's audited
financials for such year, 2) receipt of relevant information on academic
results,
<PAGE> 2
Mr. Christopher D. Cerf
July 1, 1999
Page Two
and 3) completion of the review process by the Compensation Committee.
Relocation. It is understood that you will continue to work out of
Edison's New York offices and your current office in Washington D.C. (or such
office space as shall be approved by me). At such time as you relocate to the
New York City area, Edison will pay you a relocation bonus of $50,000, such
amount to be paid within 30 days of the actual date of the move. Edison will
further reimburse you for the expenses associated with your relocation as set
forth in Exhibit C.
Expense Reimbursements. You will be reimbursed for all reasonable
business expenses you incur in fulfilling your responsibilities hereunder upon
submission of adequate documentation for such expenses and subject to the
Company's policies. Such expenses shall, subject to periodic review, include
transportation, food and lodging expenses associated with working out of
Edison's New York offices during such period as you continue to reside in
Washington, D.C.
Termination/Severance Pay. Edison shall have the right to terminate
your employment at any time without cause by giving you written notice to that
effect. The termination of employment shall be effective on the date specified
in such notice. If Edison terminates your employment without cause, Edison will
pay you as severance pay your base salary for a period beginning on the
effective date of termination and ending twelve (12) months from such date (the
"Severance Period"), provided that if you become employed elsewhere during the
Severance Period the amounts otherwise payable to you during the last six months
of the Severance Period (the "Offset Period") shall be reduced by the total
amount of any compensation you earn from such employment. You shall at your
option be entitled to treat any material uncured breach of this Agreement by the
Company as a termination without cause. Payments made to you as reimbursement
for documented expenses will not constitute compensation for purposes of this
paragraph. In consideration of such severance pay, you agree to deliver to
Edison on or promptly following the effective date of the termination of your
employment a Separation and Release in the form customarily being used by Edison
at such time. All amounts payable under the provisions of this paragraph will be
made on the dates you would have received such amounts had your employment with
Edison not been terminated.
Edison shall have the right to terminate your employment for cause by
giving you written notice to that effect. The termination of employment shall be
effective on the date specified in such notice. However, "for cause" is
restricted to (1) commission of a willful act of dishonesty in the course of
your duties with Edison which significantly injures Edison; (2) engagement in
gross or persistent
<PAGE> 3
Mr. Christopher D. Cerf
July 1, 1999
Page Three
misconduct injurious to Edison; (3) conviction of a crime of moral turpitude or
of a felony; or (4) chronic alcoholism or drug abuse. If you are terminated for
cause, Edison will pay your unpaid base salary through the effective date of
termination.
Exclusivity. In return for the compensation payments set forth in this
agreement, you agree to devote 100% of your professional time and energies to
Edison and not engage in any other business activities without prior approval of
the Board.
Confidentiality. It is understood that in order to perform your duties
at Edison, it will be necessary for Edison to divulge to you its proprietary
information, including, but not limited to, information and data relating to or
concerned with Edison's business, finances, development projects and other
affairs. You agree that you will not divulge such proprietary information to
anyone outside Edison at any time whether or not you are in the employ of
Edison, except as may otherwise be required in connection with the business and
affairs of Edison. You also agree that any developments, discoveries, or
inventions made by you alone or with others during the term of your employment
with Edison and applicable to the type of businesses or development projects
engaged in by Edison during such period shall be the sole property of Edison,
and you agree to execute all documents requested by Edison to protect Edison's
rights thereto.
Non-compete and Non-solicitation. You further agree that during your
employment with Edison and for one year after the termination of such employment
for any reason, you will not at any time engage in or participate as an
executive officer, employee, director, agent, consultant, representative,
stockholder, or partner, or have any financial interest, in any business which
"competes" with Edison or any subsidiary of Edison, or successor to the business
of Edison, provided that if restrictions regarding competition in the employment
agreements of any member of the Operating Committee are ever less restrictive
than those contained herein, the provisions of this paragraph will be similarly
modified. For the purposes hereof, a "competing" business shall mean any
business which directly competes with any of the businesses of Edison as such
business shall exist during your employment with Edison, for example, the
business of managing public and private schools for profit. Ownership by you of
publicly traded stock of any corporation conducting any such business shall not
be deemed a violation of the preceding two sentences provided you do not own
more than three percent (3%) of the stock of any such corporation. You further
agree that for a period of one year after the termination of your employment
with Edison for any reason, you will not, directly or indirectly, solicit the
employment or other services of any executive employee of Edison. For the
<PAGE> 4
Mr. Christopher D. Cerf
July 1, 1999
Page Four
purposes of the foregoing, any executive employee who within twelve months of
terminating his employment with Edison becomes employed by any entity of which
you are an officer or director or owner of more than an aggregate of 3% of the
outstanding stock or equity interest therein shall be deemed, prima facie, to
have been so solicited.
Entire Agreement. Together with the attached exhibits, this letter
agreement constitutes the entire understanding of the parties with respect to
the subject matter hereof and supersedes all prior agreements and
understandings, written or oral, among the parties with respect to such subject
matter. This agreement is governed by the substantive laws of the State of New
York.
Duplicate originals of this agreement are being provided to you. Please
sign below to evidence your agreement to the foregoing, and return one original
to me for our records.
Sincerely,
/s/ H. Christopher Whittle
H. Christopher Whittle
President/Chief Executive Officer
ACCEPTED AND AGREED:
/s/ Christopher D. Cerf
- -------------------------
Christopher D. Cerf
July 1, 1999
- ------------
Date
<PAGE> 5
EXHIBIT A
JOB RESPONSIBILITIES
(1) The planning, implementation and coordination of all of Edison's operating
activities at its multiple school sites to include staff recruitment, school
start-ups, school support and school oversight;
(2) General oversight of activities of the Company's curriculum division,
schools division, technology division, and business and administrative services
division;
(3) Working with Edison's CEO and Chief Financial Officer ("CFO") to prepare the
Company's annual business plan;
(4) Delivery of the Company's annual business plan results;
(5) Delivery of the Company's annual academic results;
(5) Management of the Company's employees;
(6) Systems design and implementation;
(7) Such other tasks commensurate with your position as may be assigned to you
by the CEO or Edison's Board, to include until such time as that position is
filled the responsibilities of the Company's General Counsel.
<PAGE> 1
EXHIBIT 10.43
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
NO. 3
STOCK SUBSCRIPTION WARRANT
TO PURCHASE SERIES A COMMON STOCK OF
EDISON SCHOOLS , INC. (THE "COMPANY")
DATE OF INITIAL ISSUANCE: OCTOBER 18, 1999
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST II or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Thirty Thousand
(30,000) shares of Series A Common Stock, $0.01 par value, of the Company (the
"Common Stock"), at the Warrant Price, payable as provided herein. The exercise
of this Warrant shall be subject to the provisions, limitations and restrictions
herein contained, and may be exercised in whole or in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Series A
Common Stock, $0.01 par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as
amended from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended.
TERM OF THIS WARRANT - shall mean the period beginning on the date of
initial issuance hereof and ending on October 18, 2004.
WARRANT PRICE - $6.15 per share, subject to adjustment in accordance
with Section 5 hereof.
WARRANT - this Warrant, issued in connection with a Commitment Letter
dated July 27, 1999 executed by the Company and Transamerica Business Credit
Corporation (the "Commitment Letter") to the original holder of this Warrant, or
any permitted transferees from such original holder or this Holder.
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
<PAGE> 2
SECTION 2. EXERCISE OF WARRANT.
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 11
hereof at any time and from time to time during the Term of this Warrant: (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the amount of the Warrant
Price for each share being purchased, and (iii) this Warrant. Notwithstanding
any provisions herein to the contrary, if the Current Market Price (as defined
in Section 5) is greater than the Warrant Price (at the date of calculation, as
set forth below), in lieu of exercising this Warrant as hereinabove permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 11
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula:
CS = WCS x (CMP-WP)
---------------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the Holder
WCS equals the number of shares of Common Stock
purchasable under the Warrant or, if only a portion
of the Warrant is being exercised, the portion of the
Warrant being exercised (at the date of such
calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
2.2. TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on
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<PAGE> 3
the face thereof unless at the time of exercise such Warrant Shares shall be
registered under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred in the absence of such registration or an exemption
therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
2.3 REDEMPTION. Notwithstanding anything herein to the contrary, the
Company may redeem the Warrant from the Holder, if and to the extent not
previously exercised, upon the occurrence of any of the following events
(collectively, "Redemption Events"):
(i) the Company's first sale of Common Stock to the public pursuant to
a registration statement under the Securities Act which has been
declared effective by the Securities and Exchange Commission ("SEC"),
other than a registration statement on Form S-8 or any similar form
(the "Initial Public Offering"), if the Company's underwriters request
such redemption;
(ii) the closing of a merger or consolidation of the Company with or
into another entity if the Company is not the surviving entity (a
"Merger"), or
(iii) the sale of all or substantially all of the Company properties
and assets (a "Sale").
Prior to any such redemption, the Company shall give the Holder at
least twenty (20) days prior written notice of its intent to redeem this
Warrant. Such notice shall contain information with respect to the relevant
Redemption Event, the date of redemption ("Redemption Date") and the redemption
price (determined as set forth below), together with a description of the terms
of the redemption of management options issued by the Company. The redemption
price shall be the difference between the Warrant Price and (i) if the
Redemption Event is a Merger or Sale, the per-share price of Common Stock in
such Merger or Sale or (ii) if the Redemption Event is the Initial Public
Offering, the public offering price of Common Stock, multiplied by the number of
Warrant Shares the Holder is then entitled to purchase hereunder.
Notwithstanding the foregoing, the Holder shall be entitled to exercise this
Warrant subject to the terms and conditions of this Agreement at any time prior
to the Redemption Date.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant. The
Company further covenants and agrees that if any shares of capital stock to be
reserved for the purpose of the issuance of shares upon the exercise of this
Warrant require registration with or approval of any governmental authority
under any federal or state law before
-3-
<PAGE> 4
such shares may be validly issued or delivered upon exercise, then the Company
will in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be. If and so long as the Common Stock
issuable upon the exercise of this Warrant is listed on any national securities
exchange, the Company will, if permitted by the rules of such exchange, list and
keep listed on such exchange, upon official notice of issuance, all shares of
such Common Stock issuable upon exercise of this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares obtained by multiplying the Warrant Price in effect immediately prior to
such adjustment by the number of shares purchasable pursuant hereto immediately
prior to such adjustment and dividing the product thereof by the Warrant Price
resulting from such adjustment.
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall be appropriately decreased so that the number of shares
of Common Stock issuable upon the exercise hereof shall be increased in
proportion to such increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(iii) In the event (a) that the Company declares any distribution upon
Common Stock, whether in cash, property, stock or other securities, (b) that the
Company offers for subscription pro rata to holders of Common Stock any
additional equity interests in the Company, (c) of a Merger or Sale, or (d) or
any voluntary of involuntary dissolution, liquidation or winding up of the
Company (each, a "Dissolution Event"); then, in connection with each such event,
the Company shall provide the Holder:
(I) at least twenty (20) days prior written notice of the date
on which the books of the Company shall close or a record shall be taken for
such dividend, distribution, subscription rights (specifying the date on which
holders shall be entitled thereto) or for determining rights to vote in respect
of such Merger, Sale or Dissolution Event; and
(II) in the case of a Merger, Sale or Dissolution Event, at
least twenty (20) days prior written notice of occurrence thereof (and
specifying the date on which the holders of Common Stock shall be entitled to
exchange their shares of Common Stock or other securities for securities or
other property deliverable upon such Merger, Sale or Dissolution Event).
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
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<PAGE> 5
(v) For the purpose of this Agreement the Current Market Price at any
date of one share of Common Stock shall be deemed to be the average of the daily
closing prices for the 15 consecutive business days ending on the last business
day before the day in question (as adjusted for any stock dividend, split,
combination or reclassification that took effect during such 15 business day
period). The closing price for each day shall be the last reported sales price
regular way or, in case no such reported sales took place on such day, the
average of the last reported bid and asked prices regular way, in either case on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading or as reported by Nasdaq (or if the Common Stock is not
at the time listed or admitted for trading on any such exchange or if prices of
the Common Stock are not reported by Nasdaq then such price shall be equal to
the average of the last reported bid and asked prices on such day as reported by
The National Quotation Bureau Incorporated or any similar reputable quotation
and reporting service, if such quotation is not reported by The National
Quotation Bureau Incorporated); provided, however, that if the Common Stock is
not traded in such manner that the quotations referred to in this clause (v) are
available for the period required hereunder, the Current Market Price shall be
determined in good faith by the Board of Directors of the Company or, if such
determination cannot be made, by a nationally recognized independent investment
banking firm selected by the Board of Directors of the Company (in its sole
discretion) (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in
Section 5, the Company shall prepare a statement showing the facts requiring
such adjustment and the Warrant Price that shall be in effect after such
adjustment. The Company shall cause a copy of such statement to be sent by mail,
first class postage prepaid, to each Holder of this Warrant at its, his or her
address appearing on the Company's records. Where appropriate, such copy may be
given in advance and may be included as part of the notice required to be mailed
under the provisions of subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall
require that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of such event
issuing to the Holder of all or any part of this Warrant which is exercised
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such exercise by reason of the adjustment
required by such event over and above the shares of capital stock issuable upon
such exercise before giving effect to such adjustment exercise; provided,
however, that the Company shall deliver to such Holder a due bill or other
appropriate instrument evidencing such Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
-5-
<PAGE> 6
SECTION 6. OWNERSHIP.
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. Except as provided below, this Warrant
and all rights hereunder are transferable in whole or in part upon the books of
the Company by the Holder hereof in person or by duly authorized attorney, and a
new Warrant or Warrants, of the same tenor as this Warrant but registered in the
name of the transferee or transferees (and in the name of the Holder, if a
partial transfer is effected) shall be made and delivered by the Company upon
surrender of this Warrant duly endorsed, at the office of the Company referred
to in Section 11 hereof, provided, that the Holder shall not transfer this
Warant or any rights hereunder to more than four transferees. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft or
destruction, and, in such case, of indemnity or security reasonably satisfactory
to it, and upon surrender of this Warrant if mutilated, the Company will make
and deliver a new Warrant of like tenor, in lieu of this Warrant; provided that
if the Holder hereof is an instrumentality of a state or local government or an
institutional holder or a nominee for such an instrumentality or institutional
holder an irrevocable agreement of indemnity by such Holder shall be sufficient
for all purposes of this Section 6, and no evidence of loss or theft or
destruction shall be necessary. This Warrant shall be promptly canceled by the
Company upon the surrender hereof in connection with any transfer or
replacement. Except as otherwise provided above, in the case of the loss, theft
or destruction of a Warrant, the Company shall pay all expenses, taxes and other
charges payable in connection with any transfer or replacement of this Warrant,
other than stock transfer taxes (if any) payable in connection with a transfer
of this Warrant, which shall be payable by the Holder. Holder will not transfer
this Warrant and the rights hereunder except in compliance with federal and
state securities laws. Notwithstanding anything herein to the contrary, this
Warrant may not be transferred to a competitor of the Company.
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date.
SECTION 8. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 8, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
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<PAGE> 7
SECTION 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE HOLDER.
The Holder hereby represents, warrants and covenants to the Company:
(a) INVESTMENT PURPOSE. Neither the Warrant nor the Common Stock or
other securities issuable upon exercise of the Warrant will be acquired with a
view to the sale or distribution of any part thereof, and the Holder has no
present intention of selling or engaging in any public distribution of the same.
(b) PRIVATE ISSUE. The Holder understands (i) that the Common Stock is
not registered under the Securities Act or qualified under any applicable state
securities laws on the ground that the issuance contemplated by this Warrant
Agreement will be exempt from the registration and qualifications requirements
thereof, and (ii) that the Company's reliance on such exemption is predicated on
the representations set forth in this Section 9.
(c) DISPOSITION OF THE HOLDER'S RIGHTS. In no event will the Holder
make a disposition of any of its rights to acquire Common Stock unless and until
the Holder shall have provided the Company with (i) written notice of the
proposed disposition, and (ii) if requested by the Company, an opinion of
counsel (which counsel may be inside counsel to the Holder) satisfactory to the
Company and the Company's counsel to the effect that (A) appropriate action
necessary for compliance with the Securities Act has been taken or (B) an
exemption from the registration requirements of the Securities Act and any state
law is available. Notwithstanding the foregoing, the restrictions imposed upon
the transferability of any of its rights hereunder on the exercise of such
rights do not apply to transfers from the beneficial owner of any of the
aforementioned securities to its nominee or from such nominee to its beneficial
owner, and shall terminate as to any securities when (1) such security shall
have been effectively registered under the Securities Act and sold by the holder
thereof in accordance with such registration, (2) such security shall have been
sold without registration in compliance with Rule 144 under the Securities Act,
or (3) a letter shall have been issued to the Holder at the request of the
Holder by the staff of the SEC or a ruling shall have been issued to the Holder
at its request by the SEC stating that no action shall be recommended by such
staff or taken by the SEC, as the case may be, if such security is transferred
without registration under the Securities Act in accordance with the conditions
set forth in such letter or ruling and such letter or ruling specifies that no
subsequent restrictions on transfer are required. Whenever the restrictions
imposed hereunder shall terminate, as hereinabove provided, the Holder or holder
of any securities issuable hereunder then outstanding as to which such
restrictions have terminated shall be entitled to receive from the Company,
without expense to such holder, one or more new Warrants.
(d) FINANCIAL RISK. The Holder has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment, and has the ability to bear the economic risks of its
investment.
(e) RISK OF NO REGISTRATION. The Holder understands that the Common
Stock has not been reviewed or approved by the SEC or any similar body not
registered under the Securities Exchange Act of 1934, as amended (the "1934
Act") and, as of the date of execution of this Warrant, the Company has no
obligation to so register the Common Stock, and if the Company does not register
with the SEC pursuant to Section 12 or Section 15(d) of the 1934 Act, or file
reports pursuant to Section 13 of the 1934 Act, or if a registration statement
covering the securities under the Securities Act is not in effect when it
desires to sell (i) the rights to purchase the Common Stock (or other
securities) pursuant to this Warrant,
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<PAGE> 8
or (ii) the Common Stock (or other securities into which the Warrant Shares are
convertible) issuable upon exercise of the right to purchase, it may be required
to hold such securities for an indefinite period.
(f) CONFIDENTIAL INFORMATION. The Holder will not use or divulge any
non-public information provided by or developed for the Holder in connection
with this Warrant whether or not this Warrant remains in effect, except as may
be required by law.
SECTION 10. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
10.1. WILL RESERVE SHARES. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
10.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
10.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 11. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail or confirmed facsimile to, the Holder at Transamerica Technology
Finance Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Phone:
(860)-677-6466, Fax (860) 677-6766 Attention: Assistant Vice President, Lease
Administration, with a copy to the Lender at Riverway II, West Office Tower,
9399 West Higgins Road, Rosemont, Illinois 60018, Phone: (847) 292-8900, Fax
(847) 685-1142 Attention: Legal Department or to such other address as shall
have been furnished to the Company in writing by the Holder. Any notice or other
document required or permitted to be given or delivered to the Company shall be
delivered at, or sent by certified or registered mail to, the Company at 521
Fifth Avenue, 16th Floor, New York, New York 10175, Phone: (212) 309-1600, Fax:
(212) 309-1604, Attention: Chief Financial Officer, with a copy to the Edison
Project, Suite 1230, First Tennessee Plaza, 800 S. Gay Street, Knoxville,
Tennessee, 37929, Telephone: (423) 546-0999, Facsimile: (423) 546-1090,
Attention: Laura Eshbaugh, and to Bill Winslow, Esq., Hale and Dorr, LLP, 1455
Pennsylvania Ave. NW, Washington, D.C. 20004,, or to such other address as shall
have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
SECTION 12. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
SECTION 13. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
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<PAGE> 9
LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF.
SECTION 14. MISCELLANEOUS.
(a) This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof
(b) All capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to them in the Master Loan and
Security Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this 18th day of October, 1999.
EDISON SCHOOLS INC.
[CORPORATE SEAL]
By: /s/ Adam Field
------------------------
Title: SVP - Finance
------------------------
TRANSAMERICA BUSINESS
CREDIT CORPORATION
By: /s/ Gary P. Moro
------------------------
Name: Gary P. Moro
Title: Senior Vice President
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<PAGE> 10
FORM OF NOTICE OF EXERCISE
[TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares
of Common Stock which the undersigned is entitled to purchase by the terms of
the within Warrant according to the conditions thereof, and herewith
[check one]
[ ] makes payment of $__________ therefor; or
[ ] directs the Company to
issue ______ shares, and to
withhold ____ shares in
lieu of payment of the
Warrant Price, as described
in Section 2.1 of the
Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
-----------------------------
[Type Name of Holder]
By:
-----------------------------
Title:
-----------------------------
Dated:
-----------------------------
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<PAGE> 11
FORM OF ASSIGNMENT
(ENTIRE)
[TO BE SIGNED ONLY UPON TRANSFER OF ENTIRE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns
and transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
-----------------------------
[Type Name of Holder]
By:
-----------------------------
Title:
-----------------------------
Dated:
-----------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-11-
<PAGE> 12
FORM OF ASSIGNMENT
(PARTIAL)
[TO BE SIGNED ONLY UPON PARTIAL TRANSFER OF WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
-----------------------------
[Type Name of Holder]
By:
-----------------------------
Title:
-----------------------------
Dated:
-----------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-12-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in Amendment No. 7 to this Registration
Statement on Form S-1 of our report dated August 13, 1999, except for Note No.
15(a), which is dated as of October 5, 1999 and Note No. 15(b) which is dated
October 15, 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 28, 1999 PRICEWATERHOUSECOOPERS LLP
